Rethinking Supply Chains: A Look at the Challenges Companies are Facing

Let’s look at some of the cost and complexity considerations in uprooting a production center from one country to the next, or in setting up a parallel manufacturing center in a second or third country.

Input supply: In moving to another country to manufacture a product, a company needs to make sure the country it is relocating to has the raw materials to produce its product. For instance, if you are in the business of making furniture, you’d need to pick a country that has the relevant type of materials to build your furniture. The raw material typically has to be close to where your plant is located, and you’d need to ensure there are proper modes of transportation to get the raw materials into the plant. There also has to be a relatively low-cost workforce to ensure your competitiveness.

Output delivery: How do you get the finished product delivered to your clients? The company needs access to proper roads, rail lines and ports from the new manufacturing site to deliver the products to customers in other countries. Shipping costs from the point of manufacturing to destination markets could also play an important role in setting up new operations in a second or third country.

Dependency on highly specific and single source inputs: Some key inputs to certain manufactured goods are rare or are produced only in a few places. For example, the Republic of Congo is the world’s key producer of cobalt.  Manufacturing processes dependent on highly specific inputs from relatively few sources will find it hard to hedge.

Input cost increases: Input costs (producer prices?) are currently rising more rapidly than the rate of consumer price inflation. This higher cost factor comes at a time when one may want to decrease manufacturing costs. The U.S. Producer Price Index for all final goods and services is running (as of April 2022) at 11% above a year ago, while the goods component of the producer price index is running at a more elevated 16%.

Skilled labor: Reshoring operations depends to a large extent on the availability of a trained workforce, or a pool of workers that can be readily trained in skilled operations. The availability of labor in China has been one of its advantages, but that position is being challenged by emerging nations like Vietnam, Philippines, Bangladesh, Mexico and others.

Wages: Wages are rising in many countries, which also makes the process more expensive and difficult.  Higher wages may also be accompanied by a higher probability of labor strife, strikes and stoppages.  For example, unions at U.S. West Coast ports are currently negotiating a new labor contract.  

Ability to pass on costs: Companies in different industries will have varying opportunities to pass on costs to their clients, and this will depend in part on their competitive environment.  Companies with strong competition and tight margins are much less likely to shift their supply chains unless absolutely essential.

Unrelated, yet simultaneous considerations: Central banks are withdrawing accommodation, which has implications for foreign exchange. The Japanese yen had slumped to a 20-year low against the U.S. dollar amid a divergence in monetary policies between the two countries – the Federal Reserve has raised rates by 75 basis points in two moves since March, while the Bank of Japan is easing monetary policy.  The People’s Bank of China is also easing, with the yuan falling to a one-year low against the greenback.

From a strategy perspective, it remains to be seen whether we are entering a period of de-globalization and economic fragmentation.  From a logistics perspective, the process of reshoring operations is difficult, complex, takes years and is costly, with a relatively high risk to capital investment.

Some companies might find it hard to pass on costs in industries with strong competition and tight margins, while also managing the impacts of inflation and changing central bank policies.