- Organizations have considered offshoring as an attractive option based on their “total landed cost” and “total cost of ownership” calculations. However, in recent years organizations have started looking at reshoring as a viable competitive option after factoring in the roles of reduced transportations costs and faster inventory turns in offsetting higher labor costs. In a survey conducted in 2019 by the Reshoring Institute, 97% of the respondents indicated that they would consider a domestic source for parts if the price and quality were competitive to foreign suppliers. In addition to the growing attractiveness of U.S. markets, the unpredictability of tariffs and trade regulations leave companies conducting international business wary of unexpected cost increases. The survey found that from 2017 to 2018, the number of companies operating in multiple global locations decreased by 10%.
- Covid-19 has brought to the fore the ability of reshoring to not only offer these advantages but also help in mitigating supply chain risk. According to a study conducted by the Coalition for a Prosperous America, during 2000-2019 imports of medical supplies related to the managing the Covid-19 crisis has increased by 368%, which was more than three times the increase during the same time-period experienced for all the goods that are imported by the United States (105%).
- The pandemic exposed United States’ vulnerability with regards to the supplies of personal protective equipment (PPEs). Almost 60% of the disposable rubber gloves came from Malaysia, where these Malaysian manufacturers were unable to produce the required quantities due to their own supply shortages. An investigation by the Associated Press found a 40% reduction in the shipments from China of hand sanitizer, swabs, and N95 facial masks from early to mid-March as compared to the shipments during the same period during 2019. This was attributed to the fact that the Chinese government had instructed its domestic producers to meet China’s demand before exporting products. In the wake of the pandemic other countries also took such measures. During April – May, some of the products such as thermometers were being sold on Amazon at almost four times their price during normal times.
- Such experiences call attention to consider the “total cost of disruption” while using traditional cost calculations for making decisions on the location of supply sources. In addition, reshoring can also help with alleviating some of the unemployment crisis created by Covid-19. According to a research publishd on MarketWatch, extensive reshoring of pharmaceuticals and medical supplies alone could potentially create more than one million new jobs and inject more than $250 billion into the GDP.
- Organizations and policy makers need to take appropriate steps to do reshoring and multishoring right.
GUIDELINES FOR POLICY MAKERS
- It might be the right time to determine manufacturing sectors that are critical for public health, economic welfare and national security. These sectors should be categorized as critical manufacturing infrastructure by the Department of Homeland Security and could be candidates for onshoring.
- Policy makers need to determine the changes to tax, legislative or foreign policy that will be necessary to move manufacturing of pharmaceutical and medical device and consumables back to the United States. For instance, The federal government can make changes to national foreign policy to mandate onshoring of a portion of pharmaceutical or other critical manufacturing sectors as a matter of national security.
- Tariffs and corporate tax incentives by themselves may not be sufficient in promoting onshoring since companies will consider other countries in the low cost region before onshoring manufacturing capacity to the U.S. It might be necessary to provide opportunities for organizations to make reasonable profits from their investments. As an example, mandating that Veterans hospitals procure their medical supplies in the United States could be a good place to start as it can help in increasing American manufacturing capacity.
- The US International Development Finance Corp (DFC), which was created in 2018 by combining the former Overseas Private Investment Corp (OPIC) and part of the U.S. Agency for International Development, can take an active role in spearheading the reshoring efforts for products that are critical for national security (including essential pharmaceuticals and medical supplies). The DFC and the defense department are jointly administering $100 million in supply-chain reshoring funds from the $2.3 billion coronavirus legislation passed in March. There has been some recommendation of leveraging this money into loans equating to billions of dollars by using it as a pool of capital similar to the U.S. Treasury’s backing of Federal Reserve loan facilities.
- It is important to recognize that concentrating all the supply from one place can be risky. Hence, reshoring should be approach in conjunction with a well thought out diversification strategy that can help in offering resilience against disruptions. In this regard organizations need to consider alternative sources as a backup for the supplies that are essential for national security and public health.
- If economics prevent reshoring, opportunities for multishoring should be explored such that portions of supply chains related to critical supplies can be relocated to the North American trading partners of the U.S.
- The reshored capacity can be the source for accumulating inventories of critical supplies similar to the thinking behind the Strategic Petroleum Reserve.
- From a policy standpoint it is important that the reshoring initiatives are implemented in a genuinely strategic manner that accommodates national security rationale but doesn’t get swayed in terms of promoting the goal of protectionism for some select business lobbies.
GUIDELINES FOR ORGANIZATIONS
- Due diligence need to be taken when choosing a supplier (within the U.S. or offshore) such that a comprehensive set of factors are considered. These factors include quality, cost, service level, technology, talent, innovation, infrastructure, automation, QMS/standards, engineering, vertical integration, market proximity, stability, ease of doing business, and risk of disruption.
- Organizations need to synthesize the existing prior knowledge, say in the pharmaceuticals and medical supplies sectors, to identify gaps, which will constitute new knowledge, that hinder the efficient development and manufacturing of generic drug products within U.S.
- Instead of seeking low-cost labor, organizations need to investigate if the needs can be served by adopting advanced and innovative manufacturing tools (e.g. 3-D printing, robotics, automation) that are served by a highly skilled and highly productive workforce. Once again the total cost of ownership after a comprehensive consideration of various factors mentioned above would help in getting a better understanding of the relative merit of alternatives.
- The reshored manufacturing capability could be spearheaded in such a way that organizations build manufacturing facilities in more flexible ways so that they can be repurposed if need be.
- Organizations can use the Assess Costs Everywhere (ACE) Tool developed by the U.S. Department of Commerce tool in partnership with the NIST-MEP and with support from various agencies within the U.S. Department of Commerce to assess total costs by identifying and considering 10 cost and risk factors. These include: labor wage fluctuations; travel and oversight; shipping time; product quality; inputs such as energy costs; intellectual property protection; regulatory compliance; political and security risks; and trade financing costs.
- Organizations can utilize the National Excess Manufacturing Capacity Catalog (NEXCAP), a resource developed by the University of Michigan to get an understanding of vacant manufacturing facilities as well as critical data on skilled workforce supply, community assets and other information pertinent to making location decisions.