Written by: Nigel Southway, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Reshoring of manufacturing back to western nations has started, and its time to learn that shorter supply chains, the application of LEAN principles, Industry 4.0 technology adoption, are keys to reshoring.
In my book Take Back Manufacturing: An Imperative for Western Economies, I describe how we are now witnessing significant growth in political will as well as significant acceptance at the business level that reshoring manufacturing is a national imperative for many western countries.
This move away from the globalized manufacturing approach is now deemed economically desirable to achieve shorter, safer, cleaner, more controlled, more reliable, more secure, and more productive local supply chains that will better support national prosperity.
Certainly, in North America we have many trade reports indicating that greater than 80% of corporations are reviewing reshoring options, with some reshoring activity now apparent in some sectors.
So, the political ask, with maybe some economic inducement and encouragement, will be for business to get on with it.
Here are the key things business leaders and anyone involved in using or selecting a supply chain needs to remember for such future business decisions:
Run the numbers
First, we need to understand and be comfortable with the economics of any source change. Onshore versus offshore factory landed costs need to be reviewed, compared, and indexed looking forward into the future.
The history of global factory landed costs has seen huge changes in the last 10 years with much more to come. Up to 2010 when globalizing manufacturing was in full swing, we had almost herd behaviour in the rush to develop offshore sources and back then the real costs were not well researched or understood. Our viewpoint was that we had up to a 25% advantage in going offshore. Over the next 5 years we began to better understand the real and hidden costs of these long supply chains and experts started to predict that mainly due to cost increases in emerging so-called low-cost countries, and a better understanding of the hidden costs, we would be at the tipping point for the factory landed costs of offshore versus onshore in many manufacturing sectors by 2015. Since then and up to the present we have seen further erosion of the offshore advantage, and more recently the past economic merits of global trade now being challenged, with trade tariffs and national government investments driving a firm reshoring trend.
Looking toward the future… Not all trade will or should reshore, but It’s clear that depending on the product, the products shipping footprint in long supply chains and the associated costs of transportation, and other border/trade activities, offshoring will become much more expensive.
Certainly, increasing interest rates operating on weeks of inventory in long supply chains that must cross many borders, versus only days of inventory for local supply chains, increases the cost difference in favour of shorter supply chains.
Also, don’t forget the additional transport packaging and associated docking effort that may be needed if shipping is across a sea or through many transit points. You must also consider the cost of packaging disposal if it’s necessary to stage and repack for the end customer.
There can be additional costs in the form of the storage space that you may need to hold for the transit inventory when sea containers arrive and have to be unpacked and redeployed into your business.
Many business risks are associated with long supply chains, including inventory obsolescence and product shrinkage, as well as the potential of delivery delays that need to be factored into the costs.
Supporting a long-distance supply chain in a different time zone and culture may also incur an added support cost delta.
All of this can be minimized if the supply chain is local.
For these reasons, shorter and more localized supply chains are now typically less expensive than long supply chains, but it will always depend on many factors, so it is prudent to seek help from experts in building a validated cost structure. Experts have developed reshoring cost models that can assist you in getting real and accurate numbers and include all of the many cost factors, so you gain confidence when making your sourcing decisions.
Process improvements
When you increase local capacity and perhaps start spending capital, it’s important to make sure you have a clear grip on LEAN principles, so you don’t automate or tolerate waste in your new processes and operating structures. This means you need a whole organization and workforce that is perhaps re-educated and trained on LEAN concepts and the culture of Continuous Improvement.
Optimizing new product quality
If you are designing new products, make sure the new product introduction design process uses Six Sigma and “Design For Manufacturability” principles to ensure a high degree of compatibility between the product and the process of manufacturing so that its inherently defect-free and highly productive.
New technologies
Although it is anticipated that in most cases the future cost of long supply chains will tend to outweigh any low-cost labour advantage gained offshore, it’s still advantageous to minimize local labour content with new automation technologies and systems called INDUSTRY 4.0.
Not only will this reduce costs, but it avoids recruiting and training labour that probably is going to be in short supply in the local economy as we see growth in reshoring manufacturing.
As shown in the diagram, Undertaking INDUSTRY 4.0 will further reduce any sensitivity to local versus low-cost labour difference. If the total labor effort of all types is lowered with LEAN and INDUSTRY 4.0 then there is far less advantage in manufacturing in a low-cost labor country and then needing to add the extra cost of a long supply chain and all the wastes that it attracts.
Future products destined for local manufacturing may not be the exact same products that were offshored. Inevitably, there will be new technology in both the products and the manufacturing processes that may demand new facilities, equipment capital, knowledge, skills, and systems. And these must be fully integrated using an Industry 4.0 strategy.
The real purpose of Industry 4.0 is to move your whole process to a cyber-physical state so that human interaction and effort in managing and undertaking the business process is eliminated or minimized.
This Industry 4.0 strategy requires that you follow a well-planned road map that involves partnering with your business system and process equipment providers to develop a specific Industry 4.0 evolution plan. This must also be front ended with a LEAN transformation journey to ensure waste is eliminated and not part of the final solution.
Reshoring may need to wait for a re-capitalization cycle
Some reshoring decisions may only be activated when a new product or process capital cycle is apparent, and this means a need for an ongoing review of supply chain and sourcing decisions as new products and new process technology decisions are undertaken within a business.
Partner with local supply chains
You need to look at your local supply chains down to the raw material level to fully understand if you can rebuild local clusters of supply capability, even if this means you need to partner or invest in such relationships where practical.
As said, it’s important to look at your supplier’s own supply chain, and, if needed, the chain feeding it to help ensure the whole end-to-end supply chain is localized as much as practical for optimum short-cycle delivery and lowest inventory. This will help the whole business supply chain reach optimum cost and delivery performance.
Support and funding
It’s worth the effort to research and connect with organizations in your local jurisdiction that provide local technical support, and maybe can arrange governmental financial funding support. Don’t be shy. You don’t have time to reinvent the wheel, plus, if you’re entitled to assisted support funding, why not access it?
Last thoughts
The geo-political expert prediction is that for many reasons western national governments will drive policy much more toward localized trade blocs or trading communities that will be far more controlled.
So, being aware of these changes and being ready to ask the correct questions and make the right decisions will ensure your business can participate and benefit from this transformation in future supply chains and trade activity.
I did not call my book “Welcome Back Manufacturing” because it certainly needs to be “taken back.” And, yes, it will take significant planning and effort by everyone, but it’s worth it for our future prosperity.
Read more from Nigel!
Nigel Southway, Executive Contributor Brainz Magazine
Nigel Southway is based in Toronto Canada and is an independent business consultant and the author of Take Back Manufacturing: An Imperative for Western Economies, and also Cycle Time Management: The Fast Track to Time-Based Productivity Improvement, an early LEAN thinking textbook. He consults and educates worldwide on Business Productivity Improvement, LEAN business practices, Advanced Manufacturing Engineering, Future Supply Chain Management, Industry 4.0, National Sustainability, Global technology transfer projects and joint ventures and more. He is a past chair of the Society of Manufacturing Engineers and the leading advocate and spokesperson for the Take Back Manufacturing Forum, and the North American Reshoring initiative in Canada.
