The Economic Argument For
By: Doug Donahue
Reprinted with permission from Forbes.com
The ongoing supply chain crunch has hit the vast majority of the manufacturing sector. In a 2020 McKinsey survey, 73% of respondents encountered problems with suppliers during the pandemic.
That’s leading to a new push for regionalization in manufacturing, especially in industries like medical devices, where shortages of critical goods aren’t possible. Market forces have been shifting since the start of the pandemic to give regional manufacturers an advantage over far-flung competitors. The shorter and stronger the supply chain, the thinking now goes, the better. This forces every manufacturer to ask a fundamental question: should we keep production where it is or move someplace else?
There’s a compelling economic case to question where your product is produced. It has arguably never been more advantageous to shift some or all of production away from stalwarts like China to one of the many viable alternatives. It has never been more urgent, either, to embrace whatever it takes to prevent the next supply chain crisis. But there’s also a huge cost involved with packing up production and moving to a new country or continent. And for private equity backers, investors and CFOs, the price tag of relocating may overshadow the long-term economic advantages.
It’s a hard sell. Nonetheless, this transformative moment is no time to sacrifice long-term strategic positioning for short-term savings. To get the holdouts on board, frame the argument in financial terms. Here are the economic benefits of moving manufacturing.
Getting Closer To Customers
Locating production closer to current and potential customers downstream in the supply chain facilitates commerce. By working in similar geographies and overlapping time zones, producers can shorten lead times, improve service delivery and offer greater levels of customization. Some locations offer additional advantages to offset the strengths of China, including stronger IP protection and low-tariff or tariff-free trade. Relocation opens the door to new revenue growth along with new revenue streams that wouldn’t be possible from the current production locale.
Leveraging Cost Savings
Mexico and Malaysia now outrank China in the BCG Global Manufacturing Cost Competitiveness Index based on factory wages, productivity growth, currency exchange rates and energy costs. In fact, the most-recent index challenges many expectations about which countries deliver the greatest value for manufacturing. For example, moving may lower the overall cost of production, not to mention the savings on shipping, which has ballooned in cost since the pandemic began. Opportunities to leverage new production methods like a hybrid of in-house and outsourced production or partnering with a shelter provider could further lower production costs from what they are currently.
Building Resilient Supply Chains
The Covid-19 pandemic is just the latest crisis to disrupt the global supply chain. Supply chain issues affect both demand for goods and supply of materials to make those goods — they’re catastrophic in economic terms. These issues have become common enough to rank as a major economic inhibitor. And with so many disruptive forces on the horizon (climate change, inflation, trade wars), production based in the wrong location could be in serious jeopardy. Moving manufacturing preemptively insulates a producer from unruly supply chain problems that could plague other producers.
Positioning For The Future
Recent history proves that distance only compounds supply chain issues. And while the same forces that stretched supply chains across the globe in the first place haven’t disappeared, they will look much different in the wake of Covid-19. As the incentive structures within manufacturing put increasing value on proximity to customers and suppliers, moving sooner rather than later comes with distinct advantages. The ability to capture new customers in markets with high demand and little competition, for one. The greatest advantage, however, will be adopting a production strategy (and location) based on present and future conditions rather than one committed to a past that isn’t relevant anymore.
It’s important to emphasize here that the economic case for moving is strong in some instances and weak in others. Even though there’s been a push for migrating manufacturing, whether as reshoring, nearshoring, dual-sourcing or regional outsourcing, these options are not universally beneficial. They may not even be viable.
Which circles back to the initial question: stay or move? The answer will be unique to each manufacturer and only make sense after a close, critical look at the production footprint. Conducting this analysis, both for the current production orientation and the alternatives (which may include complementary production in several regions rather than an outright move), will be vital for positioning future production wherever it can thrive. It also makes the economic case that much stronger for any skeptics.
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