Fueled by free trade policies, the post-war economic expansion introduced a new era of globalization. The global expansion of trade improved the economies of developing countries as it promoted investment in manufacturing and stimulated job creation. The globalized economy also prepared the groundwork for large companies in developed countries to offshore business operations in the 1970s and fostered the global supply chains that helped build multinational corporations.
Global supply chains worked well for everyone from producers and consumers — until now, a decade that is proving to be exceptionally challenging for global supply chain management. It started with pandemic lockdowns that crippled manufacturing and disrupted workflows from procuring raw materials to distributing finished goods. Then the post-pandemic era brought workforce shortages, unpredictable supply, sudden bursts of demand, and extended delivery times. The scarcity of critical components and materials such as semiconductor chips and steel affected major industries, including automotive, electronic, construction, heavy equipment, energy and medical.
Logistics bottlenecks were caused by U.S. West Coast port congestion and debacles like the Ever Given blockage of the Suez Canal. Duties and escalating freight rates caused shipping costs to soar. Now, the geopolitical tension and economic instability caused by the Russian Ukraine war, US-China tensions and political unrest scattered around the globe are overshadowed only by the climate disasters that have affected every continent.
In this environment, it is apparent why global company executives rate the shortage of materials and transport reliability as the top two supply chain challenges. It’s also understandable that 60% of North American and European companies are considering reshoring at least part of their business operations or product lines.
The Reshoring Debate
Reshoring – whether onshoring within a country or near-shoring to a region – is not a new topic of conversation in corner offices. Founded in 2010 as an industry-led movement to repatriate manufacturing, the Reshoring Initiative emphasized that offshoring may not make economic sense considering the costs incurred by warehousing inventory, transportation, and monitoring long-distance supply chains.
Over the next decade, the backlash to offshoring and the drive to bring work “back home” has fueled government initiatives, incentives and legislation. Rapidly rising labor costs in China reinforced the argument, coupled with a growing risk to intellectual property. Poor quality control meant rework or worse: loss of market share. In 2018, Trump’s 25% import tariffs triggered the US-China economic decoupling that spurred the relocation of manufacturing operations from China, as companies realigned to other Asian or African countries or returned to local or regional locations. Over the last two years, domestic corporate and foreign direct investment in facilities produced a record number of new jobs in North America and Europe. Recently, Bloomberg notes that 90% of the executives they surveyed planned to move production out of China with 80% considering relocating to the US, and construction of new manufacturing facilities rose 116% over the last year.
But not everyone’s bringing work home. The same global companies that contemplate reshoring cite higher domestic operating costs, loss of economies of scale and lack of supplier capabilities in their region as the greatest hindrance. The shortage of skilled and trade labor, lack of raw materials and production capacity leads to competition for domestic suppliers that can result in a company leaving standing. There’s also the investment in time, money and resources needed to find and vet new suppliers and get them onboard. Add the uncertain supply chain dynamics on today’s economic and political stage, and it’s clear why many businesses are reluctant to make a major move.
Proponents acknowledge these issues but counter that companies must consider supply chains as a whole. They argue for a shift from efficiency and low cost to the agility and flexibility that reshoring offers. Domestic production also reduces the country’s trade deficit, benefitting all businesses. Stronger ESG laws in North America and Europe reduce the carbon footprint and improve human rights, values that are essential for corporate responsibilit. Ultimately, they say, reshoring will rebuild domestic manufacturing and business operations, helping to reach the goal of self-reliance and supply chain resilience.
A Common Denominator
These issues are important for every company to consider, but each must evaluate reshoring by their own criteria. Whatever the decision, creating a system for evaluating and onboarding new suppliers – or re-evaluating and retraining existing ones – will be critical to avoid future disruption. It will mean developing end-to-end visibility, governance and collaboration, and implementing a system for reporting risk – wherever the suppliers are.
Reshoring may facilitate monitoring suppliers with increased visibility in countries perceived to have low ESG risk, but it may bring with it recast ESG concerns.
New first-tier domestic suppliers mean new supply networks and third-party outsourcing that must be monitored for risks. Newly formed companies, start-ups and expanding SMEs that fill the supplier vacuum may not have the resources or strategies for ESG compliance reporting. To benefit from reshoring, companies must source or cultivate suppliers and third parties that will not contribute to supply chain disruption in the future, whether caused by labor law violations or poor governance that cripples supplier operational performance and delivery.
Ethixbase360 offers customized, proven solutions for successfully monitoring complex supply chain risk. Partner with us to streamline onboarding, systemize monitoring and reporting, collect critical metrics, and build sustainable third-party relationships.