Bryan Fried, Chairman and CEO of PANGEA Global Technologies.
getty
For U.S.-based firms, there’s a confluence of factors—from geopolitical issues to high shipping costs—driving the supply chain crisis. For example, there have been significant impacts due to China’s response to Covid-19 outbreaks, with lockdowns causing port congestion, resulting in more downstream upheaval. We’re left with a multi-trillion-dollar supply chain crisis where everything from waffle irons to industrial equipment is experiencing delays.
This crisis is pushing many U.S. providers to rethink their manufacturing processes and how they forecast and manage logistics. As someone who’s worked in manufacturing and distribution since 1977, I’m seeing this happen firsthand. Let’s take a deeper look at what’s going on.
Overdependence On Asia
U.S. manufacturing’s longstanding reliance on Asia-based factories has created an overreliance on foreign-produced goods. Delays, rising freight rates, port congestion and pandemic public health rules have strained Asian manufacturers, exposing how overreliance on foreign production can risk the entire supply chain.
In the LED lighting industry where my company operates, I’ve seen many companies facing pandemic-related shortages scrambling to find domestic manufacturers who can temporarily produce hardware until the supply chain problems ease. The problem? The supply chain hasn’t improved, and customers want answers from their partners.
According to Kamala Raman, senior director analyst with the Gartner Supply Chain Practice, “global supply chains were being disrupted long before Covid-19 emerged. Already in 2018 and 2019, the U.S.-China trade war made supply chain leaders aware of the weaknesses of their globalized supply chains and question the logic of heavily outsourced, concentrated and interdependent networks. As a result, a new focus on network resilience and the idea of more regional manufacturing emerged.” A Gartner survey of global supply chain leaders in February and March 2020 found that 33% said they either had moved manufacturing and sourcing out of China or planned to in the next two to three years.
Political challenges in China are driving the movement to other countries for parts. Scott Price, president of UPS International, said that there would be “a migration to new supply chain models”—meaning goods producers will relocate existing capacity to factories closer to their consumers.
Shifting from Asia-based manufacturing impacts commercial markets just as much as consumers. Close manufacturing proximity to U.S. customers creates a competitive edge with quicker delivery and installation. On the commercial side, if producers receive a non-conforming product, the lead time for adequate repair, replacement or remediation is more sustainable.
Forecasting And Logistical Challenges
According to McKinsey, supply chain disruptions cost the average firm 45% of one year’s profits over a decade. Knut Alicke, a partner in McKinsey’s Stuttgart office, said, “The attention has shifted from [the supply chain] not only being a function that is valuable when something goes wrong but can really help us to be better.” His comment points to the need for manufacturers to review and improve their supply chains through better technology.
The rising cost of logistics also complicates forecasting. Higher costs drive up the price of essential products and create shortages of available products. The average cost of container rates has risen more than 500% since the pandemic began, reflecting the deep disruption for manufacturers and the higher costs and port congestion issues facing transportation firms. This dynamic puts further strain on every stakeholder.
Alicke said, “The holy grail of supply-chain risk management is multitier transparency. What does that mean? It basically means that a lot of companies have visibility into their first-tier suppliers—their direct suppliers—because they have a contract with them. Often the problem is not with the first tier but with the first, fourth, and fifth tiers.” His comment sheds light on the domino-effect issues with the supply chain, where limited visibility into downstream problems causes the entire system to slow to a halt.
Facing long lead times due to low product availability forces companies to commit more capital further in advance. This puts enormous strain on operations leaders to assess what consumers or business partners might require several months in advance. The forecast’s accuracy declines in step with the length of the predictions, meaning manufacturers must abandon the standard just-in-time delivery for many market segments as it does not withstand crises. Higher fuel costs and transportation capacity issues are two examples that immediately make just-in-time manufacturing more costly. Overall, the pandemic has proven that we have less resilience with just-in-time practices, with low lean inventories now driving shortages.
The Mexico Opportunity
As Julio Escandon, CEO of Monterrey-based lender Grupo Financiero BASE, noted in April, “It’s a year of big opportunities. Because of the pandemic and probably the situation in Ukraine, the supply chain that comes from Asia is moving to Mexico.” Escandon’s comments reflect robust growth in Mexico-based manufacturing, especially in areas near the U.S. border. For example, toymaker giant Mattel announced in March 2022 a planned consolidation and expansion project in Mexico that will include a 200,000-square-foot facility and employ approximately 3,500 workers.
Mexico is a logical alternative to the challenging environment found in many Asian manufacturing centers. In Mexico, companies have access to an established manufacturing infrastructure, as well as competitive labor costs. And multigenerational family structures often give companies access to dedicated workforces that stay in the area.
Companies moving production to Mexico can ensure optimal productivity by taking the time to understand and respect local customs and needs. They can also leverage the closer proximity to the U.S. and Canada to assist with the needed repair or remediation of any products created in Mexico.
Managing the supply chain crisis requires a range of different moves and strategic changes for manufacturers and suppliers. It doesn’t mean the end of globalization, as some suggest, but instead a reexamining of supply chain dynamics, with a broad shift to regional manufacturing. Many firms will engage in overstocking to hedge against shortages to help them prepare for demand. Manufacturing must return at scale to North America to reduce logistical issues, reduce shortages and get the economic engine working again.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
