In June 2020, a Gartner Survey published by the leading U.S. research and advisory company revealed that 33% of 260 supply chain leaders have either already moved their sourcing and manufacturing activities out of China or plan to do so by 2023. The cited reasons for this move include the trade war between the U.S. and China and a phenomenon called ‘resilience’. Having a highly resilient network is defined as having good visibility into supply chain issues and the flexibility to readily switch to alternative sources when issues arise.

This phenomenon highlights the risk with a just-in-time manufacturing model, which can quickly break down if supply chain issues arise.  Currently, for some manufacturers, there are either limited or no alternative resources. The trade war has raised supply chain costs by 10%. However, under the assumption that these issues will diminish under the new US administration, companies can no longer afford to ignore the phenomena of resilience. This will inevitably lead to them looking closer to home for supply chain alternatives.

What are the implications?

One possible outcome for companies is ‘onshoring’ or ‘reshoring’ whereby they will look to bring manufacturing back to home turf. For companies at home in North America, the creation of jobs through onshoring is of significant economic value on multiple levels. To start, employees producing goods locally contribute to the economy via taxes and their consumption of goods. Companies are able to benefit through the growth and diversification of their own product lines. They can also prevent further loss of design and manufacturing expertise to overseas suppliers. Finally, a shortened supply chain enables quicker responses and mitigation of issues as they arise. However, all of this comes at a price, quite literally.

For companies who elect not to choose this path, ‘just-in-time’ manufacturing sourced from low-cost suppliers works well when there are no disruptions to the supply chain. However, once an issue occurs the downside of having no readily viable alternative quickly raises its ugly head. China currently has some of the lowest manufacturing costs on the globe. This means that any switch to local suppliers will inevitably result in a higher unit cost which will then get passed on to the consumer. This illustrates the inherent conflicts of establishing or re-establishing domestic manufacturing. Yes, it creates jobs and ensures manufacturers can get the product required within the necessary time frame. However, any consequent unit price increase will be passed on to the end-user unless profit margins shrink. The question then becomes, will customers be willing to pay more for their goods and, if so, how much? 

What actions can facilitate “onshoring”?

This is where the ‘rubber meets the road’ so to speak. Some companies will believe they can indeed get their end-user to absorb some price increase. But how much remains unknown. It is an interesting challenge for manufacturers who head down this path. Another hurdle they will face is the potential for an internal struggle. Companies need to convince accounting departments that the lowest cost is not always the optimum solution. If there is a value proposition to these companies, will they be able to convince their end-users that it benefits them too? For companies who normally don’t aspire to produce goods at the lowest cost, the task may be easier since they are used to selling their customers on their value proposition. However, the question remains of whether low-cost providers will be able to do the same.