#86 – Inside Our Industry – The Economic Argument for Moving Manufacturing
Posted on | Inside Our Industry
The decision to reshore manufacturing, or at least bring it closer to the end users, has never been more critical. We are seeing more and more manufacturers examining where their products are produced and figuring out what it will take to prevent supply chain crises. Below, in part, is a post from Forbes.com that outlines the economic benefits of moving manufacturing.
The Economic Argument for Moving Manufacturing
Doug Donahue, Forbes Councils Member, FORBES.com. Jan. 24, 2022
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?
It’s a hard sell. 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.
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. 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.
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 greatest advantage… 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.