“Let’s bring manufacturing home!”
This sounds like a straightforward solution to the disruptions currently plaguing the supply chain—which have only been amplified by the Ukraine-Russia conflict.
Unfortunately, the answer isn’t so simple.
Supply chains are big, complex systems. We can shift certain pieces left or right, but that doesn’t mean we’ll see immediate relief. Take oil, where conventional wisdom might suggest an increase in domestic drilling. Yet ConocoPhillips CEO Ryan Lance feels otherwise, stating it would take at least another year before increased drilling would bring more oil to the U.S. market.
To actually dig out of the supply chain rut, leaders need solutions that help in both the short and long term.
Nearshoring, not reshoring
If we just open up a bunch of factories in the U.S., we’ll own the supply chain from end to end. Right?
Not so fast. The truth is that much of what we consume still comes from the earth in its raw form, and there are limits to where we can get those materials. Take palladium, an element commonly used in automobile manufacturing: 25 to 30 percent is produced in Russia. And China controls the majority of rare earths found on the planet.
And there’s still a headwind around labor participation in the U.S. Job openings are holding near record highs. Bringing more jobs to our shores in the form of factories doesn’t mean there will be workers waiting to fill them.
But we aren’t powerless. In the coming months and years we may see more nearshoring. That means moving segments of the supply chain to regional actors like Mexico or Central America where geography and geopolitics simplify things—and labor costs are still cheaper than in the States.
Hedge the supply chain just like you hedge finances
In the financial sector we often hear about diversification and risk mitigation. Why haven’t we brought this thinking to the supply chain?
The inventories-to-sales ratio, or the measurement of how quickly items are being refilled after a purchase, has been hovering at decades-long lows since the beginning of the pandemic. That’s evident to anyone who’s seen empty shelves over the last two years.
It’s time to invest in hedging the supply chain with the same rigor and discipline we use to hedge our finances. Even if your supply chain is regional, or even if it’s all in the U.S., you can become more nimble and resilient through this sort of hedging.
Take Amazon: Breaking out of a mostly linear model enabled it to weather Covid-19 and a multitude of other natural challenges that might have crushed other businesses. Beefing up distribution centers both better serves customers with faster fulfillment and creates a natural resiliency in the business model. If a tornado were to hit an Amazon distribution center in the Midwest, it could still fulfill orders by shifting fulfillment to another center.
Companies will also need to get creative about the components that make up their products, finding alternative raw materials or removing elements from the supply chain altogether.
The growing trend of banning certain plastic products is a great example—there’s a clear need for sustainable, eco-friendly alternatives to, say, the common plastic straw. In response to a plastics ban that went into effect late last year in New Jersey, retailers switched to bamboo, paper or reusables. By replacing plastics with resources that can be produced regionally and sustainably, the straw supply chain is becoming more resilient.
What government can do
In the shadow of the Ukraine-Russia conflict, as well as the Covid-19 pandemic, there’s a clear bipartisan desire in the U.S. to encourage change in our approach to supply chains, in particular in areas that concern national security. This not only includes energy, but also things like semiconductors and pharmaceuticals.
Companies are going to start looking at what they can do regardless of what happens in Washington, but Congress and regulators can ensure they’re making it easy for businesses to pivot. In North America we already have favorable trade agreements that make nearshoring a worthwhile consideration, so it’s up to regulators and lawmakers to create additional carrots that entice businesses to build resilience into their supply chains.
We’re about to see accelerated change that will ultimately build more resilient supply chains in the long run. Those who commit resources to solving these challenges now will be primed to weather whatever challenges come our way. In some cases, that commitment will mean the difference in whether a business, or even an industry, survives.
In the next two to three years we’ll start seeing the effects of broader, systemic changes.
In the next decade, we’ll find out who got it right.