A ripple effect caused by COVID-19 is a desire on the part of many in Washington, D.C., including President Trump, to reduce America’s reliance on China’s manufacturing and exporting of products. U.S lawmakers recently proposed a $25 billion “reshoring fund” to help companies relocate manufacturing back to the United States. The proposal has bipartisan support and is expected to become a major discussion point during the 2020 presidential campaign.
On the surface, relocating manufacturing from China to the U.S. may appear to be as simple as closing one plant and opening another. The truth is, it’s not that easy. The real challenge is untangling the myriad components that make up the global supply chains currently in place.
What Is A Supply Chain?
According to Penn State University professor Dr. John Langley, in his book Managing Supply Chains: A Logistics Approach, “A supply chain encompasses business functions and enterprises interconnected by resource flows of goods, services, information and funds. Supply chain management spans these interconnected networks to acquire, produce and deliver goods and services in our global economy.” (I earned a master’s degree in supply chain management from Penn State University in 2009).
Simply put, every product that a consumer purchases, from a pair of jeans to a home, requires multiple supply chains. The word “chain” is used to describe the fact that all steps required to manufacture a pair of jeans or build a home are, in fact, linked together like a chain.
No matter where you grab a chain and pull, the entire chain will move because of the links being connected. Disrupt any part of a supply chain, and the effects will be felt throughout the entire length of the supply chain.
And that’s the problem.
The Modern-Day Gordian Knot
According to legend, after Alexander the Great led his army into Gordium (located in Turkey) in 333 B.C., he found a wagon with its yoke tied with “several knots all so tightly entangled that it was impossible to see how they were fastened.” Fascinated by what he saw, Alexander tried to untie it without success. Instead of continuing to try, he stepped back and cut the knot in half with his sword.
In many ways, global supply chains are as intricate as the Gordian Knot. However, unlike Alexander’s ability to cut the knot with one stroke of his sword, no such remedy exists to solve the problem of globalization and lengthening global supply chains.
Over the years, companies have focused on making their supply chains as lean as possible to reduce costs. This has resulted in most businesses creating supply chains that are highly efficient at manufacturing, transporting products from international locations to the U.S., and delivering products to retail stores or direct to customers.
When there are no disruptions in the supply chain, efficient supply chains operate as designed. However, when disruptions do occur the ramifications can be severe.
A recent example of a supply chain disruption is the number of grocery retailers that ran out of essential items like food, cleaning supplies and even toilet paper when consumers were forced to remain home due to COVID-19. Working from home didn’t cause consumers to have to go to the bathroom more often. However, working from home did cause consumers to have to use their own bathrooms more often than normal, resulting in the need to purchase more toilet paper.
When customers change their behavior, the efficient supply chains in place are unable to respond to the changing demand. In this case, a massive shortage of toilet paper (among other “essential” items) ensued.
Arguments For And Against, And A Collaborative Approach For The Future
The idea that companies should shorten their supply chains by relocating manufacturing to the U.S. has supporters and detractors. While President Trump is in favor of companies returning their operations to the U.S., not everyone believes that’s the best solution.
Stanley Chao, author of the book Selling to China, makes the argument that returning manufacturing to the U.S. will result in increased pollution, as manufacturing plants, especially pharmaceutical plants, generate massive amounts of waste products. In addition, due to higher labor wages in the U.S., everything manufactured within the country will cost more, according to Chao.
Based on my experience working as a supply chain consultant globally, I understand the arguments for and against returning manufacturing to the U.S. to shorten supply chains and reduce dependence on other countries. There is no perfect solution, but some solutions are better than others.
For example, instead of rushing to return manufacturing to the U.S., I recommend identifying the optimal number of manufacturing plants to ensure continuity of supply for rare earths, critical parts, technology and pharmaceuticals. In other words, the ideal strategy may be to supplement manufacturing plants already operating in China with additional plants located in the U.S. (or other countries) vs. closing plants and leaving China altogether.
The way I see it, the Pentagon and U.S. intelligence agencies should look to significantly improve their abilities to sense and respond to potential disruptions, and provide detailed action items to business leaders, outlining steps to mitigate risk.
Finally, steps must be taken to accelerate execution across global supply chains. When disruptions occur, hours and even minutes matter. The time has come for companies to collaborate on supply chain and logistics to maximize innovation, reduce mutual costs and complexity, leverage available capacity to rapidly meet increased demand, and maintain forward-deployed inventory to minimize out-of-stock items.
Supply chains will always be complicated. Let’s not take a sword to a problem that is best solved with a scalpel.