On June 16th, Prodensa Consulting Services and Global Location Strategies formalized their professional partnership. They participated in a webcast discussing the future of North American Supply Chain amidst many challenges and opportunities.
Supply Chain Shifts
We are currently facing one of the most significant shifts in the supply chains in our lifetime. COVID-19 has accelerated the pace of these transformations, exposing corporations to risks and uncertainty not seen since World War II. The “World is Flat” model has been shocked by waves of different orders. Ranging from rising costs on doing business offshore, uncertainty on tariffs, changes in demand, all the way to an exacerbated nationalism. On the positive side, the new USMCA brings the certainty of a legal framework to do business in North America.
Looking back 20 years ago, when China’s value proposition was cheap labor and access to the local market, and the primary trend was to achieve the lowest cost of manufacturing, the supply chain risks were just something taken for granted. However, the increased risk of the dependence of certain commodities produced by Chinese manufacturers (such as electronic components for various industries), unveiled thanks to the COVID-19 crisis.
All these facts seem to be a significant opportunity to bring the supply chain back to North America. Reshoring or nearshoring concepts aim to optimize the “Total Landed Cost”. These including the manufacturing cost, the cost of logistics, safety inventories, products in transit, supplier replacement costs, and unexpected stoppages others.
Notwithstanding, picking a fight with China may not be a good idea. Since a significant disruption may jeopardize the today’s highly integrated supply chains. China learned fast to replicate its supply chain, developing a vibrant economy. Up to the point of becoming the “Dragon in the room” (difficult to neglect), and willing to conquer markets even outside of China. Also, the Chinese market by itself is very appealing for North American companies who would like to please the local markets. In the end, companies will try to keep costs down but also inhibiting the risk of logistics.
Supply Chain Resilience
The name of the game in business continuity of the supply chains is Resilience. The company, city, or region that offers the most competitive costs and also the one who minimize risks, will prevail. Total landed cost now does have to include new variables such as the cost of disruptions and risk mitigation costs. Of course, every industry poses its challenges: Biotech and Pharma require lots of redundancy systems. Aerospace takes time to qualify parts from a new supplier. Oil and Gas Industry requires the stability of utilities.
On the other side, what makes a city or region resilient? It is not just a city less prone to interruptions of production due to natural disasters or closer to the market, but where its people can react quickly to an externality, and whose institutional architecture can have the different stakeholders interact, to shield the location better for business continuity. In this line of thought, we have to make sure that the government stands certainty with the rules of the game so that companies can manage the risk. Coordination of the organized civil society is paramount, so make sure we keep pushing that polices are not made for electoral regions, but to achieve long term strategic goals.
Finally, enduring success for companies will not only reside in manufacturing activities. Also, it will reside on its environmental, economic, and social impacts. Developing scenarios to model all the potential risks and variations has proven to be a fantastic tool to address such risks better. The ability to implement a plan to address such impacts and measure them is crucial and must be in every top manager’s critical list.
Prodensa is an advisory and project management firm serving the North American manufacturing market. Our partnership with Global Location Services provides the external site selection of the North American region. We will support our clients in finding the best site for their new venture.
Jorge Ortega, Associate & Strategic Advisor. Jorge firmly commits to guiding companies to achieve international success in their manufacturing operations in Mexico. He has been supporting this effort for over 20 years.