Insight – Is it time for reshoring?

TRADE war and Covid-19 pandemic have exposed the complexity of managing supply chain.

In managing supply chain, it is all about finding the right parts from the right suppliers at the right price and mitigating supply constraint risk through second sources.

And the success of having a good and effective supply-chain management can be viewed as a leading indicator to the success of the country, industry, product and business.

During the trade war between the US and China, there was a dramatic shift away from Asian low-cost countries. In 2019, the US imports from China declined by 17%. Many US companies were said to be cutting back on their sourcing from several of their Asian traditional partners.

Apart from the trade dispute between the US and China, there are other events like the 2008 Global Financial Crisis and the 2010-2011 natural disasters such as Iceland’s volcano eruption, Japan’s earthquake and tsunami, and Thailand’s floods. Most of these incidents are relatively easy for supply chains to overcome. They are mostly isolated. Nonetheless, these disasters highlighted the risks of using single sources, especially when they are overseas.

The Covid-19 pandemic is a “wake-up call”. The restrictive measures imposed to contain the virus spread disrupted global supply chain and hurt demand as well as unemployment almost immediately. Such measures during the pandemic exposed the complexity of the supply-chain management. Weakness emerged in a large number of systems and their sub-assemblies, integrating software as well as hardware components. And to manage this complexity, it requires reliability and sustainability, which is tough and challenging.

ollowing the global pandemic, many companies started to view reshoring, onshoring and nearshoring of their production capabilities as a way to steel themselves against the next potential disruption.

Reshoring and onshoring allow companies to move production into their own countries, while nearshoring is to reposition their activities to countries that are nearer to the their home base. For example, a Malaysian company that relies heavily on Chinese production may now be looking at another country as a potential nearshoring candidate. All the three strategies are emerging in the manufacturers’ radar screens right now.

At the macro level, reshoring process can help balance trade and budget deficits, reduce unemployment by creating well-paying manufacturing jobs, and develop a skilled workforce. Manufacturing companies will potentially reduce their total cost of products, improve balance sheets and make product innovations more effective.

But in reshoring, which is to bring manufacturing back to Malaysia, for instance, it will only make more sense when businesses find their total cost of ownership (TCO) to be attractive. The TCO is defined as all the costs of manufacturing a product from the beginning to the end – labour costs, tariffs, quality issue and supply chains.

As manufacturing intends to reshore, more jobs will open up. Demand for skilled operators will rise. Manufacturers are more likely to experience elevated costs as they hire skilled workers, invest in training, define new methods to allow less skilled employees able to handle the production requirements. For companies that examine their operations at the machine shop level and take action to correct the problems at the very base, they will be able to forego high skilled individuals. They will opt to employ a less skilled individuals who will not need to make on-the-fly adjustments.

Hence, reshoring is not as easy as flicking a switch. In the wake of relocation, many of the domestic manufacturing capabilities along the supply chain have deteriorated. The challenge is also to manage expectations. Local suppliers do not inherently eliminate risk. And more reshoring does not necessarily mean that the supply chain is more resilient.

Right now, manufacturers are coming to terms with numerous issues that were not prevalent during the booming economy. What are they? Shocks to consumer demand, both in terms of volume and the variety of manufactured goods consumed. Surprises to workforce presence, composition and location. Significant supply chain fragility, with inventory shortages affecting production and stockouts impacting sales.

Still reshoring of production is possible. What can Malaysia, for instance, do?

First, there is a need to a better understanding of which industries may be deemed “essential”. A good way to do this is to use the list of industries that were allowed to remain open (or reopen first) during the pandemic’s initial shutdown phases. There is a need to map the supply chains of these industries to understand their relative localisation.

Next, there is a need to conduct a “stress test, ” to measure the resiliency of supply chains. Once those industries are defined and mapped and key opportunities are identified, the government can think about executing a series of programmes and strategies to address concerns regarding cost competitiveness. Among them:

> Connect to and leverage on regional talent generators and workforce development providers. With the labour demand of many manufacturers shifting from low-skill, low-cost labour to mid- to high-skill engineering and technical capabilities, educational institutions are well positioned to produce the very talent that will increasingly be in demand from these sectors.

> Target industries needing new investments in “Industry 4.0” technologies. Related to the need for a digitally fluent workforce, massive disruption is underway in manufacturing, with an increased reliance on technology as opposed to low-cost labour.

> Create opportunities in the various regions. By doing so, it will spur activities in the regions that are underutilised for larger, capital-intensive manufacturing projects. Companies setting up new operations in any community will need assistance with site selection, permits and local approvals, and optimising their processes.

> Establishing regions or localisation will help establish workforce programmes and wraparound services to ensure the jobs benefit underserved communities. With the need to move toward automation, it will be critical to link those programmes with educational institutions and training providers to move workers up the skills ladder and meet increasing demand for mid- to high-skill labour. Couple that with talent attraction initiatives can provide both short- and long-term solutions for reshoring operations.

> Government needs to bolster programmes and policies that catalyse reshoring efforts. These would include:

(1) government contracting is an example of a successful means of catalysing reshoring production;

(2) government programme to encourage long-term investments in low-income urban and rural communities nationwide; and

(3) government grants to help regions attract significant technological investments

It is important to take note that supply chain resilience strategies that localise critical industries and their component supply chains would alleviate the weaknesses uncovered during the Covid-19 pandemic. It will also increase employment growth across historically well-paying industries and provide economic development opportunities for the various regions or states with the economic fundamentals conducive to advanced manufacturing.

If we have learnt anything from the coronavirus and swine flu H1N1 epidemic of 2009, it is that we cannot depend heavily on other countries, even close allies, to supply us with the needed items, from face masks to vaccines.