As a result of this global supply chain turbulence and chaos, companies are now rethinking their global sourcing and manufacturing strategies. Some companies are completely shutting down factories in China and bringing production back to the U.S. But more commonly, manufacturers are sourcing more parts domestically and developing alternate suppliers in multiple global regions. Yet another strategy is “China +1” or “China +2” – keeping some manufacturing in China but adding other manufacturing sites in a second or third country. Whatever the strategy, the goal is to prepare for potential disasters such as fires, floods, geopolitics, trade wars, and most importantly, mitigate risk. The need for diversification has never been more poignant than now, given the Russian invasion of Ukraine.
For the past 10 years, reshoring manufacturing back to America has been a topic of discussion for executives and boards. These discussions were primarily based on the cost/benefit analysis of manufacturing in a low-cost country versus manufacturing in the high-cost US. But the global pandemic changed everything. Global supply chain risk became the most important factor in running global operations.
Shutting Down Factories
Shutting down whole cities and factories across China and then across other countries, caused almost immediate shortages of raw materials and products in global supply chains. Over time, most manufacturers had adopted Lean Manufacturing processes, extracting inventory out of their pipelines and depending on just-in-time supply lines and deliveries. The Hyundai factory in Korea shut down production within a week of the original Wuhan quarantine due to a lack of incoming automotive parts. Shortages of parts started appearing worldwide.
As factory shutdowns increased, decreased, and then increased again, it caused a whipsaw effect in global supply chains. Next, we experienced port closures due to Covid outbreaks, then a reduction in sailing schedules and ports-of-call, and fewer aircraft arrivals and departures, severely limiting cargo space available around the world. Container shortages and a global imbalance of containers – too many in the U.S. and not enough in Asia – have wreaked havoc in global shipping.
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What To Do Now
- We’ve been through a horrific two years and for business continuity in the future, there are specific actions that manufacturers need to take now:
- Develop a disaster preparedness framework that can be implemented when disaster strikes. This plan should include designating a leader, authorizing a budget for emergency spending, and a communications plan for employees and customers
- Develop and maintain alternate sources and suppliers
- Rethink your Lean Manufacturing and inventory policies. Consider keeping some safety stock
- Rethink your global manufacturing strategy to include multiple manufacturing locations that serve each region where your customers are located
- Consider manufacturing and sourcing in the U.S.
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