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by Chris Kuehl
It was just a few years ago that Just-In-Time (JIT) was all the rage. One could not open a business publication without seeing a piece extolling the virtue of a global supply chain. The advances in technology made ordering from across the world as easy as ordering from across the street. Communication and transportation were at the center of this revolution. This seemed to provide a solution to one of the more vexing aspects of business – inventory control. Holding vast quantities of inventory is a cost but not having what is needed is more expensive yet. The ability to get what was needed at exactly the moment it was required changed all that.
Unfortunately, there have been some major inhibitions to the JIT process and these have all become very obvious in the last few years. What is the supply chain expectation now? Is JIT really dead? There has been a great deal of speculation regarding supply chain trends going forward.
Trend Number One – Diversification. Poll after poll indicates that the majority of those currently doing business in China are actively looking for alternatives. They are not necessarily abandoning operations in China, which would be economically short sighted. They are looking to diversify their supply chain by expanding to other Asian countries such as Vietnam, Thailand, and India. They are looking at nations in Africa and Latin America as well. These shifts are not simple as these countries lack the infrastructure for trade which China has developed over the last few decades, but they are catching up and are pulling market share away from China. These moves will limit exposure to the variable nature of China engagement but will present new challenges as these nations all have their own set of issues and inhibitions.
Trend Number Two – Reshoring.
More than a few companies have elected to bring significant levels of production back to their home countries. The U.S. has already seen about a trillion dollars of reshoring and that is likely to expand by another trillion before the year is out. The advantages are obvious – shorter transportation routes, easier management, and proximity to the customer base. There are disadvantages as well. Costs are higher due to higher taxes, more regulation, and higher labor costs. Not only are workers more expensive, but they are also harder to find. Most of those that are moving to the U.S. have elected to emphasize technology and robotics to allow them to compete with those low production cost competitors in other parts of the world.
Trend Number Three – Inventory. There may be some long-term solutions such as diversification and reshoring but in the short term there have to be other adjustments. The simplest (to some extent) is holding more inventory so that disruptions are minimized. This is expensive in its own right as it means investing money to hold product that may not be deployed for months. It means paying for warehouse space or building capacity within the core operation. There is a reason that the manufacturing sector is the fastest growing segment for commercial construction.
Trend Number Four – Delays.
Not all these trends are positive ones. The most immediate reaction to the global supply chain crisis has been delay. The reality is that goods are not moving with any degree of efficiency or reliability at this time and the future promises more of the same set of delays. China is not yet backing away from its policy of lockdown and that will continue affecting output and the efficiency of the ports. Political confrontations show no sign of abating – Taiwan and Ukraine are at the top of the list, but they are far from the only ones. Leftist governments in Latin America have all but shut down exports. Argentina’s food exports have been severely limited while Peru and Chile have seen copper and other metal exports reduced by political edict. The fact is that manufacturers can’t make promises they can’t keep. We have been watching this with the automotive sector for months, but it has affected every industry. Delays can be very lengthy, and this is not a situation that will correct quickly. Even if the supply chain limitations of today were addressed in the next month or so it would be a year before the economy as a whole would return to normal and there is no signal that these issues will be resolved quickly.
Dr. Christopher Kuehl (Ph.D.) is a Managing Director of Armada Corporate Intelligence and one of the co-founders of the company in 1999.