As More Manufacturers Look into Reshoring, Efficient Supply Chains to Lower Overall Costs Will Be Important

By Adhish Luitel | 3Q 2024 | IN-7535

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While supply chain congestion and chipset shortages during the pandemic have been superseded by other news, talks of reshoring and nearshoring remain. Reshoring and Foreign Direct Investment (FDI) continue to grow in the United States-the Reshoring Initiative recently announced that, in 2023, job announcements due to reshoring and FDI reached 287,000, which had peaked at 343,000 earlier in 2022. Electric Vehicle (EV) batteries, semiconductor chips, and solar energy are industries that experienced the most growth, as they were supported by the Inflation Reduction Act (IRA). These verticals drove nearly 40% of the announced jobs in 2023. Overall, geopolitical risks are a top driving force for reshoring and FDI growth. The Russia-Ukraine conflict was and is still expected to drive FDI from Europe to the United States due to natural gas availability. Factors like inventory holding costs, wage and currency changes, overseas freight costs, and personnel risks have also contributed to mass reshoring initiatives. Reshoring and FDI away from China have reached historical highs as well. Regardless of the upcoming U.S. presidential election results, both candidates and parties have expressed an urgency to shore up U.S.-based manufacturing, so we can expect favorable policies to continue.

The results can be seen in the financial market as well as investors investing in Exchange Traded Funds (ETFs) focused on companies that are reviving or expanding production in the United States and taking advantage of government subsidies. North of US$2.25 billion has flowed into a small group of ETFs focusing on reshoring this year.

This year at the Industrial Manufacturing Technology Show (IMTS), reshoring was a major theme with a lot of talk around upskilling manufacturing and logistics using technologies and reducing costs by bolstering efficiency. With manufacturing moving back home, the obvious concern is around increasing manufacturing costs. Having said that, the potential of lean manufacturing, inventory cost reduction, and lower transportation costs are the biggest opportunities of cost reduction to manufacturers looking to effectively leverage technologies, while bringing manufacturing back home.

Collaborative Robots (cobots) were one of the more popular solutions on display at IMTS and they seem to be improving Year-over-Year (YoY). They are popular for order fulfillment operations, as they are cost-effective and very flexible to deploy. Minimal programming and setup effort is required during deployment, making it useful for Small and Medium Enterprises (SMEs) as well. We are already seeing significant adoption of cobots in warehouses and distribution hubs, as robotic warehouses are set to grow by over 10% YoY according to ABI Research's Smart Warehousing: Automation & Robotics market data (MD-SWRA-23). IMTS also had hyperscalers like Amazon Web Services (AWS), Microsoft, and Google Cloud showcasing various use cases of Generative Artificial Intelligence (Gen AI) that can serve as great low hanging fruit for manufacturers post-production. Gen AI can help supply chain decision makers find better quality data and inform decision-making. Within cloud-based platforms, enterprises can combine data with Artificial Intelligence (AI) to propel businesses to take a more proactive approach with regard to demand planning, supplier/carrier identification, route optimization, possibly adopting a Just-in-Time (JIT) inventory holding model, and with risk mitigation.

Applying rudimentary total cost models and comparing factors like wage arbitrage, price variances, and transport costs will be key. Operationally, there is a need for manufacturers to understand the Total Cost of Ownership (TCO). TCO estimators can help enterprises account for all relevant factors like overheads, balance sheets, and various other tangibles to determine the true TCO. Companies can then evaluate their long-term sourcing strategies and identify alternatives. Manufacturing inputs, which include suppliers, transportation, and location factors should be carefully considered well before investment. Site selection will also play a key role when it comes to streamlining localized supply chains for manufacturers looking to reshore and/or nearshore. From an incentive perspective, both local and state-level organizations in the United States are providing incentives to attract business investment. Beyond incentives, factors like route to final customer, potential cost and modalities of transportation, and appropriate warehouse or distribution hub locations should be identified. All these factors will help drive down TCO for manufacturers looking to reshore from a logistics perspective. Companies looking to reshore should also assess the blueprint laid out by manufacturers that have been successful with their reshoring efforts in the past. Companies like General Electric and Chrysler are good examples in the automotive and consumer electronics sectors, respectively, that have undergone a successful reshoring process using the TCO model.

For solution providers, the goal should be to form long-term relations with prospective manufacturers and show them the value of implementing technologies to get around persisting issues. Cost efficiency remains a key concern. Therefore, the value of automation solutions, along with end-to-end digitalization of processes for full visibility, should help overcome this concern. Similarly, the National Association of Manufacturers revealed that 2.1 million jobs could be unfulfilled by 2030. Solution providers should show the value in automation filling this large skill gap. Apt use cases that can help manufacturers with cost efficiency, upskilling workforce, and, in turn, contributing to a lower TCO will be key to successful reshoring initiatives.