Originally published in Brink on June 15, 2020
The COVID-19 outbreak has been an enormous shock to global manufacturing systems. Though experts have been warning about the risk of globally dispersed supply chains for years, few companies were truly prepared for the pandemic. Ultimately, those with local or diversified supply chains have been most able to mitigate the impact. Others have been caught flat-footed. The majority (75%) of companies surveyed by the Institute for Supply Management (ISM) said they have experienced disruption, and four out of ten (44%) said they had no plan in place to address supply disruptions from China.
Across industries, there are new and urgent conversations happening in boardrooms around how to improve mid-term resilience, and among manufacturers, whether to relocate plants—away from China, in many cases—and how to put into place contingency labor and production plans that can survive future disruptions. Leaders, trying to wring some clarity from the chaos, are considering ideas for the reinvention phase of pandemic response that can mitigate the impact of similar “black swan” events.
Manufacturers will ultimately have to choose between two extremes:
Placing all one’s bets on option one is risky. According to a Thomas survey, 31% of respondents are turning down or delaying orders, but another 28% said they were looking for alternative suppliers internationally and 28% saying they were looking for new suppliers domestically.
Any company that fails to protect its production will be at risk of losing future contracts and existing customers. For example, if a pharmaceutical company locates all of its plants for a key medication in the Philippines and that country is subsequently hit by a catastrophic typhoon, it could knock out all manufacturing of that drug, leading to liability, loss of business, and even loss of customers’ lives. However, if that company had already diversified and located even a portion of its facilities closer to home, it would have the ability to shift production and potentially avoid shortfall.
This same scenario can repeat itself in disruptions of tier one supplies for original equipment manufacturer (OEM) components or consumer goods. While the threat may not be life or death, it could be existential for manufacturers who are unable to resolve off-shoring risks. More than 80% of fashion brands have said they already planned to reduce sourcing from China, and many companies are reacting similarly to Wistron Corporation, an iPhone assembler, that recently told analysts it plans to locate 50% of its capacity outside of China by 2021.
Vital industries, such as pharmaceuticals or medical supplies, may have no choice but to diversify production. There is mounting public pressure in the United States to move essential production of such products and medical equipment closer to home, with several bipartisan bills already in play. Japan has also made moves in this direction, putting $2.2 billion of its COVID-19 economic stimulus package into supporting manufacturers who shift production away from China.
For many companies, this will mean:
Once a decision is made to move near-shore, one of the first questions will be about where best to locate. Prior to COVID-19, Mercer's wide experience in helping companies choose locations found that site selection was typically based on these three criteria:
As is evident, cost was the main issue. The convergence of cheap and plentiful labor with a low overall cost of doing business explains why so many plants ended up in East Asia over the past decades. However, site cost can no longer be the only driver with the risk of disruption being as high as it is today.
In the world after COVID-19, what are the primary considerations for a company choosing a new base of operations? Key issues will most likely be:
As companies consider how and where to expand near-shore production capabilities, here are ten lessons learned to help inform those decisions:
1. Decisions based on cost alone are risky.
2. Early on, determine how you will find and keep the labor you need.
3. Involve all key stakeholders as quickly as possible in the decision-making process.
4. Focus on factors that vary according to your market, such as resiliency in the face of pandemic-like shocks.
5. Avoid original data collection, which is costly and time consuming.
6. Perform due diligence on your ability to manage each potential environment.
7. Do not ignore your internal labor market and the tension between developing and "buying" talent.
8. Look across your whole portfolio and make location decisions as they come.
9. Do not copy others—especially your competitors—as it could cost you an advantage.
10. Think of your location and sourcing holistically, considering workforce planning, government relations, incentives, and partnerships.
If near-shoring is something your team is looking at as part of your post-COVID-19 recovery, Mercer can help. We already have the data and a proven global location decision framework that will help you design for both mid- and long-term resilience. Our methodology is supported by a comprehensive set of labor, business environment, and risk factors that can be fine-tuned to your specific business and industry.