Blame the retail apocalypse on Amazon all you want, but the vast shifts in the industry’s real estate footprint are just the tip of the iceberg for changes to come for U.S. supply chains.
News reports over the past year reveal executives in various sectors are making the capital-intensive choice to redesign their value chain. Whether it is leasing or building real estate options, warehouses and manufacturing plants are in hot demand in the U.S.
President Donald Trump will celebrate the trend as a success in reshoring. After all, his administration pushed through a tax overhaul beneficial to manufacturers and has been a vocal critic of offshoring practices.
But consultants close to the industry note taxes and public shaming are not all that is behind this shift. Supply chains are changing because the fundamental variables that contributed to offshoring in the first place now have made the U.S. a favorable investment.
Sean Monahan, a partner at A.T. Kearney’s Operations Performance Transformation practice, says he asked an appliance manufacturer whether the tax overhaul had anything to do with a recently made investment.
“When I put capital on the ground, that’s a 20- to 30-year decision,” the manufacturer allegedly told Monahan. “I have no idea what the tax policy is going to be 10 years from now. That’s got to be based on market dynamics and where I see the market going.”
New supply chain designs are chasing profits
At the end of the day, executives often look for ways to improve both the top and bottom lines — and reforming supply chains has become an excellent way to do both, according to Rick Schreiber, BDO’s National Manufacturing and Distribution Practice Leader.
Schreiber says three recent trends may be pushing some companies over the fence to make big new investments: The Amazon Effect, technology and political shifts.
The Amazon Effect is most commonly cited due to its impact on retail, but the shift is being felt across industries – from automakers to electronics suppliers. The trend is about more than Amazon; it is about the shift in consumer expectations that affects business-to-business transactions as well.
To put it simply, businesses are now trying to be closer to their customer – whoever that may be. Companies are thinking about “where their customers are (and) what’s the optimal cost structure to distribute supplies out throughout the value chain,” according to Schreiber.
In building greater proximity, companies can reach higher sales while also decreasing the cost associated with making each sale.
That’s the model behind Procter & Gamble’s recent shift to combining different brands’ stock at regional distribution centers, according to Monahan. Last week, the company announced it would cut jobs at a plant in Iowa and Kansas in favor of a new plant in West Virginia, according to The Wall Street Journal.
“P&G historically had a model where, if you want Tide, great you can buy a truckload of Tide from our Tide plant,” said Monahan. But if you combine inventory in a regional warehouse, a retail customer can buy a quarter truckload of four different items, carry less stock, raise fill rates and reduce lead times.
The model is nothing new, according to Monahan. “That’s a model that Unilever went to 12+ years ago,” he said. “P&G has been slow to adopt that. It began to adopt it five to six years ago.”
The U.S. is becoming a favorable labor environment
Global supply chains began with an offshoring craze that famously sent low-skilled jobs overseas.
The trend is well-documented. From call centers to apparel manufacturing, U.S. companies became multinational over decades, relying on labor in countries including Bangladesh, China and Mexico for their production needs.
Some people, like President Donald Trump, blame this industrial shift on trade deals. Others endorse the impact of technology that made globalization possible and raised the U.S. standard of living. Regardless, few dispute the strong role of low-cost labor in these decisions.
“The U.S. has always been more productive. The problem is the wage arbitrage,” Monahan said.
However, such arbitrage is beginning to disappear. In 2018, wages will double in India and rise by 10% in Mexico and 6.5% in Vietnam, Sourcing Journal reports. That alone is a big factor driving companies back to the U.S., according to Monahan.
If a brand is looking to sell on personalization – whether it is a car, shoe or phone — speed to market matters. As the labor gap closes in countries like China while transportation costs rise, the U.S. becomes attractive once more.
“If you were going to be selling something in the U.S. it also makes sense from a cost perspective to make things in the U.S.,” Monahan said.
Technology may have played a large role in driving manufacturing jobs out of the U.S. decades ago, but Monahan and Schreiber both mentioned Industry 4.0 is another major factor to bring jobs back.
Tools including machine learning, artificial intelligence, the internet of things, autonomous vehicles and 3-D printing promise to make U.S. labor even more cost-efficient.
Perhaps not as many jobs will return, but those that do will be highly productive and far closer to the end consumer.
Policy shifts may be the final push
It is difficult to deny the impact of the Trump administration, as a deluge of new manufacturing plants have been announced.
While it is difficult to ascribe boardroom decisions to political shifts — often, these decisions are made months and years in advance — Schreiber says the policy environment certainly has an impact.
The tax overhaul is a “huge home run for manufacturers,” he said, noting he also serves on the board of directors for the National Association of Manufacturers. The promise of infrastructure reform, he adds, is another drop in the well of favorable policy.
On the other hand, Monahan notes that beyond those pull factors, the Trump administration’s trade platform may also be pushing companies away from foreign countries.
The current administration, he said, “certainly is biased toward barriers that will favor things that are made in the U.S.,” and that is coming to a head with shifts in technology and customer demands.
Is it time to rethink your supply chain?
The stars are aligned to help executives lobby for shifts in their supply networks — and it shows.
Toyota and Mazda, Foxconn and P&G may have made the biggest splash with their news of production shifts, but network changes are cutting across industries.
But just because other companies are changing their networks, it doesn’t mean every business should.
“Look in the mirror and do a SWOT analysis,” said Schreiber. “All three of these forces: policy, Amazon Effect, technology. You’ve gotta have a strategy and you gotta start now.”
To determine that strategy, Monahan recommends answering a few questions:
- Where are your markets and where are those markets going?
- What’s the volume and product mix promise you need to make from a cost perspective and a service perspective?
- What type of investments in new facilities do you need?
- How does monetary policy affect your decision today, and in the future?
“All of this is about increasing the top line, decreasing the bottom line, and then reducing risk,” said Schreiber.