Recent events have caused many global companies to rethink their supply chains. For many years, large multinational companies have used a strategy focused on securing inexpensive manufacturing and outsourcing many low-skill jobs, usually from distant suppliers. They have relied on just-in-time production and low cost ocean transportation to drive costs to the bare minimum.
The experience of the pandemic has left many of these companies with trouble getting raw materials from these distant sources. They have had trouble hiring production workers and booking space on shipping vessels. Input shortages and supply chain bottlenecks are disrupting the availability and quality of goods and services critical to the success of these firms.
These companies are realizing that they are losing business because they are stuck with very long, very efficient – but very inflexible supply chains.
Some managers think the problem is short term because something like the pandemic is never going to happen again. Others argue this is going to happen more frequently, and that the world is a different place now. They argue that natural disasters, like floods in the southern US, tornadoes, and hurricanes will be more common in the future.
Strategically companies are moving away from heavy reliance on a single facility in a weather difficult area, to using two facilities in more moderate weather areas. This makes the supply chain much more reliable by reducing severe-weather risks.
Many companies have moved to strategies that give them more control of their destiny. Rather than using contract manufacturers, they are building regional factories that they own and can control. They are hiring their own workers and paying them reasonable salaries, exchanging the previous low wages and high transportation costs for higher wages and local control.
In cases where suppliers are needed, companies want to be geographically closer. When possible they many even buy their key suppliers, giving them better control of the processes and possibly reducing long term costs. Companies are realizing that they cannot be at the mercy of their suppliers.
The following are some examples:
Home builder PulteGroup depends on windows, paint, and appliances. Rather than sourcing from multiple vendors across the U.S., the company is building an automated manufacturing facility in South Carolina to assemble components such as wall panels, floor systems and roof trusses.
Majestic Steel USA, which processes and distributes flat-rolled steel has acquired new locations in Ohio, Nevada, Florida and Texas so that they can be closer to their customers and less dependent on long distance trucking capacity. They are also building a new facility on the grounds of the Nucor Corp steel mill in Arkansas, their major supplier.
The paint maker Sherwin-Williams decided to buy one of its suppliers with operations far from the weather difficult Louisiana and Gulf of Mexico area, the location of its previous supplier. The new supplier has facilities in Woodburn, OR and Chester, SC.
Benetton, the Italian clothing company, has decided to source from Serbia, Croatia, Turkey, Tunisia and Egypt. They previously used less expensive but more distant Asian suppliers for about 58% of their production. Moving the work to countries on the Mediterranean will cut transportation time from several weeks to one week. The company is confident the higher cost of production will be offset by higher quality merchandise.
Bartesian Inc. a Chicago company that makes a countertop cocktail machine has a deal with Hamilton Beach to manufacture its machines in China. A key ingredient are the recyclable capsules used to make drinks with the machine. Initially, the company planned to make the drink capsules only in China. Recently, the company has decided to set up a second facility outside Chicago. Production in Chicago is more expensive, but overseas shipping logjams could quickly bankrupt the company. Ensuring a supply of the capsules is critical to their success.
Adapted from “Farewell Offshoring, Outsourcing. Pandemic Rewrites CEO Playbook,” WSJ Nov. 1, 2021 (Gryta and Cutter).
Operations and Supply Chain Management 