In the current business environment, it’s more important than ever to take a systematic approach to evaluating options for mitigating risk and keeping your supply chain competitive.
Here are the questions you should ask to judge whether reshoring will work for you.
What processes will be used in production? Due to the expense of automation, your product mix will, to a large extent, drive the available financial benefits. Low-mix, high-volume products lend themselves to the large capital investments that fuel the productivity increases required to offset increased domestic labor costs.
When producing custom product, or other high-mix, low-volume product, the costs of automation dramatically increase. While there are market reasons to reshore this production type, you’re unlikely to find cost savings through reshoring highly customized products.
What specialized skills will be required? The replacement of manufacturing by a service economy has incentivized the workforce to develop skills with high value. It’s often easier to find a director of social media than a welder or machinist. Therefore, the necessary pool of talent may need to be developed, adding cost and time.
If you plan to reshore, consider where needed human resources are clustered. Without a robust labor market, any effort to ramp up production is likely to fail.
Where is your supply chain? Breaking existing geographic connections may offset some benefits. As with the labor pool, the network of domestic suppliers isn’t as robust as it was. If you can only find suppliers for critical components overseas, you may not realize expected benefits in inventory reduction. Or, you may realize those benefits but give up lead-time improvement and market responsiveness.
While benefits may outweigh costs, consider the supply chain that feeds your factory to understand whether increased shipping costs and lead times from suppliers, logistical challenges or increases in safety stock requirements to reduce risk will offset the benefits of reshoring.
Do you understand risk? Chaos implies risk. Even key players in the tariff drama don’t know how it will end. As leaders, it’s our job to ensure our organizations apply best practices in these turbulent times and don’t make rash decisions based upon the news of the day. When making a reshoring decision, include risk identification and mitigation at every step. Here are a few examples.
- What if the tariff issues were resolved? You may have moved to a higher-cost production location, leaving your competition with cost advantage.
- What if tariffs drive a key supplier out of the market? Understand the risks within your supply chain.
The key is to rigorously apply the best risk identification and mitigation practices to this endeavor; the more risk there is, the more important it is to be systematic.
Chaos should not lead to reactive decision-making. Rather than skipping steps, chaotic times are precisely when a systematic approach and best practices have the most value. Keep your head when those about you are losing theirs, be aware of what is indispensable in your organization, rigorously apply best practices and focus on risk.
This leads to better outcomes in all times, good or bad.
David Grafton is a chief consultant and senior director at Blue Water Growth, a global business consulting firm with extensive on-the-ground experience and expertise in North America and Asia. Its services include M&A guidance, private capital solutions, product distribution, production outsourcing and consulting services for its clients.
