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Supply Chain Managers Shift Reshoring Focus to Total Cost of Ownership

By Supply Chain Dive

This article was published in Supply Chain Dive June 7, 2021. We are sharing because it explores the many facets of reshoring and sourcing decisions.

Dive Brief:

  • Total cost of ownership is the top factor manufacturers consider when making reshoring decisions, according to the State of North American Manufacturing 2021 Annual Report.

  • Of the 337 qualified respondents surveyed by Thomas for the report, 23% said total cost of ownership outweighed proximity to market, demand for U.S.-made products and exposure to shipping disruptions, as the most important metric to consider when deciding to reshore an element of their supply chain.

  • Inventory availability, lead times and price per unit or service are the most important factors manufacturers consider when vetting new suppliers, as 100% of the 343 respondents who were asked to rank the importance of the factors said these were at least "moderately important" to their decisions.

Dive Insight:

Keeping a keen eye on cost has always been part of the culture within procurement departments, but Tony Uphoff, president and CEO at Thomas, says recent events are causing a shift in how cost is evaluated.

"Our survey shows a more thoughtful analysis of cost, as in total cost," said Tony Uphoff, president and CEO at Thomas, as manufacturers reevaluate the underlying mathematics that led to offshoring in the first place. "It's not just a per-unit manufacturing basis. It's the time, the distance, the cost of logistics."

The shift may have more to do with market conditions than an overhaul in corporate thinking. The COVID-19 pandemic exposed structural weaknesses in the way global supply chains were built. As closed offshore facilities, container shortages and volatile demand patterns spurred logistics and production challenges, many U.S. companies didn't have domestic suppliers in their network to turn to for help.

In other words, risk became reality for many companies in 2020. And for each risk event, there was an associated cost that may not have been calculated when suppliers were first vetted.

Other surveys suggest this heightened awareness of risk is one of the main drivers of sourcing shifts. Everstream published a survey in April, outlining a need to "reduce risk concentration" as the main reason its respondents sought to shift its sourcing or manufacturing "elsewhere."

This dynamic may be behind some of the high demand in the market right now, according to Uphoff, as companies seek secondary or tertiary suppliers, or seek to overstock in order to control risk.

"Can you imagine how many CEOs have been meeting with boards over the last 18 months, and boards have said, let's make sure that we don't get caught upside down in our supply chain," said Uphoff.

Anecdotes in the May 2021 Manufacturing ISM Report on Business suggest the sustained impact of risk events, which have led to long lead times and supply shortages at a time of high demand, is driving manufacturers to reevaluate their sourcing strategies:

  • A nonmetallic mineral products provider said, "Demand is strong, but what good is that if you cannot get the materials needed to produce your finished goods?"

  • A transportation equipment provider that participated in the same ISM survey said, "Ongoing component shortages are driving dual sourcing and longer-term supply plans to be implemented."

  • (ISM does not publish the identities of its respondents, but provides notable quotes from their survey participants in its monthly reports.)

In response to this mismatch, companies like HP and Dell have altered their supply chain strategies. Dell plans to prioritize orders for its "long-term and better customers", while HP plans to increase its inventories and sign longer-term contracts.

"We expect supply constraints to continue at least through the end of 2021," HP's President and CEO Enrique Lores recently said on his company's earnings call.

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