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Diversifying global supply chain footprints: Have US manufacturers finally reached a tipping point?

29 October, 2020

Brett Cayot
Principal, PwC US
Mark Hermans
Managing Director, PwC US

The COVID-19 crisis has catalyzed US manufacturers to rethink global footprints of both their production and supplier bases. Indeed, the need to rebalance supply chains has been revisited for some time during past Black Swan events such as the Fukushima nuclear disaster nearly a decade ago. In the last several years, however, the argument favoring rebalancing global footprints has further strengthened on the heels of rising labor costs, marked changes in tariff environments and the increasing need for localization, resiliency and customer centricity.

So, the disruption wrought by the pandemic could mark an historic tipping point, revealing in stark relief vulnerabilities of finely-tuned, highly interdependent and just-in-time global supply chain ecosystems. For many US manufacturers, that’s meant reconsidering whether single-sourcing – can still offer the benefits in cost and scale that it has in the last two decades. And if it can’t, manufacturers are looking for options.

Diversifying global supply chain footprints

In our recent report on reassessing global supply chains in the current environment, we examine the attractiveness and viability of alternative global footprints that can add resiliency, cost-efficiencies and improved customer-centric service to regional markets.

Four paths to supply chain resiliency

We break down options to four fundamental archetypes. All (or a combination thereof) could apply to supply chain rebalancing, depending on a company’s future plans for growth – and expectations of where that growth will likely come from. Indeed, capturing such savings in any supply chain rebalancing means forging a strategy tailored to a given manufacturer’s needs and conditions, as well as considering the most important levers affecting supply chain costs: tariffs and taxes, labor content and product value density, existing supply base and availability of raw materials.

Global single-source. While this has been a go-to supply chain tactic for many years for many manufacturers globally, a confluence of factors has prompted a revisit. This is especially true for manufacturers single-sourcing in China, where manufacturing wages have nearly tripled in the last decade, exceeding those in Mexico since 2015. Meanwhile, China’s working population has declined, as workforces in other ASEAN countries have risen.

Global +1. To add resiliency to a single-sourced supply chain, extending a footprint to another geographic locale could be a prudent move for companies that have the resources to do so. This could also introduce cost savings. According to PwC’s analysis, most US manufacturers single-sourcing in China may find now is the time to reconsider this archetype. The analysis estimates that, of the some $450 billion of manufactured imports from China in 2019, 20% could achieve cost efficiencies if nearshored to Mexico (18%) or reshored back to the US (2%), based on numerous factors, including landed cost, risk and fulfillment lead times. And, 80% of products now imported to the US from China would capture cost efficiencies if they were instead produced in other Asian low-cost country sources (LCCs). Other viable and competitive LCCs have emerged, particularly in southeast Asia – as well as India and Northern Africa – and have significantly improved their supplier bases and manufacturing labor forces, making them a more attractive option than just three years ago. And, particularly for North American manufacturers, Mexico is increasingly poised as an attractive option to China, especially for US market sales, given that the new USMCA went into effect on July 1, 2020.

Region-for-region. This archetype may apply more to large US manufacturers with diversified global markets begging for more diversified supply chains. Region-for-region also presents a great potential for resiliencies in numerous ways – including market access, lower landed cost and faster fulfillment lead times. Examples of this model could include: Poland to serve Europe; Mexico to serve North America; or Vietnam to serve Southeast Asia.

Local-for-local. This model serves well for those manufacturers that have identified healthy markets for their products in specific, localized parts of the world. It would contribute to improved, just-in-time product delivery and greater market access, while also offering supply chain agility (i.e., if a disruption occurs in one locale, another one can provide sourcing and/or production). This model favors sourcing for — and production of — “mission critical” products such as those needed for healthcare and other critical industries. In addition, local-for-local ought to be considered for products with low labor content and low value density (e.g., construction materials, chemical products).

A two-step process? Diversify the supplier base before shifting production. Whichever archetype might be the best fit, any change to a global footprint can naturally be capital intensive and time consuming – often taking at least two to three years to complete.

However, companies may consider wading in at first, instead of diving in. As US manufacturers with single-source production and supply bases now mull rebalancing their supply chains, they may do well to first examine the viability of diversifying their suppliers – both Tier 1 and Tier 2 as well as sub-tier suppliers – away from their single source. Doing so could mean dual-sourcing: adding a second source in a different country (or, perhaps, adding a second source in a different part of the same country). This could be a wise course that alone could add resiliency to their supply base not only to get through another Black Swan event, but also to secure more cost-efficient supply chains (e.g., benefiting from lower labor costs).

Once new supply chains are secured, they can be evaluated and stress-tested for strengths and weaknesses through supply chain mapping and monitoring. Therefore, realigning global footprints is not simply a one-step or static process. Indeed, as global market and trade conditions change over time, manufacturers changing supply chain configurations will likewise need to regularly and nimbly adapt to capture the greatest cost savings while reducing risk.