July 31, 2020

Assurance of supply in the global marketplace has emerged as the greatest challenge in winning the war on the Coronavirus pandemic. In the demand-driven industry of Life Sciences where human lives must be saved and the economy restored, building a resilient and agile supply chain has become the highest priority. The lop-sided dependence on China, as a source of nearly 80% of APIs, materials and supplies, must be the first order of business for mitigation of risk. Further, the characteristics of long lead time and resultant slow response in the current supply chain are under scrutiny.

Ironically, Intel’s shares tumbled 18% on the 17th of July when Bob Swan, the CEO, discussed the idea of not manufacturing its own chips. Chip design with inhouse production has been the norm in the $400-billion industry for 50 years. May be this is an outcry of the pandemic.

One of the devastating challenges that COVID-19’s frontline workers face has been shortages of personal protective equipment (PPE). The culprit was identified to be the lean global supply chain model that prioritizes cost reduction, just-in-time production, and forecasting strategies which do not adequately allow for major disruptions, such as natural disasters, pandemics or other geopolitical crises. These biopharma challenges in sourcing critical materials and supplies are also found in other industries, such as semiconductors, automotive, aerospace, textiles, chemicals, communications, and IT hardware manufacturing. The belief is gaining momentum that localization of critical industries and their component supply chains can alleviate the weaknesses uncovered during the COVID-19 pandemic while increasing employment.

Joel Sutherland, Managing Director Supply Chain Management Institute at the University of San Diego School of Business, has ranked three approaches to explore for assuring the reliable and agile supply of critical products:

  1. “Reshoring (or simply maintaining) production in the US.
  2. Nearshoring to low(er)-cost countries in Latin America (esp. Mexico and safe/secure Central American countries such as Costa Rica), and
  3. Offshoring to low-cost Asian (or other) countries where significant distance and other concerning issues (e.g., political; quality; distance/time; SC complexity; IP; etc.) may prevail.”

Reshoring is the practice of bringing manufacturing and services back to the United States from overseas. This process can help balance trade and budget deficits, reduce unemployment by creating well-paying manufacturing jobs, and develop a skilled workforce. Reshoring also benefits manufacturing companies by potentially reducing the total cost of their products, improving balance sheets, and making product innovations more effective. On the other hand, Nearshoring means utilizing sources in countries adjacent or near to the U.S., for example, Mexico and Canada. Finally, Offshoring is obtaining goods from outside the United States.

In the traditional decision model of Total Cost of Ownership (TCO) to decide the source of supply, the objective has been to minimize the cost of product, transportation and inventory carrying. Lower labor costs have heavily favored Asian and other developing countries. Very often the ancillary or hidden costs can have a significant impact on the overall cost but are ignored. These hidden costs of poor quality, delay in delivery and disruptions, custom inefficiencies and vulnerabilities of the supplier, may impact one’s ability to mitigate risk and optimize operational efficiencies within the overall supply chain journey.

Reshoring can be achieved by overseas suppliers building additional manufacturing plants and warehouses in the United States. This was done by the Japanese auto companies after they had virtually decimated the US car makers with superior product quality. In the 80s they built large auto assembly and complete manufacturing plants in the US. Today the US companies, intending to reduce offshoring, can adopt a winning strategy to build smart factories facilities to meet standards of Industry 4.0 where automation is driven by Artificial Intelligence and Machine Learning, and operated by a digitally fluent workforce. Federal grants are a tool that can help regions attract significant technological investments. The Economic Development Administration (EDA) has received $1.5 billion for economic development assistance programs to help communities prevent, prepare for, and respond to coronavirus.

A holistic Total Cost of Ownership model of decision-making will answer the call for optimization of sourcing to restore and advance the economy of the USA without compromising the principles of globalization. It has to be an economic decision and not a political one.

Submitted by Devendra Mishra, Executive Director, BSMA, 7/31/2020