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Ideas Made to Matter
Reshoring, restructuring, and the future of supply chains
The COVID-19 pandemic has been deeply disruptive for supply chains as businesses grapple with fluctuations in supply and demand, intermittent outbreaks in different parts of the world, and speculation about reshoring and reducing reliance on China. Many companies are looking at restructuring their supply chains, trying to balance resilience with efficiency and reduced costs — a process either started or accelerated because of the pandemic.
Even so, some predictions about how supply chains are changing are overblown, according to two supply chain experts. In separate web presentations recently, MIT professors Yossi Sheffi and David Simchi-Levi offered their thoughts about reliance on China, the possibility of reshoring, and how supply chains will — and won’t — change in the era of COVID-19.
Supply chain restructuring isn’t pandemic-specific
Supply chain restructuring was underway before the pandemic, Simchi-Levi said in a June webinar hosted by the MIT Industrial Liaisons Program. This includes companies reconsidering their relationship with China because of the trade war between the U.S. and China.
According to a survey of more than 3,000 companies released in February by Bank of America, companies in 10 of 12 global sectors said they intended to shift at least a portion of their supply chains from current locations. Companies cited tariffs, automation, and national security among the reason for the changes.
Some companies are thinking about bringing manufacturing closer to demand, said Simchi-Levi, an engineering professor, while others are looking toward fully reshoring.
Restructuring plans vary by industry, Simchi-Levi said. Some apparel manufacturing companies are moving out of China to Southeast Asia. High-tech industries are maintaining some manufacturing in China, but also bringing capacity closer to market demand by moving to Brazil, Mexico, and Eastern Europe. Simchi-Levi said these restructuring trends will likely continue and accelerate in light of the coronavirus pandemic.
Companies are unlikely to completely abandon China
The new coronavirus has put a spotlight on the world’s reliance on Chinese manufacturing, and prompted speculation that supply chain restructuring might start with pulling out of China.
But “this is really not happening,” said Sheffi, the director of the MIT Center for Transportation and Logistics, at the EmTech Next conference last month. While some companies have been leaving China over the last decade as costs go up, Sheffi said most can’t, and won’t, move their supply chains out of the country completely.
China is a sophisticated supplier of many parts, he said, pointing out that clothing manufacturers who have left China for other countries are still buying Chinese textiles. Proof in point: While China’s share of clothing manufacturing has fallen over the last five years, its export of raw textiles, which are made with sophisticated large machinery, has gone up.
Even if sewing and parts of some other industries leave, “big industries invested decades in building up a whole ecosystem in China,” Sheffi said. “It will take decades and untold money to move out of China, so I don’t see it happening very quickly.”
Sheffi said none of the executives he’s interviewed for an upcoming book expressed plans to move out of the country entirely.
“They just can’t,” he said. Even if costs are high, China offers capability, speed, and sophistication — an entire ecosystem that can’t easily be replicated or replaced.
The U.S. - China trade war also isn’t enough to create a business imperative to leave, he added.
“Companies are happy with what they are doing [in China],” Sheffi said, though some firms might make “eye candy” moves, like bringing some small manufacturing jobs to the United States.
Simchi-Levi agreed: “China is still going to play an important role, and it’s not surprising because it’s a huge market."
But some changes might be warranted.
“Companies will need to diversify inside China and outside China,” Simchi-Levi said. “If you have most of your suppliers in Wuhan, then you had a problem. But if you diversify, then you’ll be able to respond better.”
Reshoring isn’t necessarily the answer
The pandemic has many speculating about reshoring and bringing manufacturing back to the U.S. Simchi-Levi said that is unlikely to offer what companies are looking for.
“Reshoring does not guarantee resiliency,” he said.
Such consolidation brings risk. Simchi-Levi pointed to the relatively small number of slaughter plants in the United States that process much of the country’s beef and pork supply. Plant shutdowns because of the coronavirus led to concerns about a backup in meat production, falling prices for farmers, and meat shortages, though that outcome was largely avoided this spring.
In other cases, reshoring could require government involvement. For example, drug manufacturing has been moved to India and China not just because of cost, but because it requires highly toxic chemicals, Simchi-Levi said. Reshoring those activities would require development of clean chemical manufacturing technologies, which requires significant investment of time and money — five to 10 years of development time.
Risks can be hidden in a supply chain, Simchi-Levi said, and aren’t always associated with a particular region. Overall, companies should focus less on location and more on stress tests.
One method is the risk exposure model, in which companies look at their estimated time to recover — how long it takes a supplier to return to full operation after a disruption — compared to their time to survive, which is how long they can continue operations without their disrupted suppliers. From there, companies can figure out the performance impact from disruptions, a key performance indicator that will better guide decisions about restructuring.
Supply chain mapping is critical for this, Simchi-Levi said, and supply chain contracts should include resiliency plans. And as life science, health care, and food products are prioritized in times of disruption, the government could also get involved in establishing standards and stress tests, similar to the annual stress tests now required for banks because of the 2008 financial crisis.
Supply chains largely held up to the pandemic test
All told, supply chain performance was better than expected during the pandemic, Sheffi and Simchi-Levi agreed.
In the early days of the pandemic, pictures of empty shelves made the rounds as people stocked up on staples like rice, pasta, and yeast (and, of course, toilet paper). Despite the pictures of empty shelves, Sheffi said, the food supply chain never really failed. Many of those photos were taken later in the day, he said, and though stores might have run out of some items, there were never any actual shortages.
Despite “unbelievable” changes in demand patterns, including people spending more time at home and buying comfort food, the food supply chain in the United States continued to work, Sheffi said. The medical supply chain system also worked, with no shortages of drugs, with one notable exception: a lack of personal protective equipment, or PPE.
Above all else, the pandemic has underscored the importance of specialists who are addressing the above problems.
“Supply chain managers are going to be much more important in the corporate hierarchy,” Sheffi predicted.