With crucial manufacturing sectors facing shutdowns and cities going on lockdown, the COVID-19 pandemic has disrupted markets, causing organizational leaders to reevaluate operations from a risk perspective. Many critical products, such as personal protective equipment and active pharmaceutical ingredients, are manufactured outside of the United States, making the supply chain vulnerable to these types of disruption.
To limit risk and have more control over their supply chains, many organizations are considering the possibility of onshoring manufacturing facilities to the United States or nearby countries (also referred to as nearshoring). The trend to onshoring or nearshoring was already solidly in place prior to the coronavirus pandemic and will likely accelerate given the painful experience of the last several months. In addition to gaining greater control of the supply chain, onshoring or nearshoring also consolidates the geographic spread of the supply chain, reducing transportation times, customs delays and ultimately allowing for less inventory in transit and more predictability in delivery performance.
The Business Case
The decision to onshore or nearshore an operation is ultimately a strategic one. There may be a compelling financial business case, but more likely the justification for making this type of investment will be business continuity. Having felt the pain of a completely disrupted supply chain during the pandemic, many organizations are just not going to want to trust the success of their supply chains to decision-making authorities halfway around the world. In any event, an organization considering onshoring or nearshoring will likely need to answer a few key questions to make a solid decision:
- Should I procure the parts and assemblies from a local third party, or does it make sense to become more vertically integrated and produce parts in-house?
- Can operations be consolidated into existing facilities?
- Where should I locate? Real estate costs, availability of labor and local city or state economic incentives for providing community jobs should be considered.
- Should I build or lease a facility?
- How much space is needed?
- What opportunities exist to increase flexibility within the supply chain?
- How much automation is practical in order to reduce labor costs?
- What will be the resulting unit cost for production?
- Can inventories be reduced?
- How much will onshoring or nearshoring actually cost and what are the benefits of executing this kind of change in the supply chain?
- What is the return on investment for onshoring or nearshoring? If costs outweigh the benefits, can I justify the investment as business continuity or risk reduction?
Preparation is the Key to Success
Planning for relocation of a production process is complex, regardless of the industry involved, often taking months to sort through the details without completely shutting down production. It isn’t just about moving equipment; the organization must consider the entire value stream and the supporting functions:
- Capacity Planning
What will be the future demand for a product or service and what resources will be needed to meet that demand?
- Production Readiness
What equipment, tooling and processes are needed? Are product and production equipment drawings and specifications updated?
- Operational Processes
What are the processes and procedures necessary to perform key functions like production planning, production operations, quality control and logistics?
- Support Systems
How well-prepared are your environmental health and safety team, equipment and facilities engineering, maintenance and IT systems to support the transition to onshoring?
- Organizational Policies
Are human resource policies and procedures in place that are necessary to recruit, hire, train and retain a highly capable workforce for facilities located in the United States or nearby countries?
- Supply Chain
How will you identify, purchase, receive, store and distribute materials needed to onshore operations?
The many challenges associated with analyzing, planning and executing the relocation of production operations can be daunting. Industry partners like Burns & McDonnell can provide confidential support in all phases of these complex projects, from pre-capital planning through commissioning.