Supply Chain Reactions
The location — and relocation — of manufacturing in the world is shifting, but not necessarily in a way that matches popular perceptions.
By Bob Woods
Illustration by Tom Redfern
The state of manufacturing in the United States has been a hot-button issue for years, both economically and politically — and for good reason.
In 1960, nearly 1 in 4 Americans worked in a factory. Today, according to the Bureau of Labor Statistics, that number is less than 1 in 10. Since 2000, the United States has lost 5 million manufacturing jobs, reflecting an exodus dating back to the 1990s, when U.S. producers began setting up shop in foreign countries, most notably Mexico and China, where the cost of labor was significantly lower.
Still, manufacturing remains a mainstay of the overall U.S. economy. The sector employs more than 12.3 million factory workers — or 9 percent of the total workforce — who earn an average wage of about $26 an hour. Ongoing rhetoric touts an American manufacturing renaissance, with companies “reshoring” production facilities from overseas and bringing back millions of jobs.
There is some truth to this. But reality fails to fully match popular perceptions, according to new research.
Published in March, “Off-, On-, or Reshoring: Benchmarking of Current Manufacturing Location Decisions” delves into the multifaceted supply chains that drive factory production around the world, focusing on companies’ practices and strategies in today’s volatile global marketplace. The multiyear research project was conducted by a nine-member team of supply-chain experts from seven international business schools, including Georgetown University McDonough School of Business’ Ricardo Ernst, professor of operations and global logistics and director of McDonough’s Global Business Initiative, and Shiliang Cui, assistant professor of operations and information management. The two Georgetown McDonough researchers collaborated with Morris Cohen of the Wharton School at the University of Pennsylvania; Arnd Huchzermeier and Marc Steuber of the WHU–Otto Beisheim School of Management in Germany; Panos Kouvelis of the Olin Business School at Washington University in St. Louis; Hau Lee of the Graduate School of Business at Stanford University; Hirofumi Matsuo of the Graduate School of Business Administration at Kobe University in Japan; and Andy Tsay of the Leavey School of Business at Santa Clara University.
The world has grown up understanding the importance of developing partners for their supply chains.”
—Ricardo Ernst, Professor of Operations and Global Logistics and Director of Georgetown McDonough’s Global Business Initiative
The group surveyed executive decision-makers at 85 top manufacturing companies, predominantly from North America, Europe, and Japan. “This is the first time research of this scope and detail has been conducted at the business-unit and product level, where people are making decisions, not at the aggregate level,” Ernst says. “This is what managers are thinking and doing, more than what the company is saying.”
The study began with the premise that manufacturers are no longer relocating production facilities based primarily on lower costs, he says. The goal was to learn firsthand and benchmark what other key drivers have led to a reorganization of global supply chains.
A WAVE OF RELOCATION
The research confirms there is indeed a significant wave of restructuring of global supply chains underway. Manufacturers across all industries are shifting production volume throughout both developed and developing nations.
While China continues to be the most attractive country for manufacturing, many producers also are looking elsewhere, particularly Eastern Europe, Vietnam, Cambodia, and Bangladesh. “Manufacturing in Eastern Europe is a cost-effective option,” Ernst says, “and is performing for Western Europe like Mexico does for the United States.”
In fact, the United States also is a desirable target for relocation, but not in the way many may assume. Contrary to media reports and politicians’ promises of reshoring, 60 percent of the production-volume increase in the United States is actually from offshoring by Asian and European firms. “They see the United States as a very appealing market destination and source of knowledge,” Cui says, referring to the fact that the United States remains the world’s largest consumer market and hub of innovation.
“I was expecting that more American companies were reshoring,” Ernst adds, “but keep in mind, moving around is not an on-off switch. This is a long-term commitment and investment. American companies already have well-established supply chains in many places, so to reshore a facility is a long-term type of driver.”
The reshoring that has occurred may help explain the growing number of manufacturing jobs in the United States since the end of the Great Recession (800,000, according to the National Association of Manufacturers), although there is no indication of a return to pre-2000 employment levels.
“The rhetoric sounds good,” Ernst says, “but supply chains are an interconnection of many players. It’s important to understand that all those interconnections are critical to the game, and you can’t break it by just bringing jobs back.”
SHIFTING COSTS AND EVOLVING DECISIONS
The research team also noted a major shift in cost competitiveness.
Cost differentials between developed and developing economies has been the recurring theme, Ernst says, but the landscape has changed. “Companies have matured,” he maintains. “The world has grown up understanding the importance of developing partners for their supply chains.”
The researchers cite several reasons for the change in cost competitiveness. One is that labor costs in many developing nations have increased along with industrialization and the rise of the consumer middle classes in those countries.
Take China, for example, where workers’ wages have tripled over the past 10 years. In that same time, the Chinese yuan appreciated by 36 percent, making it less favorable to export manufactured products out of China.
Energy costs play a part, too. Even though the cost of industrial energy has increased in many developing economies, it has stayed flat or even decreased in others due to technological advances such as hydraulic fracturing, or fracking. As a result, manufacturers in the United States have benefited from cheap natural gas versus oil or coal to power their factories.
But costs are far from the only factors at play. Manufacturers increasingly are aware of other considerations that affect their global supply chains. They want to protect their intellectual property and are mindful of cybersecurity. They seek reliable partners that consistently provide high-quality parts and services. Mitigating random risks such as earthquakes, floods, and other natural disasters, as well as the effects of climate change, is part of the equation. Plus, supply chains are subject to an evermore volatile business environment that has witnessed rapidly changing demand, exchange rates, regulations, and commodity prices.
The landscape is ever-shifting as well. In the time since the research was completed, political instability in the Middle East and Eastern Europe, immigration issues, terrorism, Britain’s vote to leave the European Union, and the U.S. presidential election have presented challenges for supply chains.
“What is important for manufacturers is the ability of their supply chain partners to react quickly,” Ernst says. “Having a responsive supply chain is the ultimate goal. Supply chains look at businesses not from a vertical point of view, but from a horizontal point of view that responds to variations in demand and is resilient to changes, some of them unpredictable.”
The report concludes with advice based on the researchers’ experiential findings. “High-level corporate decision-makers should use the insights presented in our study as a starting point to critically review their own supply chains, the way production sourcing decisions are being made, and whether they are taking the most effective approach,” Ernst suggests.
Understanding the driving forces of today’s manufacturing location decisions should inform the ongoing debate about manufacturing policymaking directed at retaining and attracting manufacturing jobs, he adds. There is always a danger of letting politics get in the way, though.
“Companies are not driven by the political implications of their decisions, but by the economic implications of the efficiency of the entire supply chain,” he says.
Published in Georgetown Business Magazine, Fall 2016