Can Reshoring Manufacturing Spark a New Era of Resilience in Supply Chains?
The fragility of global supply chains has never been more evident. The need for supply chain resilience has become painfully clear after the COVID-19 pandemic, the war in Ukraine, semiconductor shortages and other disruptions. The reshoring of manufacturing will play a crucial role in fostering that flexibility.
Outsourcing production to foreign nations has been the standard in manufacturing for years due to cost benefits. The industry is shifting since organizations have experienced firsthand disruptions from outsourced manufacturing.
The Current Wave of Manufacturing Reshoring
Reshoring and foreign direct investment (FDI) job announcements surpassed 360,000 positions in 2022, an all-time high. That’s 53% higher than the previous record, which the manufacturing industry set just one year earlier in 2021. Reshoring led this growth, accounting for 58% of these new positions.
Nearshoring has also grown, though not as rapidly. U.S. companies nearshored roughly 10,000 jobs to Canada and 40,000 to Mexico between 2010 and 2022. Those figures will increase as supply chain resilience initiatives grow, but reshoring will likely remain the more popular strategy.
When asked about their reasons for reshoring, most manufacturers cited government incentives. The availability of a skilled workforce and reducing supply chain disruption risk came as the second and third most popular answers, respectively.
How Reshoring Can Build Supply Chain Resilience
Even if companies’ primary reason for reshoring manufacturing isn’t to boost resilience, they still experience it as a secondary benefit. Businesses that reshore or nearshore production build strength through several means.
Shorter Transit Times
The reshoring of manufacturing’s most direct impact on supply chain strength is shortening transit times. In these strategies, manufacturers become physically closer to their downstream supply chain partners, making them less prone to disruption and more likely to withstand unexpected delays.
Sudden demand shifts and inventory distortion are less impactful when companies receive goods in less time. Even if it takes domestic manufacturers just as long as foreign alternatives to increase output, lead times are still shorter because there’s less ground to cover between facilities. Faster shipping times also reduce risk factors related to transportation costs.
New automated technologies take these benefits further. Next-generation servo technology can enable manufacturing speeds two to four times faster than conventional systems, further shortening domestic lead times.
Reshoring also boosts supply chain resilience by increasing visibility. It can be challenging to manage offshore manufacturing processes because of distance and language barriers. Domestic production eliminates those obstacles.
The only way to reliably get timely updates from overseas suppliers is through Internet of Things (IoT) tracking, which not every company can afford at scale. By contrast, manufacturers in the same country operate in similar, if not the same, time zones, letting them respond in detail when required. Removing the need for an interpreter further streamlines this communication.
After reshoring, businesses and their suppliers will face the same geopolitical situations. As a result, it’s easier to understand what challenges or opportunities supply chain partners face, informing more accurate and faster decision-making. Company leaders can even personally visit suppliers for closer communication without time-consuming, expensive overseas trips.
Fewer Risky Dependencies
The reshoring of manufacturing minimizes vulnerable third-party dependencies. Supply chains relying on international suppliers are prone to disruption because they often depend entirely on single, large facilities businesses have minimal control over. The ongoing chip shortage — which stopped production for tens of millions of cars — is an excellent example.
Domestic suppliers can still face delays and deficits, but these disruptions are less impactful. Supply chain partners are more likely to see them coming because of the increased transparency and can adapt faster, thanks to shorter lead times. Any dependencies on domestic manufacturers also don’t carry risks from geopolitical tension, which offshore production does.
Reshoring can further reduce risky dependencies by improving supplier diversification. Companies can reshore some production and nearshore or outsource other portions. That way, they get reshoring’s time and resilience benefits while minimizing single dependencies.
Despite these advantages, some organizations are still hesitant about reshoring their manufacturing. These concerns have merit since it brings challenges of its own.
Costs are the biggest obstacle. Even though reshoring means lower transportation expenses, labor is often more expensive. The disruption from ending relationships with overseas suppliers and transitioning to new domestic ones can also incur extra costs in the near term.
Domestic manufacturers may also be unable to support the same capacity or offer identical specialization as large, established overseas companies. The U.S. has the world’s second-largest manufacturing sector, but that doesn’t apply evenly across every subsector. Some specialized sectors — like electronics — have relatively few major American manufacturers.
It’s also worth noting that reshoring often means taking more control over the manufacturing process. That’s advantageous regarding transparency and minimizing disruption, but it also means higher organizational complexity and costs.
The Way Forward for Reshoring and Resilience
Even though these obstacles remain, reshoring is still an excellent way to build supply chain resilience. The extra costs and complexity are worth it in the long run because reshoring mitigates the impact of disruption. Considering there were over 11,000 supply chain disruptions in 2021 alone, that resilience will likely pay off sooner rather than later.
Businesses can also minimize transition-related disruptions by approaching reshoring slowly. Talking with multiple domestic suppliers to find the ideal partner before moving and reviewing legal ties to current overseas companies is crucial. Organizations should also reshore their operations one process at a time over a few years instead of transitioning all at once.
Recent legislation like the CHIPS Act suggests incentives for American manufacturing are growing. Domestic supplier options and capacity will expand as that happens, making reshoring easier.
The Reshoring of Manufacturing Is a Promising Shift
Supply chains are slowly becoming more resilient as more companies reshore their manufacturing. This shift isn’t the only step businesses must take to ensure resilience but it’s critical.
The reshoring movement will cause some initial disruption but will bolster supply chain operations in the long run. U.S. manufacturers, logistics providers and the companies that rely on them will all benefit from the shift.