Global Supply Bottlenecks and rethinking China sourcing

An article in APNEWS titled “Shipping snags prompt US firms to mull retreat from China” (August 5, 2021) claims that firms are worried about container capacity, shipping delays and rising prices. Many manufacturers (52%) are thus considering moving production back to Mexico or the US. What will be the impact of moving to US sourcing for many currently globally sourced products – will it make manufacturers more or less profitable ? Should manufacturers consider splitting their sourcing across the US and Mexico or vertically integrate ?

About aviyer2010

Professor
This entry was posted in Uncategorized and tagged , , , , , . Bookmark the permalink.

60 Responses to Global Supply Bottlenecks and rethinking China sourcing

  1. YIjia Chen says:

    I think that manufacturers should make long-term plans and short-term plans to look at this issue. In the long run, doing so will reduce their profit margins. We can look at this issue from several points. Indeed, during the current epidemic, manufacturers have to increase the cost of shipping and transportation a lot, including other possible consequences. However, China still has a mature production chain, skilled workers, and moderate salary fare. Compared with the United States and Mexico, the lack of many years of such production experience and production activities, coupled with high labor costs, may greatly increase the whole supply chain costs. Vertical integration may help individual manufacturers, but not all. Because of the impact of globalization, many vertically integrated downstream companies may also have parts and processing plants in China or elsewhere in the world. Then a lot of things will be created after vertical integration.

  2. Haoning Wang says:

    According to the problem, I will say that it is an unwise choice for the manufacturers to move to the United States for many globally sourced products in the short term. There is no doubt it will be less profitable in the long term. Since the pandemic occurred, a series of problems are raising such as unpredictable demand, capacity concern, and high-priced labor. As we all know, US sourcing is limited and sometimes it is not cheap though. On the one hand, the pandemic affects the container capacity, shipping delays, and rising delays. But the pandemic will end for sure. The situation is temporary. On the other hand, Globalization makes the suppliers competitive in order to keep the price constant. The manufacturers will always get a good price for their production part from the other countries. The manufacturer can consider moving a part of the sourcing to Mexico or the US in the short term (during the pandemic). The decision-maker should also compare the price of localization sourcing to the global souring. It is necessary for the manufacturers to choose the optimized supply chain to make more profit instead of moving to US sourcing recklessly.

  3. Sruthi Madadi says:

    After the effect of pandemic on the supply chain, I think it’s time for the organizations to evaluate their supply chain and perform a basic analysis like ABC to categorize their components. For those raw materials which fall under the A category (Prime and highest priority) which contribute to the high selling final products of the Manufacturer, the company should follow a dual strategy. Along with sourcing from China, it’s always safe to identify the domestic suppliers who have the capacity to ship 100% of the company’s demand and it’s crucial to maintain a good relationship with these domestic suppliers. One of the strategies could be outsourcing about 75-80% of materials from countries like China and at least 20 -25% could be procured from the domestic suppliers (Following JIT policy). The contract agreements could be made with these domestic suppliers to supply 100% of the demand if required.
    For the raw materials which fall under the B category, the organization could outsource completely but along with which they must maintain a higher than usual buffer/safety stock level to sustain the increased lead time.
    For the raw materials under C-category which are the least priority, the organization could completely outsource them maintaining a minimum buffer/stock levels.
    Considering the labor cost, setup time I think it’s not ideal to completely turn towards domestic suppliers.
    To sustain the competitiveness in the market and react to the consumer’s demand, companies could follow the dual strategy. This could enable them not only to reap the cost benefits by outsourcing but also stay resilient to external supply chain shocks.

  4. Oladapo Olatunde says:

    Much of the discussion in the advance economies (US) lately revolves around increasing domestic production or moving manufacturing to Mexico. However, the highly interconnected nature of value chains limits the idea of large-scale relocation from present physical location, as the configuration of most of these companies reflect specialization. Some of this business has hundreds of billions of dollars in fixed investments with strong economies of scale, making them more costly to shift. Also considering labor and expertise, the cost of hiring the skills needed for manufacturing in the US will be more expensive that what it is presently in China. Although in the long run this might be a viable option, presently such decision wouldn’t solve the problem at hand.

  5. From my point of view, we can look at this article from the 4C framework of the Supply Chain.
    The first ‘C’ is chain structure. If companies try to move manufacturing from China to Mexico/the US, we can expect the supply chains to be shorter, hence shorter lead times and lesser variability. This will lower the inventory carrying cost, thereby attributing positively to profitability. Additionally, the supply chain performance will also improve as the products/services and information will now move through fewer international borders and hence pay lower duties and taxes. At the same time, companies having their operations in the form of an assembly line where their parts are coming from many countries world over may still feel performance pressure due to even a single vendor (who may or may not be in China) who is unable to provide timely delivery of its parts.
    The second ‘C’ is capacity. If companies decide to move away from China, then the supply chain capacity will reduce in the short run, adversely affecting the supply chain performance. From the standpoint of the importance of capacity in supply chain performance, I am inclined towards gradually expanding the capacity of the supply chain by having dual sourcing or multi-sourcing strategy for goods and services. This will add new capacity to the existing supply chain so that sourcing from geographically closer suppliers would make better sense when there are disruptions. Furthermore, when there are no anomalies, then the low-cost vendors from China can be relied on.
    The third ‘C’ is coordination. Coordinating the flow of goods and information across international boundaries has much friction in regulatory duties and taxes. The execution of supply chain coordinating contracts will fall under a consistent framework if all the supply chain entities are from the same country. This is a pro in favor of moving to source locally or from Mexico.
    Moreover, the last ‘C’in this framework is competitiveness. This dimension varies from industry to industry, and therefore, it is more appropriate to look at competitiveness affecting the supply chain on an industry-to-industry basis.

  6. Hao-Wen Weng says:

    I believe that some of the manufacturers are trying to move the production out of China right now. Take the apparel industry for example, in the past, the apparel were mainly made in China. However, recently, I noticed that not only China, but the tags of making in Vietnam, Cambodia or other Central American countries are getting more. Considering the 4Cs that we have discussed in the class, all the factors that impact the logistics performance. It looks like if the manufacturers move their production back to the U.S. or Mexico, the chain structure will become more stable since the factory is in the U.S. or very close. The capacity might not be as large as the production in China because they might not be able to hire as many people and have scale economics. The coordination might get better because the suppliers are in the same time zone, but the manufacturers need to find new suppliers which might cost lots of time and money. Lastly, the competitiveness, I believe that compared with the U.S., the labor cost in China is still competitive at the present. But we cannot guarantee that after 5 to 10 years, China will still keep these advantages and China might be overtaken by other developing countries. If the manufacturers move their production to the U.S, it will not be profitable because of the high labor cost in the U.S. To most of the industries, the labor cost takes the most percentage in their overall costs. However, if the manufacturers are trying to prepare for the future, moving their production to the Central American countries or Mexico can be an option for them. They can have lower labor cost, closer geographical positions and shorter lead time. I also suggest they split the sourcing across the U.S. and Mexico instead of vertically integrating. Because the latter one costs time and money and it is not flexible enough to handle the quickly changing situation.

  7. Shivang Batra says:

    In my view, moving the sourcing base to the US and Mexico is viable on a long-term basis to make the supply chain streamline but surely it will not be profitable for the manufacturers.
    China’s present manufacturing infrastructure is unbeatable along with the low labor cost (though labor cost is increasing) along with high production capacity which helps in keeping costs low.
    Talking with regards to the 4C framework, the Chain structure will include entities that are situated near the US which helps in a smooth flow of goods and information. This helps in building an efficient supply chain.
    Building capacity in each entity is not a problem but making it cost-effective will be a problem.
    Coordination will depend on where goods and services are moving as international border taxation act as friction in the movement. So, moving to the US or Mexico will surely help in removing the bottleneck.
    Lastly, competitiveness is where china wins the race as being the largest exporter of goods in the world.
    The manufacturer should split their sourcing across the US and Mexico because of the low manufacturing cost in Mexico and they can rely on a dual sourcing strategy to remove the bottleneck.

  8. Coumba Niang says:

    Manufacturers should expect a significant increase in their cost of labor as labor is more expensive here in the US, which will consequently lead to a higher product price. When looking at the 4C framework, I believe that the chain structure will be easier to manage as they will not have to deal with buffers such as long shipping times and passing through customs. Assuming that manufacturers will source most of their products in the US, Mexico, or Canada, it will be easier for them to track down raw materials and comply with the ethic laws. Manufacturers should expect their capacity to be easier to manage as they probably won’t run into many issues such as stockouts and will be able to replenish while avoiding long lead times. The coordination within the supply chain will flow easier as partners will probably share the same information sharing technologies, which leads to a more “confident” guaranteed delivery time, prices, and order amount. However, competition might get a little tough as those manufacturers who are still sourcing from China have a upper hand when it comes to prices, but manufacturers in the US can still play on having better and “verified” quality items compared to those who source abroad. If successful, manufacturers in the US will have the upper hand in the industry and we might see an increase in manufacturing as those abroad will come back and operate in the US. Even though the opportunity to innovate might be faster in China, US manufacturers still have the ability to create their own niche.
    In the short run, US manufacturers might be less profitable as they will incur losses, but on the long run it will definitely balance out and they will be profitable. It all depends on which tactic and supply chain architecture they will be following. I think that manufacturers should split their sourcing in the US and Mexico. For example, they can source labor in Mexico and get lower labor rates. And as the two countries are close together, we will be seeing a reduction in lead time as well.

  9. Vikram Narendra says:

    In my opinion, focusing on the crisis in a 4C framework – chain, capacity, coordination, and competitiveness will help simplify the problem and guide us in making a more informed solution. In a world of instant gratification, consumers expect their supply chains to be ever responsive than before. Consumers will move to a readily available competitor product, with disruptions in the supply chain occurring more often than before, manufacturers will have to relook their supply chain. Manufacturers should look within their respective industries and make decisions accordingly – for example, a toy retailer having outsourced his manufacturing to China, a disruption during Thanksgiving or Christmas can prove fatal. The toy retailer needs to look at all the 4Cs and the respective trade-offs. Insourcing and nearshoring operations will provide additional flexibility, allow reduced inventory, protect one from cross-country duties, and respond better to competition. As more countries worldwide are increasingly getting protective and looking inward, the advantages that outsourcing once offered – reduced costs, better quality, access to cheap manual labor, expansion capabilities are fast diminishing, and manufacturers must relook into their strategies.

  10. Juan Bautista Rigal says:

    Personally, I believe that moving the manufacturing to Mexico or the US will not be beneficial in the long term. Even though the transportation costs have been rising, there is no ensure that is going to be that way in the future. Moreover, the pandemic had a high impact on the structure and operations of transportation. Changing in politics are also a concern for a stable bridge between China and the US, and this has also led to problems in addition to the above mentioned. Moving the manufacturing sites will also led to new competitors that will rise once everything goes back to normal, and they will use Chinese manufacturing at a lower price and skilled labor force.
    On the other hand, there should be an analysis of having several manufacturing sites and implement a dual sourcing both in China and US/Mexico where you can anticipate major supply chain disruptions such as the one we are experiencing. Profits will probably go down on the short term, but diversification and building a more complex structure will help in the long run.

  11. Ying-Hsuen Tsai says:

    For most of the company, it’s almost impossible to move production and globally sourced products back to US or Mexico within a short period of time. Some considerations of the capacities are difficult to adjust within short period of time, such as plant sizing and infrastructure investments. However, with the rising uncertainty caused by more unpredictable weather, pandemic and even political issues, the companies can evaluate if bring the production back to the market is a good idea. Even the margin may erode, if the companies can gain more advantage in terms of increasing competitiveness and reducing risk ensues from existing chain structure and coordination, the company will still be better off with moving back. The same concept can be applied to the second question. While splitting the sourcing across the US and Mexico can leave better rooms for companies to cope with the uncertainties, vertically integration usually brings better cost effectiveness and efficiency. There’s no absolute answer to this question. The manufacturers should evaluate its 4C structures to determine which way to go. Or even a combo strategy, the combination of the two, can be considered.

  12. Sara Fortman says:

    Since it is not mentioned whether this will continue for a while or forever manufacturers will have to consider long-term plans and short-term plans. If long-term, then it would make sense for manufacturers to consider moving production to Mexico or the US because they would not have to deal with shipping containers and shipments could be planned to be more predictable. This will also create a smaller profit margin. But at the same time, most manufacturers are used to the shipping and production being overseas already. Labor costs are less overseas than in the US.
    If this is a short-term issue, then it would not make sense to move the manufacturing production to Mexico or the US because it would take a lot of time to start-up a new facility. Profit margins could grow a little bit especially since shipping should not cost as much as being overseas.
    Manufacturers can consider splitting their sourcing across Mexico and the US or they can vertically integrate. But vertical integration is costly and takes much time. Sourcing with Mexico and the US has flexibility since they are domestic and connected by land for transportation. Each manufacturer and industry can work better domestically or internationally when it comes to receiving and producing their parts.

  13. Aadav Srimushnam Sundaranathan says:

    Over the years, the supply chain network that has been developed in China has been unmatched that the point of thinking about exiting from China will lead to losses in the near term due to probable scarcity of resources. Neither does the US and Mexico with their pre-pandemic unemployment rates at 3.5% will hold the capacity to absorb the move of production facilities away from China. While different industries have their own concerns of sourcing from a specific country, the alternative supply chains will be looked into going forward to reduce the shocks of any outlier disruptions such as Covid-19. The goal from 4C’s structural analysis of supply chains for manufacturers is to ensure CONTINUITY during disruptions. The period of material shortage and flooding can be avoided only if the sourcing is diversified and distributed. To ensure this continuity, new geographies and developing countries who vie for a high growth rates provide for an opportunity to keep the costs lower and increase the resiliency of their respective supply chains. For example, Apple plans to introduce 3nm chips in all its products going forward and this new product development provides them an opportunity to move supply lines away from China and Taiwan, and into Malaysia as an alternative.
    Alternatively, this diversification to far regions should consider the factors of shipping containers issues, port capacities such as in recent times. This also provokes the thought for shortening the supply lines and bringing suppliers closer. So, these decisions would also depend on which critical supply lines are critical to economic recovery during disruptions.

  14. Esha Kaushal says:

    The article highlights the trends of American companies moving manufacturing from China to Mexico. Given the confluence of political measures and current world events, the rationale for nearshoring production does seem compelling. Analyzing the situation using the 4C framework we observe that –
    Impact on Chain Structure – Over the years China has evolved from being a primitive, low-cost manufacturing location to an ever-advancing global supply chain hub. China’s mature exports industry makes it relatively easy to find inspection agencies and suppliers experienced in meeting international compliance standards. Although shifting base closer to the US has its advantages in shorter lead time, the cost and time effort required to replicate the efficiencies of China’s manufacturing will be quite high.
    Impact on Capacity – Working with a manufacturing facility in China lets a company reduce the production cost, without reducing volume output. With higher wages, replicating the same capacity will prove to be expensive. Therefore, if a company wants to test prototypes, they can prefer manufacturing in US market.
    Impact on Coordination – Moving manufacturing from China to closer home would reduce coordination efforts as all employees would be working in a similar time zone, resulting in the ability to have more effective oversight into operations and increased productivity.
    Impact on Competitiveness – Another risk faced by companies with manufacturing in China has been a loss of intellectual property through theft, thus compromising their competitive advantage.
    In addition to this consideration, companies that have supply chains that are far removed from their markets often underdeliver when it comes to customer service, satisfaction, and product response agility. Companies that are thousands of miles away are slow to react to customers’ needs or adjust to changing market demands.
    Therefore, according to me, there is no single answer. Each company would need to analyze and see what they want to prioritize and act accordingly to establish a stable manufacturing process.

  15. ANUPAM CHOUDHURY says:

    I agree there are certain advantages to near-shoring as opposed to off-shoring, given the increasing push towards nationalism by governments worldwide. We are now witnessing a US-CHINA trade war, Brexit, USMCA which are pushing tariffs up coupled with skyrocketing ocean freight off-shoring is increasingly becoming challenging. The world container Index (WCI) assessed by Drewry (https://www.drewry.co.uk/supply-chain-advisors/supply-chain-expertise/world-container-index-assessed-by-drewry) is 360% higher than that of 2020, which is unprecedented by any standard. Even with such high prices companies cannot guarantee timely delivery. Big companies are using air-freight to meet customer commitments but small businesses are getting crushed. If we glance through few 10k reports of US automotive manufacturing companies, almost all of them have called out Logistics as the biggest source of revenue leakage even bigger than chip shortages.
    Off-shoring is based on the premise of lowering cost but post-pandemic companies have learned the virtue of injecting resilience in their Supply Chain at the cost of efficiency. I feel off-shoring and near-shoring will co-exist in the long term and moving production to Mexico or other Latin American countries will take a while but the seeds are already sown for bringing production in and around the US and companies have started scouting for candidate countries and also looking at some level of vertical integration.

  16. Calei Kelly says:

    I think in the short-term, it will make manufacturers less profitable. The capital expenditures required to relocate operations are not only costly, but also take a significant amount of time. Building/setting up new facilities, hiring and training employees, and restructuring the supply chain will all cause the move to be a financial challenge. Additionally, many of the current shipping snags are related to COVID-19 impacts. If these are temporary in nature, shipping issues should be resolved soon. Thus, the original financial benefits of production in China will be restored and production in the US and Mexico will cause them to be less profitable.
    Splitting the sourcing between the US and Mexico would be a more time-saving approach to resolving supply chain issues. If there are good, already established suppliers available, manufacturers should consider that option more heavily. Vertically integrating would give them much more control and likely higher margins, but it is much more costly and time consuming to implement.

  17. Yen Hung Chou(Misha) says:

    Based on the problems, I think moving back to US or Mexico is not a good decision for most of manufacturers because China has a competitive supply chain eco-system with economies of scales. Therefore, manufacturers will make lower profit if they move back to US. Take Apple as example, all their products currently are manufactured in China or India. If Apple’s manufacturer decides to move back to US or Mexico, they should encourage all their components suppliers move to US or Mexico together. Otherwise, not only the cost will be extremely high due to additional shipping fee and higher labor cost but also face same issues about container capacity and shipping delays. In my opinion, only manufacturers with high advanced manufacturing processes with huge US clients based should move to US. Take leading semiconductor foundries TSMC as example, TSMC will open new factory in Arizona in 2022 because they can get huge benefit. On one hand, opening new facility in US will gain trust from TSMC’s US customers to reach higher bargain power. On the other hand, TSMC can hire more talented engineers from US to develop more advanced chip to gain higher margin. In conclusion, manufacturers should consider the impact of whole chain and customer relationship for moving back to US or Mexico

  18. Jason Harris says:

    While there is an opportunity cost associated with moving globally sourced products in the US, this move will make manufacturers less profitable. The cost of labor in the US far outways the increase in transportation and other cost associated with the coordinating process of getting these goods from point ‘A’ to point ‘B.’ Manufacturers should not only split their sourcing needs across the US and Mexico, but they should also identify as many opportunities as possible across the globe to diverse the structure in which products are sourced to increase resiliency. Several untapped markets can be considered as new primary targets in this global logistics strategy. Fostering localization of production while continuing to source products across the other countries will not only reduce the impact of disruptions in the supply chain, it will also have an impact on expanding the market of product awareness in the companies long term expansion while providing new opportunities to assist in the economic growth of emerging markets. The scope of how effective this strategy will be will require engagement with sales, marketing, finance, and other areas of the supply chain ecosystem. While companies’ bottomline wants to shorten the lead time to increase inventory to provide these goods and commodities, lowering the cost of sourcing is not in the foreseeable future. By the time these investment strategies are implemented, these global production challenges will likely begin to settle. These desired cost savings will need to come from other business areas to stabilize the cost of these production needs. Material costs are still rising across the globe, and even if the entire operation moves to another location, i.e., the US and or Mexico, there will still be several materials that unfortunately can only be sourced by particular regions of the globe, which will ultimately still impact the cost and lead times of product development.

  19. Emma Wellington says:

    There are several impacts of moving to US sourcing for products that are currently globally sourced. It takes time to establish new supplier relations and supply chains. This means there is an opportunity cost of time and money that a company would invest in searching for new sourcing in the US. Further, the current supply chain problems of expensive containers, delays in shipping, and rising prices are short term. Therefore, it would be likely that by the time a company moves to US sourcing, the global landscape has returned more towards a normal state. Additionally, the cost of sourcing from the US or Mexico is generally greater than sourcing the components from China, as mentioned in the article. As a result, it is likely that in the short run, moving to US sourcing would make manufacturers less profitable. However, the decision to diversify sourcing and source from the US and other global markets could be viewed as a necessary investment. Although short term costs would increase from the decision, the company could be better prepared to face future supply chain challenges if a similar situation were to arise in the future. Therefore, manufacturers should consider splitting their sourcing across the US and Mexico. It is important for the companies to evaluate the current markets they source from, as well as the risks they would face or mitigate if they were to begin sourcing in the US and Mexico. Vertical integration could be considered for companies that are already sourcing in the US and Mexico. However, this is a significant investment for a company to pursue vertical integration from a time and cost standpoint.

  20. bmyczkow says:

    I believe the most important question is the time frame of the entire process. Each company will have a different scale of operations in China, and thus will have a different amount of resources and infrastructure to consider moving to Mexico or the US. For larger companies, the sudden move may end up taking multiple years to execute in its entirety, which may prove to be futile if shipping capacities return to normal. Smaller companies may have the advantage of requiring less resources, both materials and infrastructure, which would allow them to make a quicker transition. Larger companies will also require a suitable talent pool at the new location, China is notorious for having massive pools of highly skilled workers, which in turn drives down production costs. Building off this, it will be important for these companies to consider the offsets of any new incurred cost as opposed to their continued revenue. If all the costs end up being drastically higher, the lower lead time may not offset these new cost and the company may not find profitability regardless of moving.

  21. Ting (Tina) Lin says:

    Relocating operations from China to areas closer to the US has been a controversial topic. During the COVID-19 pandemic, I was also personally impacted by the delay in shipping and the drastic increase in the shipping price. Whether it was perishable goods for my personal use or the commercial goods my company was waiting upon, the container ship traffic jam was a big headache for most people. In the short term, companies that are usually sourced from China are looking for alternative ways to secure their goods. However, in the long run, companies will find themselves evaluating the profit of moving production plants to the US or Mexico vs sourcing from China. Manufacturers will be significantly impacted by this change with less profit as the initial investment and learning take place. China has sophisticated systems set up with highly skilled workers, which meet the needs of most companies in the US. When it comes to the question of whether implementing vertical integration, I would suggest the manufacturers split between the US and Mexico, as the implementation might take much time and costs more in the initial phase.

  22. Ahmed Hegazy Ali says:

    In my opinion, moving manufacturing from China to Mexico would be beneficial for the overall supply chain. While I think that this would lead to an increase in price, I do think that it would be less risky for the US to import from Mexico. It will in effect make a more resilient supply chain: reduction in lead time, easy accessibility for quality control and compliance officers, localization of items manufactured, and lower transportation costs. Furthermore, there will be a reduction in variation of the products, seeing that the chain structure will be more standardized due to ease of access to Mexico.
    Moreover, in terms of capacity, ordering from near by facilities means that shipments can be done more frequently, and in less size. This means that holding costs within inventory holding units (warehouses, fulfillment centers, consolidation centers) should be lower, seeing that less inventory will be on hand. Furthermore, items can sometimes be integrated to an end to end system, where they are shipped directly from manufacturer in Mexico to customer in the US or Canada. Additionally, this will reduce the risk of holding unnecessary items.
    Nonetheless, flow of information is key. As long as systems are well integrated in Mexico between supplier, logistics provider, and retailer; cost of flow of information should be driven down.

  23. Anantharaman Gomathyshankar says:

    In my opinion, moving manufacturing from China to US/Mexico carries a large capital expenditure associated with it. Moreover, labor/operating costs for similar skilled labor in the US is manifold.
    The 4C framework :
    Chain Structure => Long chain with high and varying lead time
    Chain Capacity => The capacity is currently high. Shortening the chain means shorter lead times and smaller required inventories and more inventory cycles.
    Chain Coordination => The chain will become better coordinated if the sourcing is moved closer to the US avoiding international taxation and bureaucracy.
    Chain Competitiveness => This factor is highly dependent on the industry. Careful analysis of the particular industry needs to be undertaken to understand the impact on Competitiveness.
    For the short term, there exists a possibility of postponement for low specialty goods for which factories in Mexico can be contracted to perform the final assembly stage operation and final transfer of the finished goods taking place from Mexico and large shipments are received in Mexico from China. This will help alleviate the administrative delays in the supply chain.
    For the long term, sourcing products from diverse geographies and creating a robust global supply chain for incremental product categories gives the best chance to mitigate risk of geopolitical instability. In terms of manufacturing, Central America and South America present a golden opportunity for US investment as it can create better synergy within the Americas and create a more influential trade block.

  24. Yi-Hsuan Hsu says:

    Until now, the cost of production is still lower in China, in comparison with that in North America. As the author mentioned, it is mainly because that there are specialized suppliers cluster in Chinese manufacturing centers, making it easier for factories to get the parts they need. The industry in China has already been very vertically integrated. As a result, moving to US sourcing will make the costs of manufactures become higher, and the products become less profitable. The fact that producing in China has lower costs could also be demonstrated to us by Poses’ statement in the article. He lamented that he could not find a North American factory that could produce his games at a competitive price.
    Despite the sacrifice of a portion of the profits, in the long run, I consider that the manufacturers could shift parts of the sourcing away from China to stabilize the overall inventory supply. Nowadays, the supply and demand of the global market is so unstable and changing rapidly, and thus sourcing in multiple locations around the world could be a beneficial strategy to manufacturers as it helps the manufacturers to spread the risks. However, I also consider that it does not mean that the manufacturers should shift all their sourcing back, as the manufacturing centers in China is obviously more mature and the vertically integrated production system could help the manufacturers maintain their competitiveness by acquiring inventory with lower costs.

  25. AKSHIT JAIN says:

    According to my opinion, moving product sourcing completely from offshore suppliers (Chinese supplier) to domestic (USA) | Mexican suppliers will definitely result in lower profit margin for US Firms because of higher labour cost, and strict govt. compliances, but firms can expect shorter lead time, faster delivery and less disruption in supply chain network (because of unforeseen circumstances).
    But, from long term perspective shifting sourcing to domestic supplier will be beneficial but from short term perspective shifting sourcing is not a feasible solution, instead firms can think of dual sourcing concept. Firm can categorise their Products in A | B | C category based on their product contribution in total revenue and sales volume. For category A products (20% sales volume | 80% total revenue) firm should follow a dual sourcing strategy, order approx. 70 – 75% from offshore supplier and develop domestic supplier for remaining 25% – 30% (but domestic supplier should have potential capacity of fulfilling 100% demand in future circumstances) and maintain sufficient safety stock in warehouse, in this way for category A products firm can make its supply chain more resilient and achieve higher consumer fill rate. For category B products, firm should source from offshore supplier but have to maintain safety stock (because for category B product not confident about replenishment time), for fast replenishment firm can order from domestic supplier (alternate supplier) frequently. For category C product, firm should order once from offshore supplier in year and maintain safety stock and order from domestic supplier for quick replenishment or emergency situation.
    To sustain market competition and be reactive to the consumer’s demand, companies could follow the dual strategy to enhance their customer fill rate, reduce inventory cost and make their supply chain more resilient.

    • That’s a good way to look at the issue. However, I beg to slightly differ on the strategy used for Category-C. For these SKUs (C category), I would stick to only domestic sourcing since it will give a shorter lead time. And the idea of carrying 50% articles that contribute to only 5% of revenue, is only to give ‘A one-stop shopping experience’ to complete a basket of goods. At no point, we should be leaving a way for the customer to look beyond us, due to a stock-out at our end waiting for the goods to come from an offshore factory. Offshoring for category C will be counterproductive to the very objective of carrying this category.

  26. Amanda Tronchin says:

    Unfortunately, there is not a straightforward answer. There are many aspects to profitability. I will focus on three: political, economic, and social/legal. Over the past five years, our government has been pro-“Made in America,”. This means it strongly incentivized businesses to bring back work and jobs to the United States, which were outsourced overseas, mainly China. The primary reason for the outsourcing was that the cost of producing the good was significantly lower, with relatively reliable quality. Since the cost of production was much less in the states and shipping was relatively inexpensive. Therefore companies were able to make a more significant profit by producing outside of North America. Over the past 18-months, many companies began to question whether producing outside North America was the best decision. Some companies made decisions during the pandemic that brought production back to the United States. While I can understand why some companies decided to do that, I believe others acted too swiftly and made decisions off of current issues without considering the future implications and impacts. The future repercussions will impact the future economics of the business. While shifting production from overseas is not a cheap or easy endeavor, neither will shifting back. Finally, there will be social/legal implications to bringing back some of the operations completed overseas. Suppose companies realize the cost of producing is too high in the United States. In that case, they will sometimes try to “cut corners” to increase profits. Sometimes when this happens, it becomes a social /legal, primarily when the newly implemented practices were previously used at their overseas supplier’s facilities.

  27. Dakota Ropp says:

    There are both positives and negatives that would need to be looked at when moving things back to the USA. One that it will do is decrease shipping costs and lead time by a great amount of time. This is because they won’t have to pay the shipping costs of bringing the products overseas no matter how they brought it over. It will also cut down the lead time for the same reason The products don’t have to come overseas. Customers will be able to get what they ordered faster. However, there are still negatives to doing this as well. One of the negatives is that it could increase competition to the point that it becomes a bad thing. Some competition is not bad for business but to much could chase companies away. Another negative would be that they would decrease the amount that the company actually makes. This is because of increase in costs that they have in the US that they don’t have in other countries. It will also have more government regulations and interventions that they also don’t have in other countries as well. So, it is definitely something for companies to possibly look into. However, figuring this out what is the best move will not be easy since they both have positives and negatives.

  28. Su Tien Lee says:

    For the one thing, moving to US sourcing means that the cost for buying products and labor costs may no longer be that low, but it would be an advantage that the product qualities and workflow can be more nicely controlled since human resources will gather up. Also, the transportation cost will decrease significantly and firms will have less lead time, which can better meet the actual needs. But if the snag could be alleviated or remain minor, I don’t think the manufacturers would still consider retreating from China. The production cost and labor cost in China is still competitively low and may have less strict laws and restrictions on buying behaviors, thus firms won’t give it up easily. From these information and the status quo, I couldn’t make the final conclusion on whether the US sourcing would make manufacturers more or less profitable.
    Mexico to Americas is like China to Asia. Mexico has cheaper production cost than the US, has lower transportation cost and variables in politics compared to that between China and US. With the same time zone and proximity, communication is easier and cooperation would become more smooth. The relationship between Mexico and the US is also less tensed, with US having a more powerful authority over Mexico. Sourcing across the US and Mexico seems to be a compromising way between sourcing in China and vertically integrate in the more costly US.

  29. Yilun Xie says:

    I believe that the impact of moving manufacturing to Mexico or US would be that there will definitely be higher labor costs but shorter lead time for many globally sourcing products. It will make some manufacturers less profitable and some manufacturers more profitable, I would say. As the cost go up, the price will go up if the manufacturers want to maintain the margin at certain level. But they would not go to high as that will make their price less competitive. Manufacturers will need to think of a new price that could be their new price “Sweet Spot”. In the long term, as some of the manufacturers go up with their prices, other who stick with their original prices will have more market shares, which will be more profitable. It would be good if manufacturers can split their sourcing across Mexico and US as Mexico has lower labor, which would make some of the products have higher margin or offer at lower price.

  30. Jiandong Hu says:

    Because of the following reasons, I don’t think it will be feasible to move from global sourcing to US sourcing.
    First, chain structure. Since suppliers are complexly interdependent, the manufacturer is dependent on their first-tier supplier, and the first-tier supplier is dependent on the second-tier, and so on. It is extremely difficult to build up the entire chain. Second, capacity. There should not be technical issues for the US to build manufacturing plants; however, the shortage of skilled workers will directly limit the production capacity. The bottleneck is obvious and difficult to solve. Compared to China, there are over 200 million skilled workers, among whom more than 50 million are highly skilled workers. In addition, with the concern of the raw material, it could restrain the capacity, so it is inevitable to source globally. Third, competitiveness. Even when all the issues mentioned above are solved, the cost would be the next concern. The manufacturers will probably be less profitable because of the lack of skilled workers and scale production experience.
    Regarding the severe shortage of raw material and components which the US relies on Asian countries to supply, sourcing from the US and Mexico would be the temporary strategy to tackle an unpredictable incident, such as covid. In my opinion, vertical integration is the long-term strategy to achieve lower prices and higher quality, since the lowest price will be the goal post covid.

  31. Chia-Yen Lu says:

    The company would need to keep the current chain ongoing and spend extra efforts to develop the localized supply chain for their products at the same time. The company will be less profitable in the short run, however, when the localized supply chain is built, the supply chain risk would be lower compared to the overseas supply chain. Besides, the company could be more profitable because the new supply chain has better efficiency. The reason is that, when the company is building the new local supply chain, it has a chance to adopt a more efficient way to either manufacture the parts or look for a more competitive way of finding a better fit candidate compare to the existed overseas suppliers. It also could utilize this opportunity to do a comprehensive overview of their supply chain, the old supply chain might cost too much logistic budget in shipping parts or finished goods during the transporting stages, as a result, it has a higher chance to be affected by something unforeseeable reason to interrupt the process flow. As a result, developing a localized supply chain could gain more control of the product supply chain, and it would be less possibility that the products are stuck in the middle of the ocean.
    I think the company should splitting its sourcing across the US and Mexico instead of vertically integrate. The sourcing team could out-source the labor-intense work in Mexico which has lower labor cost and source the other works in the US.

  32. lu915purdueedu says:

    The company would need to keep the current chain ongoing and spend extra efforts to develop the localized supply chain for their products at the same time. The company will be less profitable in the short run, however, when the localized supply chain is built, the supply chain risk would be lower compared to the overseas supply chain. Besides, the company could be more profitable because the new supply chain has better efficiency. The reason is that, when the company is building the new local supply chain, it has a chance to adopt a more efficient way to either manufacture the parts or look for a more competitive way of finding a better fit candidate compare to the existed overseas suppliers. It also could utilize this opportunity to do a comprehensive overview of their supply chain, the old supply chain might cost too much logistic budget in shipping parts or finished goods during the transporting stages, as a result, it has a higher chance to be affected by something unforeseeable reason to interrupt the process flow. As a result, developing a localized supply chain could gain more control of the product supply chain, and it would be less possibility that the products are stuck in the middle of the ocean.
    I think the company should splitting its sourcing across the US and Mexico instead of vertically integrate. The sourcing team could out-source the labor-intense work in Mexico which has lower labor cost and source the other works in the US.

  33. Lindsey Prommer says:

    There would be many impacts of moving to North American sourcing for currently globally sourced products. Utilizing the 4 Cs, the chain structure would not be changed. Their capacity would be changed, as contingency arrangements would be required during the switch from their old production locations to North America. As far as coordination, it must be considered if this move would breech their contract with their supplier or distributor as well as downstream impacts of this decision (strained relationships, even more delayed orders, etc.). Lastly, competitiveness must be analyzed. Moving to North America could grant the manufacturer greater flexibility and quicker order delivery if their suppliers, distributors, or all of the above are located in North America. If this is true, then the manufacturer’s improved agility will attract more customers. Overall, this move would likely raise revenues due to the great potential of increased fill rates and decreased tariffs but there would also be higher costs associated with the move, including funds to build new facilities or partner with existing plants, as well as perhaps buying out previous contracts abroad, and paying higher production employee wages in North America, as compared to elsewhere in the world. A significant amount of time would also be necessary to devote to finding where to build new production relationships, geographically where to locate manufacturing plants, and maneuvering funds to finance this endeavor. At this point, I cannot say whether this would make manufacturers more profitable. I believe that it depends greatly on the future of their industry – should manufacturers just ride out the COVID wave and then get back to business as usual in a few months, or is this being optimistic? Perhaps a move to North America is more of a long-term benefit to manufacturers and COVID simply spurred the early jump. Regardless, there is a potential for increased revenue, though not necessarily increased profitability given the higher costs associate with the move.
    At this point, manufacturers should consider spitting their sourcing across the US and Mexico. Vertically integrating is incredibly expensive and though it would certainly help to have more control over the supply chain in this time of COVID uncertainty, I believe this situation is too uncommon (and hopefully nearing a resolution) to warrant a huge change (and expense) such as this.

  34. Zeyu Hu says:

    First of all, a large part of the US imports from China are low-end manufacturing products produced by labor-intensive industries, including textiles, toys, furniture, leather products, and some mechanical and electrical products. Regarding the above products, I think that moving to US sourcing is disadvantageous in both the long-term and short-term perspectives. In the long run, labor costs of labor-intensive manufacturing industries account for a large proportion of total costs, while labor costs of the United States are about eight times that of China, will ultimately be paid by American consumers. In the short term, it is even more impossible because it is hard to find qualified manufacturers of related products in the United States.
    For the second question, I would like to talk about my understanding in conjunction with 4C framework.
    Chain structure: Sourcing across the US and Mexico can not only reduce lead time, but also even help with getting rid of the entities involve offshore trade so that simplify the whole chain.
    Capacity: In this article, I noticed that people complained about the limited container capacity during that a special time, but they ignored the production capability of manufacturing suppliers itself. China has many mature industrial belts, and its production capability and diversity of production are unmatched by that in most of regions.
    Coordination: After getting rid of tariff issues, offshore trade and even language barriers, it is easier to coordinate between each entity.
    Competitiveness: It is a trade-off between reduction in lead time and higher profit margin.
    For products with low net profit margin, I will keep sourcing from China, India and even Southeast Asia. Mexico may also be a good choice.

  35. Sara Yung says:

    If internationally sourced products move to domestic US sourcing, it could make manufacturers less profitable. In the US, there are more regulations, laws, and pay, so products will most likely be more expensive. On the other hand, some companies market their products as US made/sourced and could imply that the products are thus more ethical. There are various considerations that manufacturers need to consider when working with international suppliers. During my internship for example, for FedEx in China, the organization is only allowing premium overnight services and has put international economy shipping services on hold. FedEx representatives do not know when the economy service will be continued due to the coronavirus. As a result, shipping prices and delays have been costly for American manufactures. Another issue to consider with sourcing from Mexico are the crimes related to the drug/black market cartel. Some regions in Mexico are more likely to get criminal activity even when trucks are tracked and have security. So, there could be a possibility in which equipment and supplies are stolen which is also expensive and can cause international security issues. I think the US does not necessarily need to vertically integrate, but should use suppliers that have stable shipping circumstances and positive shipping behavior.

    • Darsh Shah says:

      Hi Sara,
      Thankyou for your comments!
      I really like your perspective on problems associated with Mexico sourcing because of drug and black market cartel. Even though they might not impact all the products being sourced, their presence cannot be ignored.
      I disagree with your comment that US does not need to vertically integrate. I feel that there is a strong need for vertical integration in US so that supply chain can become more resilient. Companies like Apple, Amazon, Walmart have already started vertically integrating their supply chain and it has given them more control and autonomy over their Supply Chain.

  36. Alexander Rabold says:

    Restarting production in the United States/Mexico may allow for less uncertainty when it comes to shipping capacity and lead time, but there are other factors involved that may nullify the advantages of such a move. Unless they already have suppliers in North America, delays in production would likely be similar to the delays faced from shipping issues, at least in the short-term. New supply chains will need to be established, new facilities acquired, and new workers hired, each of which would increase costs. While these expenses would likely lower over time, it draws away from the advantage of lower costs from overseas production. In terms of the 4 C’s, the Chain structure would need to be re-evaluated as entities move production around, as well as potentially increasing competition due to having to fire workers overseas who are skilled in producing your products.
    However, as the article stated, relying on overseas production is inherently risky. Disruptions in supply chains could result in unfulfilled orders, idle factories, and other outcomes that would be detrimental to businesses. Splitting the supply chain and setting up production in North America would allow for greater redundancy in the system, lessening the risks of disruption at the cost of having to spend time and resources on establishing new suppliers. This would both allow for greater capacity for production, as disruptions to the supply chain would be less debilitating, and improve coordination between the various entities involved due to the reduction in risk.

  37. Nicholas Reverman says:

    In the short-term manufacturers will be hard pressed on profits and lead times, as relocating and renegotiating contracts and setting up programs with new companies takes time and a great deal of capital that they will normally invest for their suppliers to be able to handle the volume they would like. Or, if they have their suppliers relocate or build new plants in the area, that would take time to move operations and/or build more infrastructure. On top of that, if over half of these manufacturers decided to source their products and components from Mexico and the US, there would not only need to be more infrastructure, but more working capital as well. Labor demand would skyrocket in both countries, and companies would end up with squeezed margins having to pay more in labor costs. Finally, some raw materials that are needed to start the whole supply chain would still need to be imported such as steel, plastic, et cetera, that the US and Mexico simply do not have enough of, and there’s not an easy way around it. All of that being stated, they would have a more reliable chain structure to work with that is easier for them to control and coordinate without long unreliable lead times, but at a steep cost.
    If US companies decided to source their parts and products closer to home, they would need to know that it is a long-term game if they would like to profit from this. However, I would not recommend this to US companies, as these higher shipping costs, and increased lead times do not seem like they will be around forever. Eventually, the amount of container capacity shipped overseas will catch up to the current exploding demand that is occurring right now. Something to remember is that economies around the world are still trying to ramp back up production to pre-COVID-19 levels, while facing a higher-than-normal demand, that will also settle down to more appropriate levels. Vertically integrating for some of these companies would make sense. However, if they are trying to vertically integrate towards the beginning of the supply chain where more raw materials rather than components are needed, it would not make sense for those that need raw materials that are not abundant in Mexico and the US, as they would have to source those internationally anyways and bring them in on containers.

  38. ptodjalla says:

    Rethinking China sourcing for US firms in the current global logistics environment is of course a worthy project. Whether moving away from China sourcing would be more profitable or not for manufacturers would depend on specific situation however, it is probably more certain to be more costly. Manufacturers have moved their operations in China initially to reduce costs of doing business. One important factor to consider when deciding to relocate operations back in the US or in Mexico, is the fact that many suppliers (for parts as well as raw materials) for these manufacturers are located in China and other countries in Asia (closer to China than to America). So, in a way moving production operations in US or Mexico may not solve the logistics headache entirely, although it would allow for shorten lead time for moving final products to consumers in the US market. Another reason why manufacturers moved operations to China was labor costs, much higher in the US than in China and around Asia markets. For this instance, higher labor costs in the US or even in Mexico would negatively impact margin level, hence such move would be less profitable if prices are not increased accordingly. Though moving back in the US will eliminate logistics costs from China to US (ocean or air freight).
    It is worth noting that higher labor quality in the US compared to China would be positive and could translate into costs saving even if marginal in most cases. Moving manufacturing operations back in the US may be a “must” for some industries, considering national security factor as well as the critical/essential nature of some products, that uncertainty of product availability or lower market responsiveness are simply unacceptable. COVID-19 global pandemic has shown the disadvantages of global logistical dependency, with China hosting large amounts of supply chain actors as well as materials. Finally, planning for production in Mexico could be a sensible strategy to mitigate for several benefits associated with producing in China.

  39. Darsh Shah says:

    There are pros and cons associated with US or Mexico sourcing. The pros will be reduced transportation costs, lesser lead times, fasters inbound and outbound services, better convenience for customers, reduction of tariffs, more employment opportunities for locals etc.
    On the other hand, the cons are lower profit margin, high labor costs, lesser production expertise, less diversity in market, more ethical issues, higher cost of product etc.
    Manufacturing and sourcing in US/Mexico can be beneficial for some companies but not for small players. it will be very difficult for small players to withstand the reduction in profit margins as their margins are usually low. So the best solution to this problem is Dual Sourcing. It will promote an increase in US/Mexico sourcing while allowing companies to import from China and benefit from their low cost production capacity.
    With COVID-19 levels declining, supply chains are restoring back to normal. With the goal of making Supply Chains more resilient, Vertical Integration seems like an obvious solution but it is not feasible for small players to vertically integrate.

  40. Li Ci Chuang says:

    Personally speaking, I think the decision to move manufacturing from China to Mexico would have different results with the time: it will be less profitable initially due to higher cost, but in the long run, it will get benefits from overall stabilization supply chain. To be more specific, the cost of labor, investment and even the land is largely cheaper in China, compared to US. Furthermore, the workers there are specialized trained and have more manufactured related experiences, thus can achieve the economics of scale.
    On the other hand, when moving manufacturing to the US and Mexico, it would reduce the lead time and transportation cost, and all the operation processes can be under full control, leading to more standardization. Most importantly, in capacity-wise, the holding cost and the average inventory will decrease, significantly reducing the risk and total cost.
    I will recommend they take hybrid approach and do continuous analysis frequently. Maybe they will shift more manufacturing part to the more profitable one and then find the most optimized portfolio approach.

  41. Wei Ling Huang says:

    The positive impacts that would increase sales volumes are having higher order fulfillment, higher customer satisfaction, higher customer repurchase rate, and higher possibilities of winning sales opportunities if other competitors have no stock to sell. Also the profit margins would increase if shipping costs and customs duties decrease.
    The negative impacts are that manufacturers have to bear higher labor costs and extra transition costs for setting up new facilities, looking for new suppliers and building good relationships, or even building a new supply chain ecosystems.
    Manufacturers have to figure out the possible net impacts. If the positive impacts outweighs the negative ones, then it will make manufactures more profitable. There is no universal practices applied to all manufacturers with different economies of scales and product categories. Whether to split the sourcing across the US and Mexico, or integrate vertically also depends if there is sufficient industrial clusters with available labors, talents, materials and so forth.
    I was faced with similar situations at my previous work during the trade war and pandemic period. One of our made-in-China products had been charged with a high tariff due to the US anti-dumping policy. As it was not a complex product, we decided to source locally and found that the labor cost still lower than the shipping costs and customs duties. However, we did not adopt the same approach for our electronic products which required hundreds of different components for assembly because the component suppliers and our R&D team were all based in Asia. Some of the customized components were small volume that was too small to implement a second source. As the shipping delays already happened to our contract manufactures in China, moving to the production lines to America would just get the component lead time worse as we could foresee. Therefore, instead of that, we placed early orders to cover the demand until 2023 and increased the safety stock levels to mitigate any losses in case of shortage of container capacity or container-ship traffic jams.

  42. Mu Hua Hsu says:

    In my opinion, the decision of whether to move the manufacturing back to the US or Mexico highly depends on the characteristics of a product. There are several ways to retain the competitive advantage of the product.
    One of the strategies is lowering the cost. For this kind of product, they don’t have too much ability to bear the risk of increasing cost. Therefore, it is not a good idea to move the manufacturing back to the US, since compared to China, the labor cost is way too high. The other choice is moving back to Mexico, which might be a potential candidate because the labor cost is relatively lower than that in the US. Still, in the short run, the company still need to evaluate their ability to endure lower margin due to the risk of moving out China and the cost of infrastructure.
    On the other hand, for the less standardized product, the competitive advantage does not come from low cost. On this occasion, I think moving out could bring benefits. Under the situation of uncertain lead time and unstable relationships between the US and China, it’s better to move some of the manufacturing out to avoid risk. However, shifting all of the sourcing out isn’t an ideal way since it is difficult to predict the long-term global scenario, and remaining part of the sourcing in China is a compromising method. If the scenario changes, the company is still flexible enough to adjust.
    In short, whether splitting the sourcing is contingent on the company’s strategy and the characteristics of its product.

  43. Zach McClurg says:

    In the long-term, bringing manufacturing jobs to North America may ease supply chain issues companies are facing, but it will not be a viable short-term solution. If factories are built here, they will still require raw materials to manufacture finished goods. This will still require goods to be shipped from overseas and for the foreseeable future require fossil fuels for transportation. COVID-19 and a potential unstable Middle East will continue to have short-term and long-term effects on global supply and the cost of shipping and producing goods. I do believe there is value in increasing State-side manufacturing in terms of jobs and the tax revenue that will increase our economy, but in terms of profitability for companies, it may not be the best decision.

  44. Wenbo You says:

    Evaluating with the 4C framework, moving to sourcing in North America may not likely be profitable for US manufacturers now, but can be promising in the long run. China sourcing is winning in its capacity and competitiveness, but according to APNEWS’s claim that US firms are worried about container capacity, shipping delays and rising prices in China, it is losing the lead in some ways.
    Today, China still has the absolute advantage of having the most well-equipped large-scale production lines in the world over the US and Mexico, but is slowly losing the advantage of low labor cost, which was the main reason manufacturers favored China at the first place. From 2019 to 2020, the manufacturing labor cost of China had increased by 12.46% to $6.50 per hour, while Mexico’s only increased by 3.43% to $4.82 per hour during the same time period. With Mexico’s development of its production lines and manufacturing industrial hubs, Mexico manufacturing and US distribution can be a profitable combination for US firms in the future.
    Meanwhile, sourcing within North America will reduce the supply chain costs and be able to mitigate against complicated oversea supply chains more easily, and products will be able to get to the market faster. If sourcing within the US alone, manufacturers can deal with fewer currency fluctuations, tariffs and language barriers that can lead to errors in supply chain operations. Thus, North America/domestic sourcing has advantages in its chain structure and coordination over China sourcing. Plus, the fact that many Americans believe in the quality of American-made products no matter what and consider “Made in China” products low quality will very likely boost the domestic sales if moving manufacturing back to the states.
    Personally, I will choose the combination of Mexico manufacturing and US distribution over US sourcing, mainly due to the lower manufacturing labor costs and real estate costs in Mexico. Utilizing the geological advantages of Baja California and US border cities, US firms can effectively mitigate against long transportation hauls and errors caused by language barriers. Also, there are chances of the US government lifting more tariffs on neighboring countries in the future that can be beneficial for this sourcing method.

  45. Vasif Yusifzada says:

    We need to look at this issue from different perspectives in order to find the best possible solution. We need to think about both the short and long-term impacts of this decision for manufacturers. Despite the container capacity issues, shipping delays, and rising prices, China is still the most economic and productive market for manufacturers. It is easier to find skilled workers who are specialized in the production of globally sourced products for many years with lower wages in this market than in any other country in the world. In case if the manufacturers decide to move to the US, I think that it will be a short-term solution for them because when you move the production to the US, you can solve capacity issues, shipping delays, but it is not guaranteed that ‘high price’ problem will be solved. In fact, compared to China, higher labor force wages will significantly affect the manufacturers in the long-run. Also, in my opinion, there could be production quality problems because the labor force in the US and Mexico is not fully specialized in the production of some of these products compared to the labor force in China. Considering all these facts, I think manufacturers should carefully reconsider their decision regarding this problem because there is a chance to be profitable in the short-term, but again, we can’t surely conclude the same thing in the long-run.
    On the other side, vertical integration is another potential ‘solution’ for this problem but surely, this decision also has some disadvantages alongside its advantages. When a company follows vertical integration strategy, it means that the company owns its suppliers, distributors, or retail locations to control its supply chain. In our case, vertical integration should have some positive effects on the manufacturers. For example, vertical integration strategy will decrease transportation costs and delivery turnaround times, increase competitiveness by delivering products to customers quickly. Also, selling a company-owned brand will improve sales and profitability in the long-run. On the flip side, this strategy might create some problems for the manufacturers. For example, when companies get bigger, it will be harder for them to control the supply chain and as a result, they can mismanage the overall process. Also, as I mentioned above, since the labor force in China is more specialized in the production of globally sourced products, outsourcing could be a better option for most manufacturers. Finally, as we know, vertical integration is not a low-priced strategy, so, it means that manufacturers might need a significant amount of capital in order to implement it which doesn’t seem to be a wise choice in the long-run.

  46. Chi Wen Chen says:

    It is always an attractive idea to bring the manufacturing back to North America, which is much closer to the NA market. There are a couple of good reasons to take this strategy. One is that for manufacturers the supply chain will be more stable and more predictable, which is leading to the lower supply risk, just like the recent global shipping turbulence causing. Another obvious one is that the shipping cost will be lower since the geographic distance is shortened. However, when it comes to individual firms, it is hard to say that they will enjoy immediate benefits because we can not ignore the effect of comparative advantage on a global economic scale. China is still “The World Factory”, which is known for its cheap but experienced labor force. Therefore, I do not think these manufacturing firms can be more profitable by souring from NA instead of China.
    Even with that being said, they should consider at least split a certain portion of their sourcing from China to North America. By doing that, they can alleviate potential supply risk. There is a saying “Don’t Put All Your Eggs in One Basket”. When applying to supply chain optimization, this still carries its weight.

  47. Rubin Mao says:

    To determine whether to split sourcing from China to US or Mexico or not, it should be considered from short-term and long-term perspectives.
    For the short term, it is not rational to move sourcing from China to US and Mexico immediately. Although the shipping cost is sky-rocketing rising since the start of Corona Virus, and the shipping time also increased, it is still cannot be the reason to give up the production factories in China. It is because of the Virus, the ships and containers are stuck at some harbors. With less available ships and containers, the price rises for reasons. Will this situation last long? I don’t think so. What if the Virus keep appearing in the world, the national transportation bureaus will have more detailed and convenient rules to manage incoming ships and containers since they are getting more experienced in managing. Once the sea transportation recovers to normal, China still owns more advantages as the World Factory.
    In a long-term run, I suggest to move part of the sourcing from China to US and Mexico. China has advantages that other countries cannot replace. First of all, Rome was not built in one day. It is not possible to build enough factories, hire workers and train them in short time. Chinese factories have complete supply chains and owns thousands or even millions of experienced workers right now. Another point, as part of the supply chain, you may change the sourcing to US or Mexico. But some others may still have their production line in China, which means the whole chain will still get influenced for the same reason. However, for the long-term, it is time to think about transfer sourcing to other countries. Since the development of China, not only workers average salaries got increasing significantly, but also products are no longer representing “Cheap”. Chinese factories are more and more paying attention on making quality products rather than control costs. The rise of labors’ salary and raw material gives other countries more opportunities to share more parts of the market with China.

  48. harishgavva says:

    Due to the current economic situation post pandemic I don’t think moving the sourcing from china to US or Mexico is beneficial for the manufacturers, at least not in short term. Looking at the article from 4C’s perspective, If the companies try to move manufacturing from China to Mexico or US, we can see a shorter chain and hence less lead times and variance. The manufacturers can then lower their inventory which also results in lower holding costs additionally, the supply chain performance will also improve as the materials will now move through fewer borders and hence pay lower duties and taxes. But the chain might be susceptible to any changes or delays caused in and around North America as they don’t have any redundancy. Coming to capacity, If companies do decide to move away from China, then the supply chain capacity will decrease in the short run, adversely affecting the supply chain performance. Hence expanding capacity by adding a new supplier in US or Mexico to tackle with the increased prices is better as manufacturers can turn to geographically closer suppliers when there are disruptions and when there we do get back to pre-pandemic situation, then the low-cost vendors from China can be relied on. the third ‘C’ is coordination. Sourcing from across international boundaries has much hassle in duties compliances and taxes. So, sourcing from US/Mexico will have an advantage in this aspect as it is much easier in terms of coordination. Coming to the last ‘C’ in this framework competitiveness. This varies from industry to industry, and as the increasing prices affect all the competitors almost equally, it is more important to look at each industry separately and analyze if the relocation of production really worth it in terms of giving a competitive edge.

  49. Vinay Krishna Devulapalli says:

    From a generic perspective moving the plants from China will improve the Chain structure as the transportation logistics would be much simpler than the current situation. This will lead to a robust supply chain. Since lead times will decrease and considering the amount of time it would take to manufacture the product, smaller inventories would suffice with more inventory cycles. However, the main challenge would be in providing this inventory at low costs and high production capacity. Moving the US/Mexico would increase the coordination as the international taxation and bureaucracy could be avoided. Finally, beating China’s competitiveness is undoubtedly dependent on the industry requirements. By moving to the new locations, If the raw materials are coming at a lower price and the ability to meet capacity by having a minimal workforce, this move will be profitable to those industries in the long term. Before deciding on the profitability, we need to have numbers depicting the positive/negative impact of moving the manufacturing plants to the US/Mexico.

  50. Hasit Yarlagadda says:

    There is a valid reason why the manufacturers are considering moving production back to Mexico or the US. One obvious reason is due to the pandemic. There has been a shortage of ships, trains, etc. and increased shipping costs due to the pandemic. Another reason is the trade war between the United States and China. No one can be sure by when this pandemic situation or the trade war would come to an end. Hence the manufacturers should look at ways to make their supply chain more efficient. Initially most of the manufacturing was done in China and other low-wage countries, then exported back to the United States. Inventory costs were also low due to the “just-in-time” approach where factories buy materials only as they need them to meet orders. But this is not possible now since there is a shortage of ships and increased shipping costs. Hence it is wise move to shift their manufacturing to the United Sates and Mexico. Although China has better experience in manufacturing and low labor costs, outsourcing manufacturing to China might cost more and is also not reliable under these circumstances. Splitting their sources across US and Mexico would be the best option if the company is not ready to invest a big sum of money and do it temporarily. If the company decides that it is going to shift its manufacturing permanently away from China, then vertical integration would be suitable since, it has better returns although the initial investment is high. My personal choice would not be vertical integration since the situation will get better eventually and manufacturing in China would be a better option then.

  51. Brian Mbui says:

    Moving to US sourcing for many currently globally sourced products might actually make manufacturers more profitable in my opinion and in some cases the margins might grow exponentially. This is because they will have removed quite a number of costs in their supply chain that were there because of tariffs which are imposed by moving products across continents and also the logistics costs involved in the shipping itself. As much as I would suggest that manufacturers stick to sourcing across the globe; to keep the competition healthy and thus better-quality products, the cost benefit of locally sourcing may attract most of them to prefer locally made products than outsourcing from across borders. When the pandemic struck, most of the businesses that first felt the hit were those that ship products globally, and thus having locally sourced options may cushion such an effect if it ever happens again in the future. Some of them may be sourcing from outside due to the cheap and quick availability of labor overseas especially in Asia, however, if stringent measures are taken upon to have fair wages for all workers working for these big manufacturers, the playing ground may evened out as they realize the costs even out between the US and overseas.

  52. Soheil Zarghami says:

    Since it will take some time to setup manufacturing, the first step will be to outsource the production to a factory that is based on one of the NAFTA’s countries. Since the other companies will do the same, there will be a manufacturing shortage for most common goods with high volume, which will lead to higher bidding and manufacturing cost. In addition, the lead time will decrease and frequent ordering will also decrease the safety stocks and inventory carrying cost. In addition, since labor cost is lower in Mexico, it is also attractive for other companies who want to follow the same strargey. This will results in labor shortage which eventually increases the labor cost in Mexico in long-term. Therefore, moving to another neighboring country should only be a temporary solution. Long-term strategy will be for high volume products, the new manufacturing setup should emphasize on automation to reduce its labor cost and spread the overhead cost on its output volume. On the positive side, a trade between NAFTA’s participant has much less custom regulation and this could reduce and impact both lead time and complexity greatly.

  53. David Ng says:

    Moving productions back to the US may seem beneficial in the short term because manufacturers can purchase their product at a lower rate, receive the products in a timely fashion, and ensure the outputs will keep up with the purchases’ demands. However, in a long run, it may not be profitable for the manufacturers. The wages, in the USA, are higher than the wages at the rest of the world. This indicates that manufacturers have to pay more to manufacture the same products they used to if they were to source that product into another country. With the vaccines and guideline that are imposed worldwide, I believe that this pandemic will be over soon, and the supply chain will be back to normal. Instead of sourcing the production back to the US, perhaps, manufacturers can start stockpile the essential components in their inventory system, and thus in an uncertain time, they will still have enough key components to produce the products that their purchasers’ order. I, personally, believe that splitting sourcing across the US and Mexico is not a bad idea, but I would source 10% of our production in US, 60% in Mexico, and 30% in China. This allows manufacturers have more suppliers to choose from and also when country, such as China, experiences political turmoil, we can turn to Mexico or US to keep production running.

  54. Nilo Cedeno says:

    After several years of experiencing this trade relationship between the US and China, the current reality is that China has been the strongest commercial partner of the US. Not just the US, but other countries have spent important investments in China thanks to their accessibility to technology, developed logistics, and qualified & cheap workforce. In this case, if the US is considering to modify their supply chain processes, they must plan this in some phases. First of all, allocating manufactures in near countries, not only in Mexico or US, where international trade will not be a problem, but with the clear idea that the workforce is different, which means that the productivity will vary. Then, supported by results and more research, estimating a financial long-term plan. Since minimizing costs (or maximizing utility) is the main goal of the US companies, they should value what is better. I strongly believe that diversification is one of the best ways that companies have to increase economical benefits, but to improve qualities in manufacturing and logistics, as well. For instance, the little parts of most of the products that Apple sells come not just from one source. Having said this, the US will learn one more time about which countries would work as good partners. In addition, this exercise will provide a good resource to energize the global economy.

  55. Daniella Cobos says:

    Moving production to Mexico or the U.S. could be beneficial for the following reasons. Shorter lead time which decreases carrying costs, keeps customers happy because they are satisfied with the timeframe in which they are receiving their products and optimizing the productivity. However, china will allow the lowest cost, because strictly moving to the US/Mexico will make manufacturers less profitable. In addition, the most skilled workers are in china because of their long experience doing this. I think the best way to look at this issue would be to split sourcing from US/Mexico and china. Which would give the companies something to fall on and they can decide which products should be sourced from china and which from US/Mexico.

  56. Colton Kaplan says:

    Doing some analysis based on the 4 C’s Framework of Chain Structure, Capacity, Coordination, and Competitiveness I believe it would not be beneficial to solely rely on manufacturing in the US and Mexico. The Chain Structure would ultimately be shorter in the long run and allow for shorter lead times. However, China has the experience and much cheaper labor. The coordination would improve because there would not be a large language barrier, the time difference would be significantly less, and there would be fewer tax issues. The capacity would also decrease in the short term. Lastly, competitiveness depends on the industry. COVID-19 will have an impact on the next few years so I believe it is smart to do some dual sourcing to offset the production that is being delayed from China.

  57. Mark Stickford says:

    I believe that there isn’t a one-size fits all answer for manufacturers. While there would be cost savings on transportation costs if globally sourced products came to North America, these savings would likely be replaced with higher wages, as well as the start-up costs of moving an operation closer to home. During the pandemic it has become increasingly nerve-wracking for logistic managers to rely on globally sourced product considering the advanced costs and lead times, not to mention outside issues such as the Suez Canal blockage. I think that ultimately manufacturers would see less profits if they decided to move their sourcing entirely to NA, however I believe that if a combination of sourcing from NA and globally then a happy medium could appear that could increase reliability in sourcing, while still keeping costs low. As the article states lead times from China have raised from 5-7 weeks to 9-11 weeks, which could still be a reliable source given the understanding of a higher lead time. If this was used in combination with U.S./Mexico sourcing then companies would have a way to source product quickly if needed to fill higher demand, while still having cheaper sources in China.

  58. Kristian Komlenic says:

    4C approach:
    Looking from the first Chain perspective, I do agree that manufacturing should be moved where you do not have to use oversea shipping. This will drastically reduce lead time and shipping cost. Coming from different angle is the complexity of the chain structure to deliver the product. I do think the focus will have to be around second C, capacity. To shift from one continent to another requires a huge amount of effort in building the right capacity for products. If 41% said they want to cut ties to China this will put a huge pressure on logistics in US. You will have a new wave of demand which will cause delays in manufacturing. Investing in infrastructure will balance the shortage of labor force currently in market. After COVID, a huge portion of US population has not came back to work which could cause further delays. Third C, coordination, will have to take care of labor capacity of manufacturers in US. This being said I do think focus should go towards Tier2&3 manufacturers and inventing in their infrastructure. This will help mitigate risk from competitiveness between different manufacturers and will help boost lower bracket of economy which struggled during pandemic. First step should be segmenting right manufacturing facilities according to location of business they are supplying. For example, if we have a Ford facility, one of the key raw materials they need is steel. Putting right facilities around Ford will help them source steel to them much faster in case of shortage. I am not saying to build the biggest producer of steel next to Ford, but rather investing in Tier 2&3 and building their chain structure so in case of shortage they are able to supply and reduce demand variability. So if you are trying to cut ties with China then we need to investigate labor market further and how will this transfer of manufacturing affect the market. Will US labor force be as efficient as Chinese workers? (should be the right question)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s