Author: Ali Hasanbeigi, Ph.D.
Everyone knows by now the story of personal protective equipment (PPE) and ventilators and how many countries faced a massive shortage of such equipment without having sufficient domestic production and being overly reliant on imports of these equipment from China.
In a rush to cost-efficiency, the United States and many other nations sacrificed their manufacturing resiliency. This has caused some real pain in the U.S. and other countries during COVID-19.
But this is just one example in a decades-long trend of sacrificing manufacturing resiliency for cost-efficiency. In the past two decades and especially after China joining WTO in 2001, many developed countries have expedited the outsourcing of manufacturing supply chain to China or other developing countries mainly to reduce cost and increase their profit margin.
This is understandable, especially when the average manufacturing labor cost in some of the developing countries where these manufacturing are moving to is 15-20 times lower than that in the U.S. or western Europe. In addition, availability of raw material and suppliers often at lower price, a different regulatory environment, and some other factors have resulted in exodus of manufacturing supply chain from developed to developing countries with a largest move being to China.
While such outsourcing of supply chain can result in cost-efficiency, companies and countries have barely considered the critical vulnerability of supply chain disruption such the one we are witnessing these days with COVID-19. While it is hard to predict the timing of such major disruptive events, it is a given that these events will happen again. Whether it is a pandemic, environmental disaster, political disputes, or other events, we will certainly face such disruption in the supply chain again. What countries and companies can do to better prepare for the next event? Resiliency is the answer.
“Business resilience is the ability an organization has to quickly adapt to disruptions while maintaining continuous business operations and safeguarding people, assets and overall brand equity.”
At the country level, the US government should boost the domestic manufacturing supply chain for vital products such as health care, food, defense, etc. This will increase resiliency of the U.S. that is currently overly reliant on imported vital products such as personal protective equipment (PPE), ventilator, drugs, etc. This is not only to bring back the manufacturing of end products, but also (most of) the upstream supply chain and take action to secure and diversify raw material sourcing. Where onshoring of the manufacturing is not possible, the U.S. companies should take action to diversify their supply chain and have suppliers located in different countries and regions.
The U.S. Government and Congress should design and help to implement policies and program such as investment tax credit for companies that bring back their manufacturing to the U.S., programs for skilled workers training needed for new manufacturing jobs, increased RD&D investment that uses full force of excellent U.S. universities and DOE’s national laboratories research capacity in collaboration with U.S. companies, major increase in funding for smart manufacturing in the U.S. that can help to lower the cost of production and make U.S. companies more competitive, thereby incentivize more onshoring of manufacturing.
This onshoring of U.S. manufacturing will be a clean, energy-efficient, and low carbon transition for the U.S. manufacturing since these new U.S. industrial plants and processes will use state-of-the-art technologies that are most likely more efficient and cleaner than their counterparts in the developing countries. In addition, the average electric grid and fuel mix in the U.S. has lower carbon emissions intensity than in China and some other major manufacturing countries because of large availability and use of natural gas and increased use of renewable energy in the U.S.
Currently, the U.S. is a large net imported of GHG emissions embodied in traded goods and products. (See our report The Carbon Loophole in Climate Policy: Quantifying the Embodied Carbon in Traded Products).
The U.S. government can also take advantage of Green Public Procurement or Buy Clean programs to support cleaner and more environmental friendly domestic production of goods in the U.S. (See our report Curbing Carbon from Consumption: The Role of Green Public Procurement).
Companies also can take action to increase resiliency across their supply chain. Here are some specific, detailed actions in addition to those mentioned above:
Companies must diversify supply chain and do not be overly reliant on just a few supplier in one or two single country even if such diversification increases the cost.
Diversified supply chain means higher chance of variability in raw material or intermediate products quality. Companies have to have proper standards and systems in place and take a full advantage of smart manufacturing and integrated product management systems to ensure compatibility and harmonization across value chain. Block chain technology can be a useful tool for secure tracing of products across supply chain.
Companies need to invest in workforce training across their suppliers globally to ensure high quality and harmonized production.
Companies should design production processes to have ability to produce a variety of products on a single machine or process. In the event of disruption in market for one product, these companies can retool and produce an alternative product. Overall a more versatile production process that can be retooled and produce variety of products adds to the resiliency of a companies.
Companies should diversity the supply of raw materials. For example, companies are overly reliant on China for supply of rare-earth metals. One could see a major political issue between US and China could disrupt that flow.
Companies should conduct integrated risk assessment across their supply chain to assess risk and cost of major disruption and make appropriate changes to reduce risk and increase resiliency.
The answer to these problems is certainly not anti-globalization and reshoring everything. International trade has benefited both developed and developing countries. However, in light of the serious problems caused by the COVID-19 pandemic, there are good reasons to reshore manufacturing of some critical products such health care and other products. Most importantly, even after this pandemic, there are many good reasons for companies to increase their supply chain resiliency, so they can better weather the storm in the event of next major disruption.
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