A Blog by Jonathan Low


Nov 3, 2021

Supply Chain Failures Cause Rethink of Outsourcing, Off-Shoring

The cost savings in cheap labor and less expensive manufacturing overseas have been offset by the financial burden imposed by failed global supply chains, causing many companies to rethink the out-sourcing and offshoring strategies of the past 30 years. JL 

Thomas Gryta and Chip Cutter report in the Wall Street Journal:

For more than a generation, multinationals have secured inexpensive manufacturing in distant locales, outsourcing low-skill jobs and relying on just-in-time production and transportation to grind down costs.With international trade slowed, business leaders are ditching, at least temporarily, overseas partners and the conventional wisdom of the global economy in favor of reliability, even if it costs more. Some are moving workers and production facilities closer to home and relocating plants closer to suppliers. Others are buying their suppliers or bringing former contract work in-house.

With the machinery of international trade slowed, business leaders are ditching, at least temporarily, overseas partners and the conventional wisdom of the global economy in favor of reliability, even if it costs more.

Some are moving workers and production facilities closer to home and relocating plants closer to suppliers. Others are buying their suppliers or bringing former contract work in-house.

“It’s about control. I want to have more control in an uncertain world,” said Ellen Kullman, chief executive of 3-D printing company Carbon Inc. and the former CEO of DuPont.

For more than a generation, many executives at large multinationals have pursued a tested strategy: securing inexpensive manufacturing in distant locales, outsourcing many low-skill jobs and relying on just-in-time production and ocean transportation to grind down costs.

But since the pandemic, many companies have had trouble getting raw materials as well as hiring production workers and booking space on shipping vessels. Input shortages and supply line bottlenecks are disrupting the availability and quality of goods and services for everything from sneakers to airline flights to breakfast hours at McDonald’s.

Ms. Kullman, who also is a director at Goldman Sachs Group Inc. and Dell Technologies Inc., said some of her customers in automotive, medical and consumer durable goods, industries that rely on manufacturing facilities in Europe and Asia, increasingly want a presence in the Americas.

“They’re realizing, right now, they’re losing business because they’re kind of stuck with a very long, very efficient—but very inflexible—supply chain,” Ms. Kullman said.

“There are some people who are saying, ‘Look, what I need is short term because this is never going to happen again,’ ” she said. “Then there are other people who are saying, ‘This is going to happen more often than we think.’ The world is a very different place, and it’s not just the pandemic. It’s natural disasters. It’s the floods down in the South. It’s tornadoes, it’s hurricanes.”

Supply-chain troubles at Benetton, the Italian clothing company, hit chief executive Massimo Renon in September. He tried to order a blue peacoat on the company’s website and found it was out of stock.

“I was asking my team, ‘How can that be?’ ” Mr. Renon said. “And they told me, very openly, raw materials are late, logistic transportation is a mess, production cost is increasing dramatically, control of the supply chain is impossible.”

The company has since decided to boost manufacturing in Serbia, Croatia, Turkey, Tunisia and Egypt, away from less expensive but more distant locales such as Thailand. It is a reversal of the decadeslong shift by many apparel companies to Asian factories that offered low-cost supplies.

Delta Air Lines Inc. discovered during the pandemic that its contractors couldn’t find enough people to clean planes or push wheelchairs in U.S. airports. The airline hired its own.

“I’m not waiting for them,” Delta Chief Executive Ed Bastian said in August. “I’ve in-sourced it, and I’m not looking back.”

Delta hired thousands of airport employees in the past months, Mr. Bastian said, paying entry-level wages generally higher than those offered by contractors. Many business leaders are waiting for the labor market to loosen, he said. But he isn’t holding his breath.

“I think a lot of people have retired. I think a lot of people have moved,” Mr. Bastian said. “If you’re running a hotel and you can’t find staff, well, staff isn’t going to show up magically. You got to go out and you got to be creative.”

In-house supply

Home builder PulteGroup faces daily shortages of such essentials as windows, paint and appliances. To keep work sites going, the company sometimes has to retrieve available materials from spots across the U.S.

“We also have to be flexible and creative in sourcing materials even if this means spending additional dollars,” Chief Executive Ryan Marshall said on a conference call last week.

The Atlanta-based company is building an automated manufacturing facility in South Carolina, set to open next year. The plant is intended to make up for a shortage of skilled workers expected to continue over the next decade. It will be Pulte’s second off-site facility to assemble components for its homes. The first, acquired last year and located in Jacksonville, Fla., makes wall panels, floor systems and roof trusses, which also have been in short supply.

“You’re in a bit more control of your destiny” by having your own facilities, Mr. Marshall said. The company plans to build six to eight of the factories in coming years, he said, but even that won’t eliminate uncertainty. The company needs raw materials, he said, “and, clearly, those are in short supply.”

Shipping delays and trucking bottlenecks are making many companies rethink geography for every part of their operations. Multinational companies got an early shock in the pandemic when border closings, local restrictions and lockdowns caused chaos. Some have decided on permanent solutions.

Majestic Steel USA, which processes and distributes flat-rolled steel for a number of industries, has used acquisitions to broaden its footprint to the West Coast, adding to locations in Ohio, Nevada, Florida and Texas.

“We want to be closer to our customers, whether because of trucking capacity or just the pure challenges and impediments in the supply chain,” said Dave Kipe, Majestic’s chief operating officer.

The company also is trying to close the distance from suppliers. In August, Majestic committed to building a 515,000 square-foot facility on the grounds of a Nucor Corp. steel mill in Arkansas.

“We get a lot of steel from Nucor,” Mr. Kipe said. “Instead of shipping it to Cleveland, we will be much closer to the site and can reduce lead time.”

Disruptions from hurricanes and other severe weather also figure into production decisions.

Sherwin-Williams Co. decided to buy one of its suppliers with operations far from the Gulf of Mexico, where bad weather has hampered production.

The paint maker has cut its 2021 earnings and sales projections because resin suppliers, hurt by Hurricane Ida this summer, are taking longer to resume production. By acquiring Specialty Polymers Inc., which has facilities in Woodburn, Ore., and Chester, S.C., Sherwin-Williams can increase output and reduce severe-weather risks, executives said.

“These plants on the East Coast and West Coast get us out of the heavy reliance on the coast down in the Louisiana, Houston area,” Sherwin-Williams Chief Executive John Morikis said in a September conference call.

At Benetton, executives spent the summer studying how to overcome delays and rising costs in its supply chain. About 58% of the company’s production is in Asia.

Using third-party producers in Laos, Cambodia, China and Thailand is cheaper. But it requires regular visits to make sure manufacturing and materials meet quality standards, said Mr. Renon, the Benetton boss, and some aspects, such as production timing, aren’t under the company’s control overseas.

The plan is to cut its Asia-based production by half in the next 12 to 16 months and move the work to countries on the Mediterranean. The shift will cut transportation costs, the company said, and travel times will fall from several weeks to one week.

Mr. Renon said he was confident the higher cost of production would be offset, in part, with better merchandise. Customers may buy less, he said, “but they come to us when they want to have something based on quality.”

Supply uncertainty is especially tough on young companies trying to get a foothold in their market. Bartesian Inc., a Chicago startup that makes a countertop cocktail machine, had to revamp its manufacturing strategy just as demand soared in the pandemic.

The company had a deal with Hamilton Beach to manufacture the machines in China, where Bartesian also planned to produce the recyclable capsules used to make drinks. The company last year scrapped its plan to make the drink capsules only in China, and it set up a second facility outside Chicago.

“We’ve learned that we need to have control,” Bartesian CEO Ryan Close said. “We can’t be at the mercy of our suppliers.”

Production in Chicago costs more than China, but the current shipping logjam would have likely left Bartesian empty-handed or losing money to import the products from overseas, Mr. Close said. The company was at stake.

“If we run out of capsules,” he said, “we go out of business.”


Jdynqq said...

Guys, why are you sitting around? I have been making money with a set of captcha for a long time, just follow the https://2captcha.com/
and see for yourself. Easy and fast money, I advise everyone!

Post a Comment