As reported by Dion Rabouin in the Wall Street Journal last week, “top executives at large U.S. companies are increasingly talking up bringing workforces and supply chains back home — known as ‘re-shoring’ — during second quarter earnings calls. Data from Bank of America shows use of the term has spiked to a record level, even though only about a quarter of S&P 500 companies have reported earnings so far.”
In a note to clients, Savita Subramanian, Bank of America equity and quant strategist, stated, “Companies’ mentions of re-shoring skyrocketed recently amid supply chain challenges and we believe the 2020s will mark the beginning of de-globalization.”
This is a bit of history repeating itself.
Back in March 2013, for example, I wrote the following in a post titled “Best-Cost Vs. Least-Cost Sourcing”:
The “reshoring” of manufacturing operations from China and elsewhere to the United States continues to make headlines. Back in December 2012, for example, Apple announced that it is investing $100 million to build some of its Mac products in the US. A month later, Walmart announced that it will increase its sourcing of US products by $50 billion over the next 10 years. And earlier this month, the Wall Street Journal published an article about how the toy maker K’Nex has moved most of its manufacturing operations from China to its factory in Pennsylvania.
What factors were fueling the reshoring trend back in 2013?
In an interview I conducted with Kevin O’Meara at the time, who was the Senior Vice President for Supply Chain Effectiveness at Breakthrough, and prior to that was the Senior Director of North America Logistics Operations at Whirlpool, he shared three factors that were driving the reshoring trend. The one that caught my attention the most, however, was how companies were shifting their focus from least-cost sourcing to best-cost sourcing. Here is what he said:
[Reshoring] is happening, probably not as much as the hype has been happening, but it’s going on. A couple of things have changed. One is the thought process around best-cost sourcing versus least-cost sourcing. Now that’s a pretty dynamic change in thought process. I think the massive rush to offshore manufacturing was done at a time when people looked at a very small component of the overall supply chain — i.e., the manufacturing portion of it — and they said the cheapest place I can get this done is overseas and off they went. Now it’s much more about what is the most efficient and lowest-cost way I can get a product to market and get it on the shelf available for a consumer to buy it, and that’s best-cost sourcing. That means that some portion of the supply chain may actually have an increase in cost so that another portion can have a decrease in cost and [better] efficiency. So I think that is first and foremost [why reshoring is occurring]. More and more people that I talk to who are in the decision points of these types of things are thinking more about best-cost sourcing rather than least-cost.
If the best cost isn’t necessarily the lowest cost, then what makes it best?
Here’s what I wrote at the time:
There are many ways to answer that question, but at the risk of oversimplifying, here is my quick litmus test: The best cost is the one that enables you to respond faster than the competition to shifts in demand and supply, and also lowers your overall supply chain risk profile. Best cost, therefore, is proportional to increased responsiveness and reduced risk.
A lot has changed since 2013. But a lot has stayed the same too. To paraphrase Kevin, reshoring has been happening for many years, although not as quickly and widespread as the hype suggests. Will the 2020s “mark the beginning of de-globalization” as Savita Subramanian suggests or will it be a continuation of what’s already been happening for years?