Tariffs will spur rethink of supply chains, business models in 2019

Supply chainOutsourcing purely to achieve cost savings is no longer an optimal strategy, according to the Reshoring Institute (Los Gatos, CA). As market-leading companies try to balance a diverse set of needs—responsiveness, quality and innovation as well as cost—across a global network, they will engage in off-shoring, near-shoring and on-shoring strategies simultaneously. 

As the tariffs war between the United States and China stretches into 2019, many OEMs are rethinking their business models, looking at the possibility of reshoring manufacturing if imported goods become cost prohibitive. We’re already seeing some OEMs placing mold work with U.S. moldmakers, meaning molding work probably will be done in the United States, as well.

Rosemary Coates, Director of the Reshoring Institute, noted in the Aug. 31, 2018, issue of Supply Chain Management Review that while some companies are looking to move work from China to other low-cost countries such as Vietnam and Thailand, there’s a downside to that. Productivity rates are 20% to 30% lower than in China. “In the final economic analysis, it is often better to keep production in China and pay the penalty tariffs,” she said.

If a company’s customers are mainly in North America, moving back home might be the best option; however, that’s not without its costs, as well. As Coates and many others who’ve written about bringing manufacturing back to the United States have noted, stockpiling inventory, finding and certifying new suppliers and getting them up and running with quality systems in place can take 12 to 18 months.

For some OEMs there are no alternative suppliers for the type of parts they make. When they lost their OEM customers to foreign suppliers, some domestic suppliers stopped making certain components and sold off the equipment used to make them. 

With quality and risk mitigation high on the list of OEM requirements for suppliers, there’s a good possibility that more work will be reshored from China.  LNS Research noted in a report, “Risk-based Approach to Supplier Quality Management,” that OEMs increasingly are evaluating supplier risk on an ongoing basis as risk management becomes more and more critical. “A supplier’s quality and risk capabilities and performance are increasingly monitored by its customer base to assess the supplier’s status and suitability for contract awards,” said LNS, adding that “suppliers across manufacturing have risk-based compliance obligations, including ISO 9001:2015 for general industry, IATF 16949:2016 in automotive, HARPC in food & beverage, and ISO 14971 and Q9 in medical devices and pharmaceuticals.”

LNS Research recommends that suppliers shift their perspective from conformance to performance if they want to improve recurring revenue and bottom line performance, with one particularly important area being the approach to risk. Risk-based supplier quality management is increasing dramatically, with a supplier’s risk profile increasingly impacting sourcing decisions and audit plans by OEMs.

Image courtesy Iaroslav Neliubov/Adobe.

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