Feature Article
COVID-19: A Wake-Up Call To Reevaluate Sourcing Decisions
by Harry Moser, Founder/President, Reshoring Initiative T
he COVID-19 pandemic has underscored the need to shorten U.S. supply chains. We are far too
dependent on imports, especially from China, and cannot afford to ignore yet another signal to accelerate reshoring. With the Phase I agreement, tariffs of 7.5% to 25% apply to a broad range of Chinese castings. Add the coronavirus, and reshoring becomes very attractive. Reshoring shortens supply chains, reduces response time and our overreliance on imports, while, in many cases, maintaining or improving profitability. The hidden costs of globalization are becoming apparent. Tectonic shifts in global supply were
chains apparent even before
COVID-19. Analysis by Bank of America points to tariffs, automation, carbon footprint issues and national security as driving factors of the shift. Global supply chains that were once so appealing are becoming less attractive due to geopolitical
turmoil, rising costs and
trade wars. According to a Thomas study, 60% of U.S. manufacturers say business has been impacted by the coronavirus. A recent Thomas follow-up study
found that over 50% of manufacturers surveyed are ‘likely to extremely likely’ to bring production and sourcing back to North
America post-coronavirus.
Additionally, 47% of U.S. manufacturers report they are now seeking domestic sources of supply.
Quantifying The Costs And Risks Placing a real value on more than two- dozen, often ignored, relevant “hidden” costs, most of which individually represent only a small percent of a product’s final total cost can tip the scales in favor of producing or sourcing at home. In aggregate, savings from domestic sourcing will offset most or even all of a 15% to 25% advantage in purchase price enjoyed by low labor cost countries. See Table 1. TCO is a key tool in the sourcing decision process, quantifying whether the costs and risks avoided offset the often-higher U.S. manufacturing cost or price. Most of the issues are related to distance: freight, delivery, inventory, etc. Others are country-specific: rising wages, IP risk, political instability, etc. A broad range of costs and risks can be quantified using the free online Total
Figure 1 below shows the distribution of Chinese price and Chinese TCO across hundreds of products analyzed by TCO Estimator users.
Table 1 Researcher/Base
Six U.K. Manufacturers
European auto industry re ICB (Boards)
Parker/Dewhurst Booze & Co.
Prof. John Gray, Ohio State University
Estimated Sales in 2020 ® Cost of Ownership Estimator® .
Before tariffs and COVID-19, about 8% of imports from China were more profitably sourced here, based on Ex- Works price. Figure 1 shows that the 8% rises to 32% if the decision is based on TCO. With 15% tariffs also added, the U.S. share rises to 46%. COVID-19 will eventually be history and Chinese deliveries will improve. Hopefully, U.S. companies will remember, prepare for future disruptions and reshore a large portion of what they have offshored.
How To Compete More Effectively Vs. Imported Castings
I will be presenting at the 2021 Business & Leadership Development Conference to be held in New Orleans, LA on April 18-22. My presentation details the tools and programs to target and compete with imports. The Reshoring Initiative’s tools and data can help OEMs make better sourcing decisions and contract manufacturers sell against imports. Our Import Substitution Program can identify importers of investment castings and train you to use TCO to convince the importers to source more from you.
Hidden Costs, % of Price 25-50% 15%+ 24%
17.5%
More than price difference in cases studied
25-50% May 2020 ❘ 11
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