This Guest Post comes from Prof. Jonathan Opata, who teaches Operations & Supply Chain Management at George Mason University and Southern New Hampshire University
The U.S, although it has a GDP of about $22 trillion, depends profoundly on China and other countries for many of its critical supplies. Medical equipment, pharmaceuticals, and food production are often outsourced, as the U.S has organized its economy following the theory of comparative advantage (Ch. 2 in your Heizer/Render/Munson OM text), which simply means allowing other countries to provide goods or services using the best cost-effective strategies.
With the ongoing pandemic, the U.S. has just formed a public-private partnership to expedite the production of personal protective equipment’s (PPEs) and other supplies required. But these critical supplies were previously being outsourced internationally, exposing the U.S dependence on global trade. Even though the cost-effectiveness of locally manufacturing medical supplies may be impracticable, the events of recent times have shown that the pros outweighs the cons. Public health is a national security issue and the failure to retool critical supply chains blunders can put the U.S. at risk.
For example, the 2009 “swine flu” (H1N1) outbreak, a dry run for the coronavirus, found neither hospitals nor manufacturers nor the government making sweeping changes. Instead, each part of the medical industrial equation acted in its own interest and did not set aside resources that might have help prepare for the pandemic. The result: a shortage of 250 million N-95 masks needed per month.
To address these concerns, it is crucial to re-evaluate what essential products are and also redesign every aspect of the supply chain. This means a strategy to incentivize domestic production of critical materials through purchase commitments and other guarantees with robust, resilient, and secure manufacturing. As The Wall Street Journal (April 30, 2020) writes: “Supply chain issues are are among the most significant U.S. challenges, and a matter of national security.”
This leads on to the question as to what items are critical and then whether all or a proportion of any particular item should be made locally.
What about raw materials ?? The USA mines very little of the rare earth minerals used in complex electronics, mobile phones, electric cars and so on. Should it mine 50% or 75% or 100% in the USA ?? Who pays for the explorations costs and set up ??
Which food items ??
How are these decisions going to be made ?? Clearly business has made its decision which is the status quo that has existed – make it cheap in China or Vietnam or India (in the case of medications India is a huge source). Is it the government ? Doesn’t that smack of socialism ??!! LOL at the last part.
Those are all good questions. But for some items, such as masks, the government could step in and purchase a stockpile of them for potential future needs. The country of source in that case becomes irrelevant. The U.S. certainly has some stockpiles that it expects to never use, including certain missiles and much of the strategic petroleum reserve. So we have made those decisions in the past. The question is whether or not we make similar decisions for medical equipment and certain food supplies in the future.
Jonathan and Andrew make excellent points. Given that international supply chains have a political as well as economic aspect, both must be considered. And both are fraught with sundry issues. Trying to maintain economic efficiency while keeping a level playing field for firms as America tries to reshore parts of its ubiquitous supply chains will be a challenge. Tariffs, subsidies, ‘Buy American’ mandates, and government ownership will all be considered. And none may yield the current efficiencies.
Andrew, great question. Chuck and Jay, thank you for the succinct response to Andrew’s question. The paper posits that there can be no single answer to the question of operational best practices for outsourcing.
The opinion is to establish that the generic business strategy that dictates outsourcing as the latest fad requires an understanding of which supply chain resources to own, control and leverage, noting that the USA does not have superiority over all raw materials as referred to, I contend that this requires the development of the appropriate practices to allow for the successful appropriation and accumulation of value from customers, competitors and suppliers to the advantage of the country and not necessarily opting for outsourcing in almost every sphere.