Tag: nearshoring

OM in the News: GE Appliances’ Supply Chain Overhaul

GE Appliances, one of the largest home-appliances manufacturers in the U.S., says a $2 billion effort to remake its supply chain has helped it double revenue since 2017. The Louisville-based company, now a subsidiary of China’s Haier Smart Home, has added manufacturing capacity, opened seven new distribution centers and implemented digital tools to knit together operations from production through to delivery. It is an example of how companies are resetting their supply chains to be more flexible, moves that come after retailers and household goods companies navigated disruptions, shipping delays and dramatic shifts in consumer demand during a chaotic period marked by waves of stockouts and overstocking.

“A lot of companies are really striving to create increased visibility in their supply chains and also to build greater resilience in their supply chains,” said an N.C. State professor. That includes efforts to “improve coordination and integration and scheduling, and at the same time, try to reduce their inventory.”

One of the biggest changes has been to bring more manufacturing into the U.S. from Asia, reports The Wall Street Journal (July 8, 2024). GE has added 4,000 manufacturing jobs across its nine U.S. plants over the past seven years. Shifting production from overseas has cut shipping costs by reducing the number of bulky appliances that are sent across the Pacific Ocean and has given GE more control over production. When you have something that’s in a container on a boat for six weeks, it’s difficult to change your orders and be able to adjust to shifts in demand.

GE also measures inventory differently today than before the pandemic. The appliance company previously tracked “weeks on hand,” which measures finished products relative to how many units typically sell in a given week. It now tracks customer orders delivered on-time and in-full, a measure that prioritizes existing orders so the company doesn’t spend time manufacturing items that aren’t in demand. To accommodate that change, GE installed digital tools that allow factories to see upcoming customer orders. The plants can then manage production schedules to ensure orders are ready on time, but not too early. Storing bulky, fragile appliances in a warehouse for a long time eats up space, adds storage costs and increases the risk of damage.

Classroom discussion questions:

  1. What is the difference between “weeks on-time” and “on-time and in-full”? Hint: See our Feb, 25, 2024 blog
  2. What major OM moves ae described in this piece on GE Appliance?

Guest Post: Developing a Magnet Supply Chain in the U.S.  

Dr. Misty Blessley is Associate Professor of Supply Chain Management at Temple University

The American war machine depends on tiny bits of metal, some as small as dimes. Rare-earth magnets are needed for F-35 jet fighters, missile-guidance systems, Predator drones and nuclear submarines.

Although crucial to many industries, the U.S. lacks a robust domestic magnet supply chain. A recent Wall Street Journal article underscores the significance of regionally producing or nearshoring magnet production. China holds 92% of the global market share for rare-earth magnets. This figure increases when considering magnets produced in other countries but containing materials sourced or processed in China. 

The U.S. looks to establish ‘Mine-to-Magnet’ supply chain for rare-earth magnets

China’s dominance in the industry enables it to set prices so low that potential competitors are discouraged from entering the market. One U.S. company is set to mass-produce magnets, but at costs estimated to be 50% higher than the Chinese equivalent. Abiding by costly mining and processing regulations contributes to the disparity. In addition, the U.S. lacks expertise in magnet production.  

Although regional or nearshore production is important for national defense and clean energy sectors, the prospect of higher-priced magnets poses challenges. Faced with higher costs, manufacturers in defense industries may witness reduced orders from customers unwilling to bear the increased costs. Similarly, major users such as electric vehicle and wind turbine manufacturers would need to be willing to accept higher costs in exchange for the benefit of having a supply chain decoupled from China. Currently, only General Motors has committed to purchasing the American-made magnets.

The U.S. Government is actively supporting efforts to develop a domestic magnet industry by extending support to domestic firms from mine to magnets. But after three decades of post-Cold War deindustrialization, rebuilding the industry—against China’s market heft—is an uphill battle, even with government help. 

Classroom discussion questions:

  1. What are the benefits and costs of regional or nearshore magnet production? 
  2. In Chapter 11 of your Heizer/Render/Munson text, Figure 11.1 is of a beer supply chain that exemplifies a multi-tier supply chain. Magnets produced outside of China may still contain material sourced or processed in China, demonstrating the importance of looking beyond tier-one suppliers. What do you think the role of firms, governments and trade associations is in investigating multi-tier supply chains? Why? 

OM in the News: China’s Four ‘Ds’ and Nearshoring

China’s  seemingly unstoppable growth model proved less sustainable than originally thought. The 4D’s—demographics, debt, drought and decoupling—weigh heavily on China’s economy, writes IndustryWeek (April 25, 2024) .

Demographics: China’s population is shrinking. Birthrates are falling and its population is aging. China’s labor shortages and rising wages are driving some U.S. companies to reevaluate manufacturing or sourcing in China, as Chinese exports become less competitive.

Debt: As exports decrease, Beijing bolsters the economy by pumping money into the system with investments from state banks and local governments. . According to the World Bank, “No country in history has amassed so much debt so quickly as China has without succumbing to a financial meltdown.”

Drought: Water scarcity is threatening China’s industrial base. Retreating glaciers, disappearing ice cover, increasing temperatures and China’s unequal water distribution are contributing to its water shortage crisis. Eighty percent of China’s water is concentrated in South China, even though the nucleus of its national development is in the north.

Decoupling: These 3D’s plus geopolitical risk are driving the 4th D. The perception that investing in and sourcing from China was risky business suppressed foreign direct investment (FDI), an important driver of China’s economy. FDI into China plummeted 82% in 2023, to $33 billion, the lowest figure since 1993.

Foreign companies’ worries include a wave of raids, investigations and detentions and an expanded anti-espionage law. By late 2022 countries worldwide had lifted COVID restrictions, but China persisted and the Chinese economy began to lose ground through 2022. To mitigate supply chain risk, multinational companies reconfigured supply chain strategies, choosing localization, China +1 or an “anywhere but China” policy to reduce over-reliance on uncertain Chinese policy. Chief Executive magazine’s 2023 survey confirmed that “geopolitical risk exposure” is the most highly ranked of the “main drivers for reshoring operations.”

Finally, China creates the most emissions—12.7 billion metric tons of emissions annually—due to its reliance on coal. For many products, emissions from production and shipment from China to the U.S. are 25% higher than sourcing domestically.

Classroom discussion questions:

  1. Are the 4D’s enough to make manufacturers nearshore?
  2. What is china’s main strength as an exporter?

 

OM in the News: China or Mexico?

“We needed to have a near-source option to complement our supply chains out of Asia,” said one U.S. manufacturer. “The supply-chain crisis taught us that it’s crucial to have critical components close to home.”

More and more companies seek to navigate a world of mounting geopolitical and business uncertainty that has exposed weaknesses in far-flung supply chains. For many manufacturers, that has meant returning production closer to home, a push toward nearshoring that is chipping away at the offshoring drive over the past few decades that moved a swath of production from Western countries to low-cost centers in Asia, and most of all to China.

Mexico appears to be ideal for some companies seeking sites outside Asia to make goods more cheaply than in the U.S., reports The Wall Street Journal (April 25, 2023). It has a relatively cheap labor force compared with other North American workers and is a member of a free-trade agreement with the U.S. and Canada, saving the cost of tariffs that are imposed on a raft of imports from Asia. Although the cost of manufacturing in Mexico may be higher than in some parts of Asia, the country also delivers cost savings from shorter shipping distances to U.S. consumers that reduce the need to carry so much inventory. This also offsets the risk of production disruptions and lost sales because of freight delays.

But Mexico also has drawbacks that make factory decisions far from certain. The electrical grid can be unreliable and the lack of locally produced parts and raw materials mean manufacturers still must source components from Asian suppliers. Building up similar ecosystems in Mexico will take years. And physical security is a concern in a country notorious for drug cartels and violent crime.

Although China is losing its share as an exporter to the U.S. of goods such as electronics and apparel to countries like Mexico and Vietnam, it remains the global manufacturing leader. “China’s losing out, but it’s not lost,“ said an industry expert. 

China’s advantages go beyond the low-cost production that initially lured manufacturers to the nation. A vast network of suppliers has sprung up since then—companies providing everything from refining commodities for factory production to makers of the inner components of manufactured goods—offering a sprawling ecosystem of businesses for a variety of sectors.

Classroom discussion questions:

  1. Summarize the Mexico vs. China tradeoffs facing American manufacturers.
  2. Figure 8.1 (page 357) lists six KSFs for country location decisions. Compare Mexico and China on each.

OM in the News: Mexico’s Industrial Hubs and Nearshoring

An industrial park under construction in Monterrey, Mexico

Companies from around the world, writes The Wall Street Journal (Feb, 3. 2023), are moving production and equipment to Mexico as they seek a manufacturing hub closer to the U.S., part of a broader shift in global trade. Some companies are relocating from Asia, while others are investing millions of dollars to raise output of goods that are exported tariff-free to the U.S. (In Table 8.3, we point out that Northern Mexico has become a cluster of electronics firms such as Sony, IBM, HP, Hitachi, and Panasonic).

Now, supply-chain disruptions, prolonged Covid-related shutdowns in China, soaring shipping rates and geopolitical uncertainty caused by Russia’s invasion of Ukraine are fueling the nearshoring trend.

In Tijuana, home to one of the world’s largest export manufacturing hubs for TVs and electronics, industrial parks are almost at full capacity. And in Ciudad Juárez, across the border from El Paso, Texas, recruiters are hiring workers for companies arriving or expanding operations at job fairs. Mexico’s manufacturing-based economy, free-trade pacts including the U.S. Mexico Canada Agreement (see Chapter 2) and proximity to the U.S. are among its attractions for investors. Labor shortages in the U.S. also are playing a role.

Mattel, for example, the maker of Barbie dolls and Mega Bloks, expanded its Monterrey plant into its largest manufacturing facility worldwide with an investment of $47 million between 2020 and 2022. The toy maker more than doubled its workforce to 3,500 at the plant as part of a global supply-chain restructuring to boost output and productivity, with immediate access to the U.S., the world’s largest toy market.

The Mexican government says more than 400 companies currently have shown interest in moving production from Asia to Mexico. But Mexico also has problems of government corruption, rule of law, and public insecurity. These are all a drag on decisions to switch investments to the country. In addition, as demand for industrial space picks up, insufficient electricity infrastructure is limiting the speed at which manufacturers can move into Mexico.

Classroom discussion questions:

  1. Why are companies nearshoring? Why not reshoring?
  2. Why Mexico?

OM in the News: Mexican Factories Gain in Supply-Chain Revamps

Workers on an assembly line at the MGA Entertainment toy factory in Ciudad Juarez, Mexico

New data suggests Mexican suppliers are gaining ground as manufacturers reset their supply chains amid growing global disruptions, reports The Wall Street Journal (April 1, 2022). Last year, large American manufacturers solicited chemicals, produce and construction materials and other goods from six times as many suppliers based in Mexico as they did in 2020. At the same time, the number of suppliers in China that received procurement bids declined by 9% in 2021.

The push for suppliers in Mexico comes as more companies say they are resetting their supply chains by adding suppliers and bringing some production closer to end users. The effort is aimed at bolstering resilience, redundancy, and reliability following a series of shocks to supply networks brought on by Covid-19 outbreaks, port bottlenecks, extreme weather and geopolitical conflicts.

“If you’re a manufacturer and you used to have strategic relationships with one or two suppliers that produce the same good or a similar good, we’re now seeing that same manufacturer have relationships with three or four different suppliers,” said one industry expert.

The added suppliers tend to be closer to the buyer and its customers. There was a 514% increase from 2020 to 2021 in Mexican suppliers receiving bids from U.S. buyers and a 155% increase in Latin American suppliers. At the same time, manufacturers sought goods from 26% fewer suppliers in the Asia-Pacific region.

A separate survey of 2,000 U.S. and U.K. CEOs by a London-based group found that 15% had moved production closer to their home countries or sourced from suppliers in nearby regions, and 26% were looking into doing so.

Classroom discussion questions:

  1. What is “nearshoring” and what are its advantages?
  2. What are the OM implications of these two studies?

 

 

 

OM in the News: The Furniture Supply Chain Crisis

Big, bulky and heavy. Furniture has been one of the biggest casualties of the global shipping and supply chain crisis as costs to transport a sofa or table are much higher than an iPhone or a pair of sneakers. In some instances, container costs for sofas, tables and chairs have risen as much as 1,200% since the start of the pandemic, forcing furniture retailers to raise prices.

If you think about the size of an cell phone and how many of those you could fit in a container and you think of the size of furniture, the cost per product really does shoot up. It means companies largely face an unenviable choice — absorb the extra costs and take a hit to profit margins or increase prices, which could weaken demand for their products.

The main problem for European and US retailers, reports Financial Times (Feb. 14, 2022), has been their reliance on China, which manufactures everything from cheap sofas and garden tables to flat-pack items made from chipboard. The rocketing transport costs have prompted some European and US retailers to move some of their manufacturing operations closer to home and their customers, known in Chapter 2 as “nearshoring” or “reshoring.”

British-based furniture retailer DFS, which makes 40% of its sofas in England, is also increasing the amount of automation in its domestic factories, citing benefits of higher quality, greater control over the supply chain and lower lead times. Other European retailers, hit by long delivery times from Asia, have relocated production to countries nearer home such as Poland, Lithuania and Latvia, which have advantages because of the low cost of labor and access to raw materials such as wood.

“If you’re looking at nearshoring of wood products, then you’re looking at countries with a lot of forests,” said one industry expert. Sweden’s Ikea, the world’s biggest furniture retailer, sources many of its goods from Poland, where a fifth of its products are made, and other countries nearby. However, even Ikea has been forced to plug gaps in the availability of some of products by using trains and chartering ships from China.

Classroom discussion questions:

  1. If nearshoring is so important, why did furniture imports from China increase 30% last year?
  2. Click to enlarge the furniture value chain graphic above. How does it relate to the concept of nearshoring?