In an increasingly interconnected world, the global supply chain’s health is affected by, and impacts, the wider economy. Severe disruptions to the global supply chain in 2020, triggered by the COVID-19 pandemic pausing some manufacturing and distribution activities, increased goods’ and production prices. This, alongside numerous other socio-economic and political factors, resulted in increased inflation in the U.S. and many other markets.
While the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index (GSCPI) shows a significant decrease in pressure through the first half of 2023, this started to rise again in July 2023. With 44% of institutional investors predicting the U.S. is on the cusp of a 1987-style stock market crash (where the S&P dropped by 30% over a few weeks), pressure on the global supply chain could spike again over the coming months.
Small businesses often feel the impact of small changes to the economy and global supply chain more than large corporations. So, with significant headwinds potentially on the horizon, many will be wondering how they can build resilience across their logistics and wider business operations. Many small businesses have been responding to supply chain instability by shifting to domestic sourcing and production (reshoring or onshoring).
This article will explore the pros and cons of this approach, alongside tips on how to optimize supply chain localization and boost business resilience.
Responding to Economic and Geopolitical Risk
We explored how the economy and global supply chain affect each other above, but there are many other ways the supply chain can be disrupted.
Geopolitical factors are another significant risk that can create uncertainty resulting in higher costs, increased complexity, and less efficient supply chains. For example, political or military crises, and even extreme weather, can affect shipping channels and block key distribution routes. Changing regulations, tariffs and sanctions can also disrupt access to materials, suppliers, manufacturers and markets. It’s no wonder that a 2022 global survey from PwC revealed 32% of CEOs said geopolitical conflict was a top threat to growth, and 71% said it could inhibit their ability to sell products and services.
The war between Russia and Ukraine is an example of the kind of geopolitical turmoil that can impact the supply chain. The key Nord Stream natural gas pipeline coming out of Russia was limited after six months of the conflict, causing natural gas prices to rise by 120-130%. Russia was also a main supplier of key metals to the U.S before the war, including platinum group elements, titanium and nickel, which now have to be sourced elsewhere.
Numerous economic and geopolitical factors impacting the cost and reliability of producing and shipping goods means many small businesses (and large corporations like Ford Motor and Lego) are shifting parts of their supply chain into the U.S.
The Move from Global to Local Supply Chains
Deloitte reported that in late 2022, 62% of U.S. manufacturers had begun reshoring or near-shoring production capacities (near-shoring is defined as when production moves closer to the business but not into the U.S., for example to Mexico). This trend is proving most popular amongst businesses with a complex, high-tech end product (like electric vehicles and medical devices) but many small businesses are also seeing it as a good way to boost resilience in response to ongoing supply chain disruption.
Reshoring explained
Reshoring brings the production and manufacturing of goods to a business HQ’s location. It is sometimes also called onshoring, inshoring or backshoring, and is the opposite of offshoring. Offshoring is where businesses manufacture goods overseas in an attempt to reduce labor and production costs, for example in China or Taiwan which are manufacturing hotspots.
Local-to-local manufacturing
Local-to-local is another term describing reshoring, although it arguably has a slightly more political definition. Companies like Walmart have said that goods ‘made in the USA’ can be a driver of purchase decisions, second only to cost. This is because U.S. consumers perceive locally produced goods as better quality, and like to feel that they’re supporting local businesses and the economy.
The Pros and Cons of Supply Chain Localization
While many businesses see the benefits in reshoring to build resilience in the face of economic and geopolitical impacts on the supply chain, it isn’t a silver bullet solution that fixes all problems. In fact, reshoring comes with challenges of its own.
Pros of Reshoring
A streamlined, easy to control supply chain
When small businesses are closer to their supply chains, and when their supply chains are closer to customers, products are able to move faster. This results in happier customers, lower transport costs, and if businesses receive faulty products from suppliers and manufacturers they can be returned and fixed faster.
Higher quality products
One of the reasons certain countries are used for offshoring is they have less stringent labor regulations than the U.S. meaning production costs are significantly cheaper. However, rules around quality and production can also be lacking, meaning businesses products aren’t being made as well as they, and their customers, would want. The U.S. has more mature regulatory systems meaning products will more often be made to the high quality businesses expect.
Creates local jobs and boosts the economy
Funding local manufacturing injects more capital into the U.S. economy and creates more jobs, both of which can support the GDP (Gross Domestic Product) and help create a better market for small businesses. The Federal Government is also funding incentives for businesses looking into reshoring to encourage more investment into local manufacturing.
Consumers love local
As the Walmart case study showed, customers may be more willing to spend money on small businesses’ products if they are ‘Made in the USA’ because they like to shop locally.
Can be more sustainable
Reshoring can also help small businesses meet their sustainability goals by reducing the amount of travel a product is going through in its journey from production to customer. This is only one step however, businesses can also seek to work with suppliers and manufacturers adhering with the latest social and environmental standards and consider how sustainably their products are made more holistically.
Cons of Reshoring
Higher costs
Manufacturing has prioritized offshoring for many years because it is more cost-effective to produce goods in countries like China and Taiwan where labor costs are lower. This has meant that the U.S. manufacturing sector has also seen a decrease in labor force. As reshoring encourages it to grow again, there will be a period when costs could be higher and production slower as local manufacturers and suppliers hurry to recruit labor and onboard automation technology to support demand.
Disruptions moving from offshore to onshore
As with any business transition, when a small business moves from offshoring to reshoring production this will likely produce delays. There can also be significant admin involved for the small business owner including building new supplier and manufacturer relationships, negotiating new contracts and payment terms that support cash flow, and adjustments to inventory management. Reshoring is a resource heavy process that may also require additional investment in the form of consultants or new hires.
Compliance factors
Offshoring can mean small businesses benefit from specific tax structures, trade agreements and regulatory frameworks that support more cost effective production. When reshoring, business owners can consider bringing in legal counsel to support compliance with U.S. manufacturing regulations. This can also involve significant admin which can be tough for busy small business owners.
Tips for Supply Chain Localization as an SMB
Reshoring is a great way to boost small business resilience when the global supply chain is being affected by economic and geopolitical challenges. It also encourages flow of capital into the U.S. manufacturing sector and wider economy, and a healthy economy is good news for small businesses.
When making the decision to reshore manufacturing there are some key factors small businesses can consider:
Don’t reshore without help
Reshoring comes with significant benefits, but it is a significant task to move manufacturing from one location to another, especially if national borders are being crossed. Business owners can consider seeking help from outside consultants or even new hires to help with critical admin tasks like compliance, finding new suppliers and manufacturers, and negotiating contracts. This obviously comes with a cost that businesses need to factor into cash flow plans, but the long-term reward of seeking help is worth the investment.
Take advantage of government support
The Reshoring Institute and Reshoring Initiative are non-profit organizations supporting businesses and manufacturers to bring production to the U.S. from offshore locations. They both feature large banks of resources to help small businesses with their reshoring strategy, as well as insight on government support and incentives available.
Be transparent with customers
Moving manufacturing is a huge task that can bring delays or changes into production and shipping schedules. Small businesses can consider being transparent with customers, letting them know the time period when delays may occur and the reason why. Customers appreciate honesty and will also be excited that their favorite small business is shifting to a local-to-local model.
Adopt a smart cash flow strategy
Before embarking on a reshoring journey, small business owners should spend time building a smart cash flow strategy that considers all possible eventualities and supports what can be a costly exercise. What payment terms does the small business need to agree with new suppliers and manufacturers to support smooth cash flow? If the small business is investing in additional staff to support reshoring, do they need to consider alternative funding sources to continue the rate of production?
These are all key questions to ask when building a cash flow strategy that supports reshoring.
Supporting Positive Cash Flow With PO Financing
While small businesses will appreciate that reshoring can support long-term resilience, many will not be able to pause production and sales without a significant hit to their cash flow.
To support the reshoring journey, and continue maintaining positive cash flow once reshoring is complete, small businesses can use Setscale’s flexible PO financing to pay suppliers and manufacturers once they’ve received a purchase order from a customer. This alternative financing solution can be a great way to fulfill open customer orders without going through the difficulty of obtaining a commercial loan.
Find out more about how we can help you during your reshoring journey and beyond, or fill in a request form to get started.
