Reshoring becomes higher priority for Iowa manufacturers 

Economic recovery report, Manufacturing 4.0 will provide
resources

By Joe Gardyasz

An increasing number of U.S. manufacturers say they’re considering reshoring or nearshoring more of their production or supply capacity since the COVID pandemic began in March, according to consecutive studies over the past several months by product sourcing company ThomasNet. 

According to the latest survey released in June, which included nearly 750 qualified manufacturers, 69% said they were either “likely” or “extremely likely” to bring manufacturing production and sourcing back to North America, compared with 54% in February and 64% in a survey conducted earlier in May. 

“The COVID-19 pandemic will fundamentally redefine how industrial companies approach their supply chains and will further advance the digital transformation of manufacturing. By embracing real-time resource management, redundancy, reshoring, and the convergence between the digital and physical supply chains, manufacturers will come out of this crisis even stronger than they were before,” said Tony Uphoff, president and CEO of Thomas.

A recent white paper by the Brookings Institution on reshoring advanced manufacturing supply chains defines reshoring as “the practice of bringing manufacturing and services back to the United States from overseas.” It can also refer to bringing manufacturing back to North America. 

Among the potential benefits, reshoring “can help balance trade and budget deficits, reduce unemployment by creating well-paying manufacturing jobs, and develop a skilled workforce,” according to Brookings researchers. “Reshoring also benefits manufacturing companies by potentially reducing the total cost of their products, improving balance sheets, and making product innovations more effective.” 

Mike Ralston, president of the Iowa Association of Business and Industry, said he’s hearing the term a lot more often these days from ABI member companies across the state. Ralston made the comment in late August during a panel discussion on the pandemic’s effects on Iowa manufacturing organized by the Business Record. 

“We hear a lot about that subject at ABI from a number of folks who might have had people supplying them products from China,” Ralston said. “There are all kinds of reasons — not just a pandemic but because of the political situation — that they’re looking to find vendors much closer to home. It’s just something we hear about all the time; it’s certainly happening.”  

Kanlaya Barr, a global economist with Deere & Co., noted during the same panel discussion: “A lot of people have come to recognize that the trade tension between the U.S. and China is probably not going to go away anytime soon. … A lot of supply chains are going to start thinking about this because this might be the new normal trade environment going into the next few years.”

While reshoring to Mexico may become more common, an even larger trend may be “nearshoring” away from China to suppliers in Southeast Asia, particularly Vietnam, say some experts. 

Industry experts note that companies are typically reticent about discussing their individual supply chain strategies and potential reshoring initiatives for competitive reasons. 

Jeff Kappen, an associate professor of management and international business at Drake University for the past eight years, said he’s talking a lot about both reshoring and nearshoring with his students, and the latest research shows clear trends. Kappen is also a consultant with Baton Global, a Des Moines firm that advises businesses on international trade. 

“I think companies are generally trying to build multiple, flexible bases in various countries rather than basing everything out of China,” Kappen said. “I don’t think companies are looking at pulling completely from China — there’s just too much there. But they’re looking at pulling back.” 

If there is a big early winner emerging as a nearshoring destination, it’s Vietnam, he said. “There has also been a pullback to Vietnam. That country has seen a lot of activity. I think Vietnam has been the big winner in Asia this year.” 

Kappen said that two broad areas of manufacturing are likely to have the highest probability of success in reshoring sourcing or production. 

The first are products that had just enough complexity where automation wasn’t feasible, but now it is feasible. For instance, a manufactured item that was offshored 20 years ago to meet cost goals might now be revisited because automation makes it feasible to produce the item in the United States. 

The second broad category is “anything where there is mass customization, where there’s an opportunity to bring the product close to the consumer and tailor it to the consumer,” Kappen said.  

If there are potential drawbacks to reshoring, the No. 1 pitfall is the risk of change, he said. 

“If you have something working for you, changing that location brings with it lots of risks,” Kappen noted. “There are risks to leaving something where it is, and risks to moving it.” 

When you make that decision and pull the plug on your old supplier, there are certainly risks. That’s why companies are slow to reshore – if it’s working, it’s hard to justify movement.” 

The Center for Industrial Research and Services at the Iowa State University Research Park in Ames has served as a resource for manufacturers in adapting to a number of emerging trends over the years, and preparing for reshoring is no exception. 

Mike O’Donnell, program manager of CIRAS, noted that the process of “offshoring” production or sourcing to China that was prevalent three decades ago is neither a fast nor a low-cost move for manufacturers to execute. 

Likewise, “reshoring things that you haven’t made in a long time is going to take considerable investment,” O’Donnell noted. “There are some companies in Iowa that are at least considering it. The question is: Is it going to be worth the effort and cost?” 

While it may be worthwhile for some, he said, “I think other companies will very quickly fall back into the current supply chain.” 

So how should manufacturers think about the payback period for reshoring? Will it take a fairly long time for companies that reshore to recoup their investment back into the United States or nearby countries such as Mexico? 

When considering the cost-benefit equation, it’s important to understand the total costs that factor into buying from a closer supplier, often referred to as “landed costs.” 

“It’s important that companies have an understanding of all of the soft costs involved in buying from a foreign area,” he said. For instance, time lost in transport really does equate to money. “If something is farther away, you have more material in your supply chain at all times, and more money tied up in your supply chain,” O’Donnell said. Additionally, “some of the better companies will include things like the cost of quality in their decision process.” 

The COVID pandemic has for the first time brought some of the inherent risks that had just been theoretical into very real terms. “They had never hit the bottom line — this year they did,” he said. “This spring and summer, they actually saw it happen.” 

So is supply chain and reshoring top of mind now for Iowa manufacturers? 

“I would say it is higher up the priority list,” O’Donnell said, “but right now what’s top of mind for manufacturers is recovering demand. Right now they just don’t have the market out there. We have had some increased interest and discussions about reshoring, but not nearly at the level of ‘How do I find new sales?’ ” 

O’Donnell said he hopes by next spring the conversation can begin shifting to an exploration of whether reshoring is worth the time and investment. 

New reports to reflect input, offer recommendations 

One of the resources that Iowa employers are expected to have by that time is a year-end report that will be released as part of the work going on now with the Governor’s Economic Recovery Advisory Board. 

One of five subgroups making up the advisory board is a manufacturing focus group that is building on work that had started in January by the Iowa Economic Development Authority. 

“Rather than create a new subgroup for economic recovery, the focus group discussions for the supply chain/reshoring topic served as the input for the economic recovery work,” said Hank Norem, president of Ramco Innovations and a co-chair of the advisory board’s Advanced Manufacturing Work Group with Kevin Gaul, director of operations for Pella Corp. 

Working with the subgroup is Jill Lippincott, project manager for the IEDA’s Targeted Small Business Program. Part of the strategy has been to ensure that direct input is received from a wide array of industry leaders, she said. The work will dovetail with information that will become available with a Manufacturing 4.0 report that will also come out early next year. 

“A key factor [in facilitating reshoring] is ensuring that digital capabilities are compatible,” Lippincott said. “I think that’s where the Manufacturing 4.0 Study will help, so that as buyers are looking closer to home, that [small to medium-size enterprises] have the technologies available or digitization of processes in place.” 

Are there some success stories about bringing manufacturing back to Iowa? 

“I think we’re still in the early stages of exploring that,” Lippincott said. “Techonomy is doing work to put together examples and that will be part of the report when it’s put together.” Because of a pause in the work due to COVID, the report release has been delayed, but IEDA now hopes to have it ready by the end of this year, she said. 

In broad strokes, the report will examine how existing resources can be leveraged by manufacturers to work with their supply chains or original equipment manufacturers in reshoring efforts. The processes it will look at include supply chain mapping and identifying areas for growth, as well as an examination of state policies and how they support growth in manufacturing. 

The report will take a holistic approach to assisting manufacturers that want to explore reshoring, Lippincott said. 

“We’re always listening to manufacturing leaders, and I think we’ve done a great job of supporting their work for manufacturing to be a large part of the state’s GDP,” she said. “We will look at what we can do to support their needs and how it ties into their efforts to be ready for reshoring. One of the things the report recognizes is that this doesn’t exist in a vacuum. I think the report will address many aspects of how it all works together.”