The pandemic exposed the fragility of our global supply chains and their many vulnerabilities to disruption. While supply chains are starting to stabilize, Resilinc hopes the pandemic’s lessons will lead procurement and supply chain managers to shift to more regionalized sourcing models.
Over the past 40 years, U.S. and global OEMs have optimized and globalized sourcing and procurement to reduce labor and other input costs. Unfortunately, the result is a system of inherently fragile supply chains vulnerable to disruption and manipulation.
Early in the pandemic, shortages of isolation gowns, medical-grade masks, and other PPE endangered healthcare workers—and shortages of ventilators put patients at risk. These were followed by shortages of drugs needed to treat COVID-19 patients. Yet, follow-up research revealed that these weaknesses were growing for years before the pandemic as the U.S. became more dependent on foreign manufacturers for active pharmaceutical ingredients (APIs). The Drug, Chemical & Associated Technologies Association have blamed this on a “race to the bottom” mentality that drove manufacturing to low-cost countries such as India and China, which are now the largest global suppliers of APIs.
The pharmaceutical industry is not alone in its overdependence on overseas suppliers. Half of the global manufacturing is based in Asia. The risks of this dependence became apparent in late 2020 and early 2021. When U.S. consumers began buying electronics, vehicles, exercise gear, and other products on a scale that exceeded historic demand forecasts, backlogs and delays manifested in our Asia-dependent supply chains. And as recently as Q2 2022, factory shutdowns and logistics delays caused by China’s COVID policies and energy shortages continue to disrupt supply chains.
ROADMAP TO REGIONALIZATION
Resilinc supports federal initiatives to create incentives for supply chain reshoring, regionalization, and diversification—with the priority focus on critical industries. These include the four sectors prioritized by the Biden Administration in its 2021 report on improving supply chain resiliency: high-capacity batteries, semiconductors, critical minerals and materials, and pharmaceutical APIs. To those sectors, we would add telecommunications, energy, and food.
Some pharmaceutical companies are already taking on this challenge. For example, Premier Inc.—an alliance of hospitals and health care providers with extensive pharmaceutical supply chains and distribution networks—has worked with partners and competitors over the last two years to increase domestic production and sourcing of PPE and APIs. Premier leverages its supply chain data to identify supplies that are most at risk and invests in those categories with “Buy-American” commitments.
But Premier recognizes that the U.S. cannot become self-sufficient in API production. There is a shortage of manufacturing labor in the United States and several key raw materials that the U.S. does not produce. Premier believes—as does Resilinc—that both U.S.-based and geographically diverse manufacturing are needed to improve the resiliency of medical and pharmaceutical supply chains.
A PAN-AMERICAN SUPPLY NETWORK
Instead of our current overdependence on Asian manufacturing, the United States would benefit financially and strategically by investing in a Pan-American supply network. A regional, “near-shored,” land-based supply chain would accelerate movement across the Americas, and substantially reduce transit times and working capital requirements.
Creating a Pan-America supply network would require a mix of private investment and public funding and incentives. For example, governmental funding could be used to build a transportation infrastructure that linked the U.S., Canada, Mexico, and Central and South America.
The cost of labor in Mexico and Central America rivals that of China. Additionally, countries in Central America have the population and demographics to support a large-scale manufacturing and logistics footprint (the average age across Central America is 28). Central American communities would welcome local manufacturing to create jobs, build wealth, reduce the pressure to migrate, and promote political stability.
Initiatives by the U.S. apparel and footwear industry, with support from the Biden Administration, are already beginning to impact developing Central American supply chains. For example, U.S. manufacturer Parkdale Mills recently announced that it is building a multimillion-dollar yarn-spinning factory in Honduras.
Of course, a strategic reset of this magnitude will take time and come at great expense. It would be up to the United States, along with more developed countries like Canada, Mexico, and Brazil to lead the Pan-American initiative and persuade others. But it’s likely other countries in the Americas would be willing to help share the costs given the clear economic, political, and social benefits.
MAPPING OUT THE FIRST STEP
How do you begin to understand where to start the journey of regionalizing your supply chain? For supply chain managers, corporate leaders, and even the Biden administration, the journey to a regionalized, risk-adjusted supply chain network strategy begins with mapping your supplier network. While historically, it has been costly for companies to develop and maintain an accurate map of their supply chain, today, with the right partners, the process can be much more streamlined and efficient.
Rapidly evolving technology, cloud adoption, and enterprise networks have made mapping cost-effective, scalable, and rapidly achievable. What’s more, the new generation of software companies providing mapping capabilities go far beyond what could be accomplished with emails, phone calls, and spreadsheets.
A SENSE OF URGENCY
We need to start approaching supply chain regionalization with a sense of urgency, as the first step in addressing the risks and vulnerabilities affecting our supply chains. However, this shift to more regional supply chains will not be easy. It will take significant investment and cooperation across private industry and public spheres. It will also take time. China took more than 30 years to become the world’s dominant manufacturer. Building this kind of capacity in other countries and regions will also take decades—which is why we need to start now to design the supply chain for the next 50 years.
This blog post was adapted from a May 2022 Supply Chain Quarterly article by Resilinc CEO Bindiya Vakil. Read the full article: Regionalized supply chains: the key to resilience