Shoring Up Operations for Growth

Both domestic and foreign companies with operations abroad are realigning their supply chains and moving operations closer to the U.S. in order to strategically position themselves for growth.

By Jeff Jorge, Principal, International Growth Services Practice Leader; and Thane Hutcheson, Director; Baker Tilly, LLP

The pandemic wreaked havoc across every industry, and companies in the manufacturing and mobility/transportation sectors were not spared. The result? Companies are re-evaluating their supply chains and operations in a post-COVID environment.

Realigning the Supply Chain

For the past 20 years, manufacturing moved operations from the U.S. to East Asia to take advantage of cheap labor. This approach dominated manufacturers’ strategy, paving the way for a status quo where low-skilled and large-scale manufacturing was done in China. But COVID-19 — coupled with rising wages in East Asia, trade tensions, and a tariff war between the U.S. and China — undermined the business logic of a long, extended supply chain with all of its potential chokepoints along the way.

Today, the status quo is no longer tenable: The impact on the supply chain of a tanker running aground in the Suez Canal and bringing shipping to a halt is no longer a “what if” scenario.

Companies with operations abroad are looking to shore up their logistics and move operations closer to the U.S. And it’s not just U.S. companies making these calculations. Increasingly, foreign companies are building plants in the U.S. and in nearby countries to be closer to the world’s biggest economy — and to position themselves strategically for growth.

A “Goldilocks” Scenario for the Economy

The pandemic — and the lockdown — produced one of the sharpest declines in U.S. economic activity since the Great Depression. But because the recession was driven by an exogamous event, rather than arising from internal factors (such as inflation, overleveraged consumers, a real estate bubble), the economy has proven resilient. Given the pain that the pandemic inflicted on the U.S., the fundamentals of the economy remain relatively healthy. More importantly, growth is about to become the name of the game in the United States.

By Memorial Day, a large portion of the adult population within the U.S. will be vaccinated. It’s possible that by summer, herd immunity will be achieved. That’s not to say that precautions will not remain. But the worst in all likelihood is behind us. Companies that succeeded in battening down the hatches and survived the pandemic are seeing the light at the end of the tunnel. Stimulus checks have hit bank accounts, people are getting vaccinated, weather is improving, and the fundamentals of the economy are showing strength.

Along with the recently passed COVID-19 relief package, the Biden administration is looking to push through an infrastructure bill to repair roads and bridges, bring highspeed Internet service across the country, and seed innovative areas for growth. Moreover, the Federal

A CASE STUDY IN BECOMING AN OMNICHANNEL PLAYER

A publicly traded home-improvement products manufacturer historically sold its products to big-box retailers, distributors, and specialty retailers. Given the backdrop of a predictable demand landscape, the manufacturer set up operations offshore in the Far East.

Suddenly, however, COVID-19 hit, and the demand landscape and the manufacturer’s business model underwent a paradigm shift. People are spending much more time around the house as a result of the pandemic; they’re making improvements to their homes; and they’re buying a lot more of these products. Meanwhile, the manufacturer’s big-box retailers and specialty distributor customers are changing their approach to order fulfillment from the standpoint that orders are now coming from almost anyone, at nearly any time, and can be fulfilled from almost anywhere. And they’re turning to the manufacturer to fulfill those orders directly.

That’s placed pressure on the organization to figure out how to become an omnichannel player: They’re asking themselves, “How do we fulfill orders that look like they’re shipping from the big-box or specialty retailer, but are actually coming directly from us? We’re drop shipping for somebody else.”

The company was not structured for it. It lacked the systems, the supply base, and the ability to package, label, ship, and track was nonexistent.

The company has put in a patchwork of temporary fixes to meet needs, but it’s inadequate for the long term. More importantly, they recognize that business will not go back to the way it was. It’s likely that their big-box retailers and specialty shops will continue to rely on them to dropship orders direct for them.

The company approached Baker Tilly to work with them to help them assess their current capability to respond to their customers’ needs. Based on the gaps, what should their ideal omnichannel design look like? How should it be designed, simulated, and then launched?

Reserve has indicated that it holds steady on monetary policy, allowing the economy to run hotter than usual to repair the damage from the sharp downturn.

These macro issues matter greatly. Companies that have survived the tumultuous year and are stable are asking themselves, how do they make sure they don’t put themselves in a position where, if another external black swan event hits, it takes down their business? How can they build resilience — and, conversely, how do they act strategically and take the next step toward fueling growth?

Take a Strategic Approach

The most difficult competitor firms face is not necessarily other companies — their most difficult opponent is the status quo, inertia, and resistance to change. And there’s good reason for that: redoing and restructuring the supply chain is a big undertaking. It’s no small matter moving an operation and contemplating things you haven’t had to contemplate for 20 years. (See Case Study.)

That’s why it is important to revisit your strategy toward the supply chain and undertake an analysis to evaluate the possibility of nearshoring and/or onshoring your business. By moving your base of operations closer, you mitigate risk. You can reduce potential chokepoints, exert better control over operations, and eliminate logistics issues. You also remove another source of uncertainty: becoming the victim of a tariff war and trade tensions arising from currency manipulation or rising costs of labor.

Secondly, if you decide to onshore operations to the U.S., the analysis will give you a framework for those actions/considerations to keep in mind as you search for a new site. In selecting a site, it’s key to understand your supply chain, what you’re making, and what region might make sense, and then understanding which site characteristics are important for the company’s project.

Knowing what the site actually entails and being able to move on it quickly — rather than waiting for an understanding of the geotechnical aspects — can eliminate or mitigate uncertainty. Has the site been certified and is it ready for development? Has surveying, mapping, and platting been done upfront by the state or community so that the project is made easier? All these things simplify and speed up the development process.

Onshoring: Risks of Going It Alone

We’ve talked about the risks of maintaining operations far away and of the benefits of bringing things back home. But there is also another risk companies face in onshoring and site selection: the tendency of companies to do the analysis in-house.

Organizations often take the view that no one knows their product, systems, and processes as well as they do and that they’re best able to analyze whether relocating, nearshoring, or onshoring is right for the company.

While that may be true, few companies have the resources to dedicate to analyzing the many options. The same team being asked to evaluate complex strategic decisions has other day-job responsibilities. It’s very difficult to pull that off while minding the shop on a day-today basis.

“It is possible that we will have a Goldilocks moment —

As a result, companies un- fast and sustained growth, inflation to countries that are nearer derestimate the difficulties of onshoring and site selection and decide to move forward that moves up gently (but not too much) and interest rates that rise and more stable. Companies are taking a long, hard look at their supor, conversely, they pass on (but not too much),” said Jamie ply chain and logistics, and the opportunity, when they Dimon, Chairman and CEO of rethinking where they do should go forward with it. It’s JPMorgan Chase in his annual letter business to lay the groundusually advisable to engage to shareholders 2020.1 work for the post-pandemic short-term external support surge in growth — and for a long-term solution, rath- mitigate their exposure to er than pulling the team from disruption. In making these the day job, i.e., what they’re trying to do plans, the issues of place and overarchwith internal resources. ing business ecosystem have never been

The COVID-19 pandemic was a disrup- more important. It’s critical to consider tive and transformative experience for a number of key factors in scouting sites companies, especially manufacturers and and planning facilities — factors such as a their supply chain, exposing organizations to risks that deep pool of trained and qualified labor. few had considered prior to the pandemic. Consequent- Undertaking the analysis will provide you with a clearly, the long-held argument among businesses of basing er view as to what to consider in the months to come to manufacturing in China and Asia to leverage its pool of position your company for growth. It’s both an opportucheap labor is no longer as compelling as it once was nity for resilience as much as it is to make decisions that — as witnessed in shortages of vitally needed PPE sup- will help you grow in the coming years. n plies at the onset of the pandemic. The solution is to bring some of that manufacturing back to the U.S. and 1 https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/ investor-relations/documents/ceo-letter-to-shareholders-2020.pdf

Where'sthe TALENT?

Unlike in past expansions, growth may spread across more cities as more people have the freedom to work remotely from their preferred locations.

By Michael Reid and Barbara Denham, Senior Economists,

OXFORD ECONOMICS

The latest data from BEA indicate that employers are paying more than ever for talent, as the compensation of employees has more than recovered to $11.7 trillion in Q4/2020, above the previous peak seen at the start of 2020. Now, more than ever, talent is playing a critical role in propelling the U.S. economy and, importantly, reshaping how cities grow and prosper.

While we do expect the labor market recovery to be more protracted than GDP growth — with U.S. employment not returning to its pre-recession level until the end of 2022 —

some cities will outperform others due to their exposure to fast-growing industries and reliance on skilled workers who command high incomes. Nevertheless, a number of smaller cities have grown rapidly as well and will continue to do so despite a lack of concentration of well-paid, highly educated tech workers. This article summarizes the key jobs likely to be demanded in some of the fastest-growing cities in the U.S. First, we have selected a group of fast-growing cities based on projections by Oxford Economics that includes Boston, Raleigh, and Boise. Additionally, we highlight the outlook in Detroit, a city that is facing a particularly steep recovery. Each city’s forecast provides a unique view of growth drivers, which can be applied strategically by understanding the industrial drivers and the talent that supports its growth. Within each city forecast, we identify the top contributing industry for jobs at the MSA (city) level. This allows us to highlight some of the most in-demand skilled occupations using industry staffing patterns. Lastly, we look at those occupations and their links to college majors that serve as the future talent supply. With this approach, we can highlight how postsecondary institutions in a city help to supply the right talent to support growth but recognize that there is no consistent formula for growth. For state and local stakeholders, knowing the occupation outlook helps to strategically organize services to provide workforce support to key industries in their local economies.

•l• A Renowned Center of Life Sciences R&D

Boston has one of the leading life sciences sectors, which is fed by its legacy of revered universities and top-notch hospitals. After growing by 51 percent over the previous five years, Boston’s science R&D sector added 3,750 jobs (5 percent) in 2020. Its large institutions along with a number of liberal arts colleges not only fortify its science and tech sectors, but they fuel a diverse economic base.

• Industry with the largest growth driver:

Research and development in the physical, engineering, and life sciences

• Occupation demand:

Within the R&D life sciences sector, the largest occupations or employed jobs include medical scientists; biochemists and biophysicists; and chemists — most of which require a graduate degree in the biological and biomedical sciences field.

• Talent pipeline:

Universities in the Boston region supply over 2,000 graduates annually from their biological and biomedical sciences programs. Notable universities here include Boston University, Harvard, MIT, Northeastern, Tufts, Massachusetts College of Pharmacy and Health Sciences, and a number of smaller science and liberal arts colleges.

• Outlook:

Boston’s knowledge-based economy should continue to outperform the U.S. Our forecast shows Boston’s GDP growth of 12 percent from 2019 to 2025 outpacing the

U.S. growth rate of 10.5 percent.

• Comparable cities with a life sciences sector:

San Diego, Philadelphia, suburban Maryland

•l• A Rapidly Growing Tech Hub

Raleigh’s economy is recognized for its “research triangle” anchored by its three large universities that have fueled a strong tech base in the area. Moreover, its relatively low business and living costs have attracted a number of businesses

and residents seeking a low-cost alternative to the coastal cities. After growing by 33 percent over the prior five years, Raleigh’s professional and technical services sector added 1,700 jobs (+2.6 percent) in 2020. Tech firms with a large presence in Raleigh include IBM, SAS, Cisco Systems, and soon Apple, which recently announced that it would build its newest R&D campus in the “research triangle.”1

• Industries with the largest growth driver:

Computer and peripheral equipment manufacturing; computer systems design and related services

• Occupation demand:

Within the high-tech manufacturing and computer systems design sectors, the largest occupations include computer systems analysts; software developers; and computer programmers, which typically require a degree in computer science or computer engineering.

• Talent pipeline:

Universities in the “research triangle” region supply more than 3,000 graduates annually from their computer science and computer engineering programs. Notable universities near Raleigh include Duke University, the University of North

Carolina, and North Carolina State.

• Outlook:

The metro’s tech-fueled growth is expected to continue.

Raleigh is expected to see net 2019–2025 GDP growth of 16.1 percent, which ranks in the top 10 of 382 metros and far exceeds the U.S. growth rate of 10.5 percent.

• Comparable cities with a high-tech sector:

San Francisco, Austin, Seattle

•l• Overshadowed But Not Outshined

Located in the southwest corner of Idaho, Boise benefits from its proximity to the many Pacific Coast tech hubs as well as its access to abundant natural resources, which along with its low cost of living have drawn many new residents over the last 10 years. Its 2014–2019 population growth of 13 percent ranks 10th of 382 metros. Like a number of smaller Mountain region metros, population growth has driven economic growth, instead of the reverse. Like many fast-growing metros, it is home to a number of universities; however, these do not generate the same postsecondary STEM degrees that tech hubs’ universities have. Although Boise provides a different template, its lack of STEM degrees has not impeded its growth; GDP growth in Boise averaged 5.3 percent per year from 2014 to 2019, well ahead of the national average of 2.6 percent.

• Industries with the largest growth driver:

Indeed, the fastest-growing sector has been construction, which saw job growth of 58 percent from 2014 to 2019 along with another 8 percent in 2020.

• Occupation demand:

Within the construction sector, the principal occupations include carpenters, electricians, and plumbers — nearly all of which do not require a college degree.

• Talent pipeline:

Nevertheless, the abundance of colleges in the area —

Boise State University, Brigham Young University Idaho,

University of Idaho Boise, and College of Idaho — feed the professional services sectors, including a large cohort of business, management, and marketing graduates, averaging 2,800 annually.

• Outlook:

Looking ahead to 2025, we expect GDP growth of 15.2 percent over 2019, which is considerably higher than the 10.5 percent national growth rate. Moreover, the growth is expected to be spread across every sector, with the information, finance, and professional services sectors seeing some of the healthiest rates.

• Comparable cities with rapidly growing populations:

Provo, Utah; Bend, Ore.; Bellingham, Wash.

•l• On the Road to Recovery

Synonymous with auto manufacturing, Detroit was just starting to get its groove back with a healthy rate of job and development growth when the COVID-19 pandemic hit. This caused many manufacturing facilities to shutter, which cut durable manufacturing employment in half. Despite a plunge in car sales during the pandemic, demand for new vehicles should resume with the prospect of additional stimulus checks and the pent-up demand for travel. Moreover, Ford and GM announced they would invest billions in electric vehicle technology over the next few years.

• Industry with the largest growth driver:

Detroit-Dearborn’s motor vehicle manufacturing sector is a popular destination for mechanical engineers supplied by its large universities.

• Occupation demand:

Within the motor vehicle manufacturing sector, the largest occupations include highly trained industrial engineers and mechanical engineers, which require related degrees in engineering, as well as many blue-collar production jobs.

• Talent pipeline:

Its large state universities, such as University of Michigan,

Michigan State University, and Wayne State University draw a talented pool of students from around the globe. As a result,

Detroit area universities are able to produce over 5,000 graduates annually with degrees in engineering and provide

a steady pipeline of talent to the local auto manufacturing sector.

• Outlook:

Detroit’s expected GDP growth of 6.5 percent from 2019 to 2025 trails the U.S. expected growth of 10.5 percent. Its growth, however, is expected to be spread more evenly across manufacturing, finance, information, and professional services. In short, urban enthusiasts’ efforts to re-build

Detroit after the housing bust were only partially thwarted by the pandemic.

• Comparable cities on the road to recovery:

Cleveland, Pittsburgh, Greensboro, N.C.

Now, more than ever, TALENT is playing a critical role in

PROPELLING

the U.S. economy and, importantly, RESHAPING how cities GROW and

PROSPER.

•l• Spreading the Growth

Although the knowledge economy spurred significant job and GDP growth over the last expansion, a number of other smaller cities showed that growth can occur without a major tech university feeding its workforce. The major tech hubs should still see the highest growth over the next five years. However, as more have the freedom to work remotely from their preferred location, outdoor, cultural, and other amenities should spread the growth across more cities than experienced in past expansions.

1 https://www.areadevelopment.com/newsitems/4-27-2021/apple-wake-countynorth-carolina.shtml

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