18 minute read
Supply Chain Mix and Match
Global trade imbalances have been created by systems designed pre-pandemic to handle JIT manufacturing that were not adaptable to sourcing and moving goods.
By Derek Cutler, Chief Economist; and Chris Steele, President & CEO; EBP-US
Imagine, if you will, that you are a logistics manager for a major manufacturer in December of 2019. The economy has been growing at unprecedented speed, and you are doing everything in your power to ensure that raw materials are getting to where they need to go. You’ve been speaking with each of your suppliers to better understand what’s happening in their production cycles so that you can get your parts to your assembly lines as quickly as possible.
Cost is king, and time is money. You’ve done everything you can to remove all waste from the system, and everything is humming along the way that it should.
But you’re starting to see some interesting news stories about this unusual flu that you had never heard of before, which is being seen in a part of China. Clearly, it won’t have any implication for you, right?
Roots of the Problem
So, let’s back up slightly, and remind ourselves of just how flat the world has become in the past four decades or so. Manufacturers worked hard over that time to both produce goods in the lowest-cost locations and reduce waste and minimize the need for large warehouses full of inventory in favor of more nimble supply chains that deliver just what is necessary.
This shift from centralized, scaledriven production minimized the need for warehouse inventory, meaning firms only maintained enough safety stock to overcome minor delays. Over time, manufacturers came to rely on a continuous flow of goods and money, with constant communication between sections in a supply chain.
This worked well under typical circumstances. However, problems began when the systems designed to handle this “just-in-time” (JIT) manufacturing lacked the necessary adaptability in sourcing and moving goods to address the cascading
Container Imbalance Index CAx | Year on Year
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Metro St. Louis/ St. Charles County 4 major interstates
6 class-one railroads
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Easy access to the northernmost ice-free port on the Mississippi
Welcome to Missouri's Fastest-Growing County
With a unique combination of competitive operating costs, a growing population, and logistical advantages, St. Charles County, Missouri, offers the ideal location for your company.
An Unbeatable Location Located just 20 minutes from downtown St. Louis, St. Charles County, Missouri, is one of the most cost-effective locations in the US for organizations seeking to fully globalize their trade. Our central location and sophisticated transportation infrastructure allow your product to be anywhere in the US - including major coastal ports - in a matter of days.
A Deep Talent Pool As the fastest-growing county in Missouri for over 30 years, St. Charles County has a deep talent pool to meet your workforce demands, adding approximately 5,000 new residents each year. What's more, our location within the St. Louis metro area provides access to an additional workforce population of over 1 million.
Amazon Triples Workforce In 2019, Amazon opened its first Missouri fulfillment center in St. Charles County and announced plans to hire 1,500 workers. Less than three years later, the e-commerce giant was the County's largest employer with over 6,100 employees at its state-of-the-art facility along the Highway 370 Logistics Corridor. General Motors Invests $1.5 Billion St. Charles County is home to the largest private investment in Missouri history, GM’s $1.5 billion re-investment in their Wentzville Assembly Plant. The plant, which is one of GM's most productive, manufactures the Chevy Colorado, the GMC Canyon, and two full-size vans.
$300 Million Semiconductor Investment MEMC, a St. Charles County-based subsidiary of GlobalFoundries Inc., produces silicon wafers, a critical component of computer chips used in industries ranging from telecommunications to automotive and aerospace. MEMC's parent company is helping alleviate the global chip shortage by investing up to $300 million to expand production capabilities at its St. Charles County facility.
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worked hard
[over the last four decades] to both
produce goods
in the lowestcost locations
and reduce
waste and
MiniMize the
need for large
warehouses
full of
inventory.
series of imbalances that started to affect global trade.
At the outset of COVID, Hillebrand (freight forwarder) wrote, “countries implemented lockdowns, halting economic movements and production… [leading to] carriers [reducing] the number of vessels out at sea.”1 These effects lowered import and export volumes and also led to empty containers being stranded and not returned to their points of origin.
This became a significant problem for Asian traders, who couldn’t retrieve empty containers from North America. Then Asia, as the first hit by the pandemic, was also the first to recover, creating a further complication. While China resumed exports earlier than the rest of the world, other nations were (and still are) dealing with restrictions, a reduced workforce, and minimal production.
The results are extremely visible in the reporting of trade patterns. For example, the accompanying graphic is a measure of the container imbalance for the current year, and two years prior for reference.2 Values greater than 0.5 indicate an imbalance between inbound and outbound containers (causing an accumulation of unmovable containers).
There has been a huge influx of imports to the U.S. as the pattern of consumer demand pivoted from local spending to retail and e-commerce shopping requiring deliveries. This makes sense if you remember that families were required to quarantine, frightened to be in closed environments of stores and restaurants, and eventually changed their behaviors to embrace the convenience of home deliveries. Without enough workers in warehouses and trucks to efficiently move those goods, delays ensued, and containers were left taking up space in ports and warehouses.
This confluence of events resulted in an overall shortage of containers — combined with more ships waiting offshore to unload cargo due to insufficient port space — and then, in turn, led to even fewer vessels and containers available, cascading to reduce overall capacity. This shortage of capacity has resulted in reports that the cost of shipping a container from China to the West Coast has exploded to as much as 400 percent–600 percent over historical values (or more).
Addressing the Problem
But what does this mean for our “flat-earth” global economy? Are we looking at an end or at least a slowdown of a globalized economy? Probably not. As much as we may wish to have production capacity (and manufacturing jobs) come back to North America, the simple truth remains that for the short and medium term it is easier and less costly to create inventory than it is to re-create the infrastructure, capital investment, and workforce needed for substantial manufacturing. And this hypothetical rebuilding certainly cannot be done on the same cost basis as in other globally competitive locations. However, there are circumstances that will keep forms of JIT as a preferred strategy for manufacturing. Professor Yossi Sheffi of the MIT School for Transportation and Logistics points out3 that JIT systems have preserved flexibility for manufacturers and given them the ability to react to shortages by quickly altering their supply chains and to avoid the historical problems of being tied to a large, pre-negotiated inventory of goods in the face of sudden shifts in demand.
In addition, near-shoring and reshoring, which reduce the distance between links in a supply chain, are also discussed as a potential solution, along with re-evaluating safety inventory stock levels. Each of these reactions can serve to alter the pattern of trade costs being expressed: reducing distance-related costs, altering the geography and concentration of partners to increase resilience, or increasing software integration to enable smoother planning and reaction to changes in conditions.
U.S. Transportation Secretary Pete Buttigieg has announced a novel pilot data exchange program called “Freight Logistics Optimization Works” (FLOW), which will involve stakeholders from all facets of goods movement from transportation to port operation to warehousing. This public-sector effort is centered around providing more continuous streaming of goods movement data to allow for real-time intelligence as a cost-saving and performance-enhancing mechanism.
This approach has already been taken up by individual companies in their pursuit of supply-chain resilience. Toyota has spent the past several years digging their way multiple levels into their supply chains
to better understand not only their OEM and Tier 1 suppliers’ logistics, but even the logistics of Tier 2 and 3 suppliers, to better understand their risk and attempt to diversify supplier options.
There will be obstacles along the way. Broader adoption of mass data-sharing platforms such as FLOW will be slow and rife with pitfalls, especially given the sensitive nature of the data involved and the driving fear by firms of misuse for competitive gains. Many businesses will likely seek to privately invest in their own supply chains and not work in a broader integrated process, despite the benefits of scale participation. In this sense, development of new technologies and approaches may be more sporadic and occur at an individual firm level.
What Can We Do Now?
Responsible government agencies should and will look for ways they can assist in both reducing regulatory barriers and nurturing the development of new approaches — such as creating best practices in goods movement as well as protecting each company’s proprietary data.
FLOW may be an important first step toward trying to create a more adaptive and resilient future — but federal action as a data sharing coordinator is not the only way that the public sector can look toward futureproofing resilience issues.
The ability to look at vulnerabilities stemming from logistics operations both domestic and foreign, from a planning context, is of direct relevance to public agencies. The U.S. is a data-rich environment that allows companies to synthesize novel lines of thought for identifying, valuing, and managing risk. The ability to identify at-risk regional economies and industry — and then assess their relative risks from disruptions at border ports and along goods movement routes — can enable more informed prioritization of investments and identification of supporting strategies. These models can support more informed discussions with local business leaders and further help in planning for a more resilient future.
In the end, the more valuable outcomes that may result from this crisis are more likely to come in the form of technology and supply-chain diversification than to result in a wholesale change in where products are made. However, creatively addressing these problems will allow for a truly global economy to move to its next and more resilient stage. n
1 https://www.hillebrand.com/media/publication/where-are-all-the-containers-theglobal-shortage-explained 2 https://www.container-xchange.com/features/cax/ 3 https://www.wsj.com/articles/commentary-pandemic-shortages-haventshattered-the-case-for-just-in-time-supply-chains-11643547604
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Available land, lower Visitors costs, and the desire to Montana to co-locate with know the state’s suppliers and nickname of “Big customers draw Sky Country” is companies to rural well deserved. locations, but The state’s rural satisfying setting and wide infrastructure open spaces, aside needs and access from being scenic, to talent shouldn’t factored into the be overlooked. recent decisionmaking process of an international industrial company. The result was an economic development plum for the state.
Hyundai chose Bozeman as the location for its New Horizons Studio, a research, development, and lab center focused on the evolution of ultimate mobility vehicles (UMV), which can travel over terrains challenging for conventional ground vehicles. The facility is being developed at Montana State University’s Innovation Campus.
John Suh, a vice president with Hyundai Motor Group, will head New Horizons Studio. He says the search for New Horizon’s home was handled in-house, noting he was familiar with Montana as a vacation attraction but had not previously thought of it from a business viewpoint.
Rife with Resources
Suh says Hyundai’s project is about developing alternative mobility via the addition of robotics to a car design. Montana, he believes, offers a great set-
By John McCurry
ting for testing of the vehicles and a great potential future market in areas such as mining and energy exploration.
“That leads us to look at areas with a wide range of natural resources, whether it is agricultural, ranch land, or forest,” he says. “There are a lot of places in Montana where such a vehicle could add
value. It is important to be close to our potential customer and close to the scenarios where our vehicle can provide value.”
Hyundai also wanted a place rife with talent, where the company could “ease into position as the premier employer” for engineering talent. Hyundai’s project will serve to keep talent at home, Suh says.
Hyundai considered other locations but kept coming back to Montana’s distinctiveness and the
Hyundai will develop Ultimate Mobility Vehicles (UMVs), including the concept vehicle Hyundai Elevate, at its New Horizons Studio in Bozeman, Montana.
potential for the company to be a unique employer in the region. Asked if Hyundai might eventually locate a UMV manufacturing facility in Montana, Suh notes design and manufacturing of vehicles usually occur in two different places. “But I do believe in Montana we will find the market and customer base that will make sense to also do our manufacturing here. But that decision has not been made yet,” he notes.
The Lure of Rural Settings
Hyundai’s need for rugged terrain for vehicle testing makes it somewhat of an anomaly, but in general, site consultants say many of the qualities that lure companies to rural settings are the same as urban locations. At the top of the list are land, labor, and educational opportunities.
Courtney Dunbar, director of site selection at global construction and engineering firm Burns & McDonnell, says decisions to locate in rural areas are typically the product of a proactive, rather than a reactive, approach. That makes it less consultant-driven.
“More likely, it would be where there was an anchor industrial type, or an agrarian company, that may be located in an area that might be considered rural population-wise, but where there is a cluster of need up or down line. You’re either supplying to it, or you’re taking supply from it, to feed whatever is being manufactured or created in the operation that may site there,” she explains.
For example, Dunbar says, a location with a major food processor in a rural area may have packaging companies that may also wish to co-locate. Or it could be machining or smaller companies that deal with an equipment repair that may want to co-locate.
Clustered Together
Site advisor David Hickey, managing director at Hickey & Associates, notes the biggest challenge for manufacturers is securing suitable land. Rural America offers availability and cost advantages. Land and labor costs trend lower in rural areas.
The Southeast continues to win big projects in lower populated areas. Hickey cited Tennessee, Georgia, the Carolinas, and Virginia as having done well in recent years in terms of bringing together state and local resources to attract projects.
“They are finding ways to find and develop the infrastructure to ultimately make these projects a reality,” Hickey says. “The infrastructure is a key issue. The industry wants to know what sites are ready today. What is it going to take to make it come together? They want to know what availability or challenges exist in order to access local power, water supply, and wastewater management, and what access is available to roads, rail lines, or ports.”
Quick Site Plans
Hickey and Dunbar say with projects moving so quickly today, site developers must plan two to three years ahead, to make sure sites are ready when needed.
“In a lot of instances, rural locations don’t have ready or prepared sites,” Dunbar says. “You have to be in a position where you can at least show that you prepare a site quickly. It demands diligence to get them to a shovel-ready perspective, versus a pre-built industrial park scenario, which can
This illustration shows the 400,000-square-foot addition to Schwan’s footprint in Salina, Kansas.
be very difficult for rural areas.
“If I have something in the cluster that already exists, what is needed in the up and down line? Do I have raw product in my backyard that can be used to attract industry that can utilize that raw product? Logistics matter too in that equation. You must make sure your workforce somehow is higher in volume or skill level or both, to compete for certain industries.”
Rural sites offer more opportunities and often attract much larger projects, says James Chavez, president and CEO of the S.C. Power Team, the economic development arm of South Carolina’s 20 electric cooperatives.
Development of rural sites presents a few challenges. First, developers must prepare a site for today’s fast-moving projects, Chavez adds. “If you don’t already have control of the property, if you’ve not engineered or acquired a right of way for whatever infrastructure will be required, you just can’t keep up with project timelines.”
Highlight the Workforce Assets
The second challenge, which is the same for all communities, is providing a workforce. Chavez says being able to articulate workforce assets to companies is essential.
“Just because you are small does not mean you do not have a large-draw area, the ability to pull people in from a large radius,” Chavez says. “It’s essential to be able to know what skill sets those people have, and to be ready to communicate a proper and compelling workforce story. Knowing what your existing employers are going to say about their workforce is super-important. Any potential employer looking at a new area is going to want to talk to other employers to get a feel for the market.”
One of South Carolina’s biggest rural projects in recent years is Samsung’s sprawling complex in Newberry, about 40 miles northwest of Columbia. The Newberry site, which manufactures washing machines, recently passed the fiveyear mark. Initially operating in a vacant building formerly occupied by Caterpillar, Samsung has since expanded its footprint to 1.5 million square feet.
Samsung has invested about $500 million and created 1,600 jobs at its Newberry campus. Tom Komaromi, general counsel at Samsung Electronics Home Appliances America, says the company has also made progress with localization of its supply chain, bringing four major suppliers to the area. Komaromi says Samsung ultimately chose Newberry for reasons including “an incredible workforce, a robust energy and transportation infrastructure, and local officials who are business ready and have a track record of success with international companies.”
Samsung’s site selection process took several months. “We developed an extremely aggressive timeline,” Komaromi says. “Just six months after our initial announcement, we opened the doors in Newberry and produced our first residential washing machine in the United States. Since that day, we are running two production lines with multiple shifts and have produced over four million washing machines.”
The sprawling Samsung campus in Newberry, S.C., has steadily expanded over the past five years.
Taking a Holistic View
An ongoing rural success story is Schwan’s Company’s growth over the decades in Salina, Kansas. Schwan’s acquired the Tony’s pizza brand in Salina in 1970. The facility has since grown from 18,000 square feet to 550,000 square feet, including a distribution center that was added in 2006. An expansion currently under way will add another 400,000 square feet to the complex. The company believes the facility will be the largest pizza plant in the world.
“We have been able to develop some great relationships through the years in Salina at the community, state, and federal levels,” says Schwan’s spokesman Chuck Blomberg.
“Generally speaking, you would typically find that operating in a rural area can be less expensive due to a lower cost of living, but this isn’t the only factor for us in choosing a location. We have facilities in both rural and more urban areas. We tend to look at a project holistically in how a specific location might benefit our business and the community.”
With that in mind, Hyundai’s Suh advises companies considering rural areas to examine the ingredients needed to make a successful business: “Look for a source of talent, such as technical schools or universities. Look at your market and gain knowledge of the customer, and educate them about you as well,” he concludes. n
