Deglobalization was already happening before the coronavirus brought the world to a grinding halt. Global supply chains that were once so appealing were becoming less attractive due to geopolitical turmoil, shifting priorities, rising costs, trade wars and environmental concerns. Then the coronavirus outbreak delivered an unprecedented, systemic, paralyzing blow to our tightly linked global supply chains.
Our overdependence on imports became clear. As companies consider options for more resilient supply chains, they should consider reshoring. Reshoring shortens supply chains, reduces response time and overreliance on imports, and improves profitability.
Shortages brought on by the pandemic have made Americans keenly aware of our overreliance on imports of essential medical devices and pharmaceuticals. Eighty-six percent of U.S. hospitals and healthcare systems are concerned about shortages of personal protective equipment (PPE) for front-line medical heroes. However, about 80 percent of PPE is manufactured in Asia. Producer countries like China, Taiwan, Thailand, India and South Korea imposed temporary export restrictions on PPE. Life-saving ventilators and key components for our limited domestic production also come from offshore and are in short supply.
According to the Commerce Department, 97 percent of antibiotics in the U.S. come from China, and U.S. manufacturers source 80 percent of their active pharmaceutical ingredients (APIs) from overseas, primarily China. China is also the chief supplier of APIs for producers in other countries. At a recent White House press briefing, Peter Navarro, director of trade and manufacturing policy and national Defense Production Act policy coordinator said, “Never again should we rely on the rest of the world for our essential medicines and countermeasures.”
A recent report by the United Nations Conference on Trade and Development said, “The COVID-19 outbreak will potentially accelerate existing trends of decoupling and reshoring driven by the desire…to make supply chains more resilient.” A Thomas study found that over 50 percent of manufacturers are likely or extremely likely to bring production back to North America after the pandemic. Additionally, 47 percent of U.S. manufacturers report they are seeking domestic sources of supply.
The Reshoring Initiative can provide resources to evaluate what to reshore. A range of costs and risks can be quantified using the free online Total Cost of Ownership Estimator. Making sourcing decisions based solely on price often results in a 15 to 25 percent understatement of offshoring costs. TCO analysis helps companies objectively quantify, forecast and minimize total cost. It takes into account the ex works price, plus 28 additional costs and risks. TCO also quantifies other factors, such as supply chain disruptions caused by natural disasters, political unrest or even pandemics.
Careful examination of total costs and changing conditions can lead to new opportunities in supplier selection. The decision to insource increases from 8 percent based solely on the ex works price, to 32 percent based on TCO, to 46 percent based on TCO and a 15 percent tariff.
Many medical device and pharmaceutical manufacturers have already made the decision to insource. In March, for example, Algernon Pharmaceuticals awarded the contract to manufacture the active ingredient for the new drug ifenprodil to U.S.-based Cascade Chemistry. The drug was developed to treat idiopathic pulmonary fibrosis, but is now being investigated as a treatment for COVID-19.
G95 Inc., a manufacturer of outerwear with built-in filtration technology, has reshored its supply chain from China to a contract manufacturer in Grand Rapids, MI. The disruption from the coronavirus outbreak in China left the company with more than 1,000 unfilled orders. “As a business, if you don’t have anything to sell, you’re not a business, and you’re out of business pretty quick,” says G95 owner Carlton Solle.
GM and other large U.S. manufacturers have dramatically stepped up to temporarily fill gaps in the medical device supply chain. We call on these companies to apply the same flexibility in shortening their own supply lines.