By Wall Street Journal
This article was published in Wall Street Journal April 18, 2022.
Companies looking to make their supply chains more resilient with nearshoring strategies may only be bringing production problems closer to home, experts say.
U.S. importers who are studying shifting their sourcing from the Asia-Pacific region to Mexico and deeper into Latin America are finding it tougher to find suppliers with the right raw materials, production quality and networks for getting their own components that have been established in manufacturing hubs like China and Southeast Asia. Reproducing that capacity and re-creating clusters of suppliers under a nearshoring strategy will take years, experts say.
“Undeniably, China is the single biggest market for all sorts of nuts and bolts, everything from your basic components to sophisticated components,” said Kamala Raman, a vice president at Gartner Inc. who advises companies on supply chain networks. “You cannot recreate that ecosystem in any other country of the world.”
Finding suppliers has been a challenge for Boca Raton, Fla.-based bedding maker Hollander Sleep Products LLC, which has been looking into sourcing from Mexico and Central America to “future-proof” its business against supply-chain disruptions, said James Hill, its senior vice president of global sourcing and supply chain.
Hollander has struggled to get materials such as cotton and synthetic fabrics that aren’t prohibitively expensive, especially compared with the fabrics produced at a larger scale in China, Pakistan and India, where the company has been sourcing many of its finished goods.
In Latin America, “there’s not the embedded infrastructure to produce that grade of material at a very low cost,” he said. “A part of the evolution of nearshoring and regional sourcing has to be looking at the inputs and the availability of raw materials to support that.”
Supply-chain disruptions over the past two years, resulting from the impact of the pandemic, have driven more Western companies to look at moving production close to home. The push has gained steam as bottlenecks have left seaports jammed, store shelves empty, factories idled and many billions of dollars of goods stuck in overstuffed distribution networks.
Nearshoring, or placing production closer to consumers and end users, is supposed to make supply chains more resilient to such shocks by eliminating the long supply lines that can subject shipments to more disruptions and higher costs.
White House economists said in a recent report that decades of moving production to distant countries has made many supply chains “complex and fragile, with central nodes that lack agility and have few substitutes.”
But shifting supply chains built up over many years is a complicated undertaking, particularly when the availability and transport of raw materials and components that go into final assembly have to be accounted for.
“When we talk to companies, it’s still on the agenda,” said Ed Barriball, a partner at consulting firm McKinsey & Co. in Washington, D.C., who advises clients on supply chain and logistics operations. But, he said, “the realities of the transition can be bumpy.”
Omar Troncoso, a partner in the consulting firm Kearney based in Mexico City, said the firm saw “an amazing increase in the number of clients trying to nearshore” over the past year and that Mexico is a favored target because of its proximity to the U.S. Mexico also has existing manufacturing infrastructure and established freight transportation networks.
Although 70% of CEOs have planned, are considering or expect to move manufacturing to Mexico, only 17% have already done so, according to a recent Kearney study of American manufacturing executives.
Many companies are finding that capacity in Mexico is tight and that certain pieces of equipment or components can’t be made there, like expensive molds for plastic goods that have to be brought in from China, said Mr. Troncoso.
“Here, you really have to know people in the industry you’re looking for and you have to get close to the suppliers,” he said. “Frankly, you have to convince them that your business is good for them, because they’re going to have to invest.”
Sirius Archery Products LLC in Burlington, Ky., has been trying to find a closer source of high-quality carbon for the arrows it sells since the Trump-era U.S.-China trade war but hasn’t found suppliers it can afford in Mexico, said Seth Poston, the company’s president.
The company sources its carbon instead from Japan, and Mr. Poston said higher prices from a seller in the U.S. would force Sirius to increase the cost of arrows by 40%.
“There’s just no option for us there” in Mexico, he said.