The Shift from International to Domestic
You have probably experienced the negative effects of the global supply chain issues during late 2021 and early 2022. Customers have experienced long wait times for new cars, durable goods like washers and dryers, and power tools. In addition, store shelves have emptied quickly for common goods like milk and bread. These problems illustrate the outcomes that are forcing CEOs to rethink the current view of supply chains.
At the global level, many firms have partnered with overseas suppliers who leverage the low local wages to manufacture at a much lower cost. They can then use low-cost overseas shipping to move the products to the U.S. and still save money versus trying to manufacture the goods domestically. However, glitches in the global supply chain, such as fewer ships to transport the goods and not enough port capacity to unload the goods once they arrive in the U.S., have revealed the weaknesses in this global supply chain strategy.
Domestically, the labor shortage has resulted in producers not being able to manufacture goods at their normal levels. Then, a lack of truck drivers impedes the ability of those companies to get their products to markets, which is why grocery stores might not have milk on any given day.
These supply chain bottlenecks were created by the emphasis on low cost, which is best achieved by offshoring or outsourcing a number of activities within a company’s value chain. However, lower costs on a much lower volume has a dramatic negative impact on profits, which has led CEOs to change their supply chain strategy. The new strategy focuses on more domestic manufacturing and more insourcing of activities as a way of ensuring greater reliability (access to necessary goods) and quality.
For instance, Bartesian, Inc., is a Chicago-based startup focused on making a countertop cocktail machine. They had a contract with Hamilton Beach to manufacture the machines in China, and they also planned to produce the drink capsules there. They decided to move the drink capsule manufacturing to a facility outside Chicago, because, as CEO Ryan Close said, “If we run out of capsules, we go out of business.”
Similarly, Delta Airlines had outsourced a number of activities such as cleaning planes and pushing wheelchairs for customers as ways to reduce costs. However, after discovering that contractors were unable to attract workers, Delta decided to hire its own, paying higher wages than the contractors. Delta CEO Ed Bastian stated, “I’m not waiting for them. I’ve in-sourced it, and I’m not looking back…You got to go out and you got to be creative.”
Questions for Students
1. Do you think these trends toward onshoring and insourcing are long-term ones, or are they mostly driven by the pandemic? Explain.
2. What do you see as being the major tradeoffs companies make when they decide to offshore or outsource?
Note to Instructors
This is a good place to discuss business trends and how businesses adopt strategies to address current problems. In the past, they faced problems of cost competitiveness and focused on offshoring and outsourcing, but by doing so, they gave up control of access to resources. Now that the problem is lack of access to resources, they are prioritizing that over costs. The big question is, once the supply chains have adapted and are back to a stable and productive level, will cost become the primary concern again?
Source: Gryta, T. & Cutter, C. (Nov. 1, 2021) Farewell offshoring, outsourcing. Pandemic rewrites CEO Playbook. Wall Street Journal. https://www.wsj.com/articles/pandemic-rewrites-ceo-rulebookputting-reliability-before-efficiency-11635779679