Insights

Adjusting to Manufacturing’s New Normal

 

The manufacturing industry's dependence on foreign suppliers, especially those in China, has caused concerns for many years. But the COVID-19 pandemic has put a spotlight on this issue, forcing some manufacturers to rethink their offshore business arrangements. Would your business be better off switching to U.S. supply chain partners? Here's some important information to consider.

Foreign Threats

Manufacturers may have concerns related to foreign business arrangements. For starters, the potential for intellectual property theft and cybersecurity breaches involving China and other foreign countries has presented major risks in recent years.

In addition, during the COVID-19 pandemic, many companies' supply chains were disrupted as China struggled to address pandemic risks and was forced to suspend or severely limit operations. Simply put, Chinese suppliers have been unable to meet global demand for consumer goods, industrial needs and much-needed medical equipment.

In light of these issues, so-called "reshoring" initiatives — that is, plans to bring jobs, customer service and supply agreements back to the United States — have become economically and politically expedient. However, restoring America's place in the global pecking order is easier said than done.

3 Challenges

To move successfully to domestic supply chains, U.S. manufacturers face three major obstacles:

1. Cost efficiency. Despite recent inroads, it's still generally cheaper to produce goods in China and other foreign countries. Cost remains a key factor and could deter reshoring efforts, especially if the United States experiences inflation and labor costs increase in 2021. U.S. manufacturers are seeking a lifeline from the federal government through subsidies, tax breaks and other incentives that could help defray higher costs for domestic production.

2. Skills gap. A recent study conducted in association with the National Association of Manufacturers found that 62% of U.S. manufacturing companies currently report a worker shortage. That problem is expected to worsen as older, more-experienced workers retire without younger workers to replace them. To help bridge the gap, some manufacturers are implementing training programs that target "second-chancers," such as rehabilitated felons and individuals with prior drug-related problems.

However, the skills gap trend also can be attributed to a systematic problem: U.S. educational institutions have failed to emphasize opportunities in manufacturing, and they perpetuate a perception that manufacturing is a dead-end field. To remedy this situation, school districts need to introduce and support science, technology, engineering and mathematics (STEM) programs, starting in elementary schools. Additionally, high schools, vocational programs and colleges should partner with the manufacturing sector to promote the industry's use of advanced technology and growth opportunities.

3. Infrastructure concerns. Over the last 50 years, the United States has shifted from a manufacturing economy to a service economy, and its infrastructure has been largely neglected. This deteriorating infrastructure puts domestic manufacturers at a disadvantage globally. Significant infrastructure investment — including rebuilding road, bridges, railways and power facilities — is needed to get America back on track. Federal and state governments must take on this challenge.

Tips to Surviving Bankruptcy in Your Supply Chain

Manufacturers may be vulnerable to bad debt write-offs, lost revenue, production delays and reputational damage when bankruptcy strikes a major supplier or customer. Here are some ways to minimize these risks.

Find the weakest link. Know your firm's major suppliers and customers by name and volume. Supply chain partners that represent more than 10% of annual materials purchases (or annual revenue) pose "concentration risks." Reduce your exposure by minimizing these risks or eliminating them.

Stay informed. Conduct regular meetings with key supply chain partners and negotiate access to their financial data. Successful supply chains typically adopt a "we're all in this together" mentality.

Be all you can be. Equip your business with safety nets to help weather supply chain disruptions. This may include building a cash reserve, obtaining a line of credit, carrying safety stock in your warehouse, and identifying alternative sources of raw materials and parts.

Be proactive. A company's bankruptcy can have a ripple effect on its entire supply chain. Offer financial assistance to your supply chain partners or direct them to financial professionals who can help. Advisors can help financially troubled companies with routine due diligence, contingency planning and supply chain collaboration to minimize operating risks.

Biden's Plan

"Made in America" is expected to be more than just a catchphrase, starting in 2021. Fortunately, presumptive President-Elect Joe Biden has proposed the following federal tax law changes to encourage manufacturers to reshore their operations:

  • A 10% tax credit for investments designed to create U.S. manufacturing jobs or modernize U.S.-based manufacturing facilities,
  • A 30.8% tax penalty on profits for companies that offshore production while selling products back to the United States,
  • Increased tax incentives for domestic R&D, and
  • Higher taxes on foreign profits of U.S. companies.

Biden would like to allocate substantial financial resources to his Made-in-America effort. For example, he's proposed resurrecting federally funded institutes created during the Obama administration for applied research in manufacturing. And he's expected to push for requirements for the U.S. government to "buy American."

However, the president can't enact these changes alone. So Biden's plans will require buy-in from a divided Congress.

A Customized Approach

Every supply chain has unique threats and opportunities. Contact our professional advisors to assess your position in today's uncertain marketplace and help determine what changes you should consider making to your business plan in 2021 and beyond. 

 

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