Risk Mitigation for Reshoring
The Global Supply Chain Will Never Be Better Than It is Right Now
When people speak of supply chain resiliency, they are loosely addressing the 25 to 40 specific touch points from the manufacturing shipping dock in an Asian country all the way to the receiving dock of an American retailer’s distribution center. The pareto rule applies here, only it's even more skewed towards a small part of the supply chain process that is responsible for nearly 100% of the risk. Because of the recent longshoreman strike, we would be remiss to not mention the impact of labor shortages on supply chain risks, but for all intents and purposes, ocean travel is where the risks occur. Here's a short list of global (ocean freight) supply chain risks:
War & Conflicts: Supply Chains will continue to be impacted by war & conflicts, such as missile attacks from Houthi rebels disrupting flow in the Red Sea. To avoid attack, hundreds of commercial vessels were rerouted to sail around Cape Horn, often tripling the travel distance of the freight. The Russia-Ukraine War has impacted supply chains. If China makes any military move against Taiwan, shipments from that region will likely cease.
Piracy: The main piracy threats today include hijackings, armed robbery, kidnappings for ransom, and cargo theft. Hotspots include the Gulf of Guinea, Southeast Asia, and parts of the Indian Ocean. Piracy is still active off the Somali coast, and most still remember the Iranian Revolutionary Guard dropping troops onto an oil tanker in the Strait of Hormuz.
Drought and Panama Canal: While the Panama Canal is set to be free of drought restrictions for the first time in several years, it is still below prime operating levels. Add to that rocky reliability and maintenance schedules, and the Panama Canal is often not usable for large shipping vessels.
Labor Disputes: Threat of further labor strikes on the US East and Gulf Coasts are still in play, and the unions have won concessions to make port operations less efficient. Similar labor disputes can occur at any port around the world, and emerging labor prominence in the South Pacific and Indian ports keep this risk at an elevated level.
Environmental Impact: It’s not the weather – it’s the surcharges. The European Union not only has an environmental surcharge regime in place, but raises the surcharges on a whim, which adds a hidden tax on the end consumers. While primarily a European issue, it can be implemented quickly in the US, depending on the next administration.
Future Global Pandemic: The Covid Pandemic emphasized the reality of disease entering the world via numerous different pathways. While the Coronavirus was leaked from a Chinese Lab, these virology labs exist in many countries, and can be spread just as quickly as Covid due to the frequency of global air travel – the horses will be out of the barn before you can close the door. Freight will be affected.
There’s probably a few more risks we can add here, but the thrust of this topic is on the mitigation of these risks, and how to lessen their impact on the global supply chain at large, then the traffic entering and exiting ports in North American next, and the imports into the US, in particular. There is a change coming which will all but ensure these risks remain in place, namely the end of US naval protection of shipping lanes.
Here is a quick history reminder. After World War 2, the United States formed a pact with the rest of the world that it would protect ocean shipments via its superior naval fleet in exchange for cooperation in keeping the USSR (today’s Russia) “boxed in”. There was (essentially) an early United Nations meeting (44 countries) held in 1944 in Bretton Woods, New Hampshire (hence called the Bretton Woods Agreement). Their purpose was to agree on a system of economic order and international cooperation that would help countries recover from the devastation of the war and foster long-term global growth. This included the establishment of the gold standard, a fixed currency exchange, and ultimately the creation of the (gulp) International Monetary Fund. All of this made sense in the post-World War II environment, where Europe was devastated, and America was the only intact military power in the world. The US used its military might in a positive sense, keeping a lid on conflicts that might disrupt the global order. The unintended consequence of “safe oceans” was international commerce, or globalization. Within 25 years, Japan and Germany, our enemies on the battlefield, were now our competitors in manufacturing, and soon they were beating us across multiple product categories. Damn.
We are sitting back, 80 years later, and Bretton Woods has run its course. The US position of dominance in monetary policy is under attack by BRICS, and our navy is no longer capable of providing the reach and protection it once offered. Every administration for the last 40 years has allowed this decline to occur, and neither party today shows any intent of restoring that capability. Bretton Woods as both a communist deterrent and policy project is almost over.
The simple conclusion is that the Global Supply Chain will never be safer, less expensive, less regulated, and less time-consuming than it is right now. There’s nowhere to go but down.
The Only Solution is Reshoring
“If the only tool you have is a hammer, you tend to see every problem as a nail.”
This is a famous quote by Abraham Maslow which refers to a concept commonly known as the 'law of instrument' or Maslow's Hammer. It refers to an over-reliance on a familiar or favorite tool.(2) In the case of supply chain risk mitigation, the vast majority of risks associated with ocean freight are eliminated, not mitigated, by reshoring. Let’s look at the risks again in this context:
War & Conflicts: No international conflict outside of North American will impact HermitCrab shipments inside the US, or across the borders into Canada and Mexico.
Piracy: Gone. OK, it’s a stretch, but maybe HermitCrab trucks will be pirated in the future? If that happens, we have much bigger problems.
Drought and Panama Canal: Gatun Lake is a massive artificial lake in the middle of the Isthmus of Panama, formed by the creation of the Panama canal. If it goes dry, reshored products are unaffected.
Labor Disputes: The 47,000 members of the International Longshoremen's Association whose strike impacted 36 ports across the United States East and Gulf Coasts, can take as much time off as they want. A reshored product does not need to be unloaded from a container ship.
Environmental Impact: We spend an entire class to the CO2 devastation caused by ocean freight. Reshoring reduces emissions by over 90%, saving money and saving the planet!
Future Global Pandemic: Even during the Covid lockdowns, the trucks still rolled, and products made in America reached the store shelves without disruption.
90% of supply chain resiliency risks are eliminated by reshoring. That seems like a no-brainer in hindsight, yet few companies currently importing goods from China/Asia are even taking a fresh look at their real costs of offshoring. Hopefully, HermitCrab and other reshoring experts (thinking about Harry Moser and Reshore Initiative (www.reshorenow.org) as a prime example), can help change this way of thinking.
Because of this, let’s reapply Maslow’s Hammer Analogy:
“If Reshoring is the Hammer, Every Ocean Supply Chain Risk is a Nail.”
Conclusion: The decision to reshore manufacturing activity is a multi-faceted issue, covering numerous factors such as material availability, labor cost, regulatory concerns, product selection, location selection, and navigating the complexities of taxes and incentives. It is always desirable to simplify where possible, and eliminating the time-consuming, costly, and environmentally damaging portion of the supply chain, while simultaneously reducing risks of delivery outages, makes reshoring an excellent choice in this key element of manufacturing success.
Thank you for Reading! It’s a breath of fresh air to see such an easy way to solve so many problems at once. Not everything is that easy. Tomorrow’s topic is Day 25: Collaboration with Local Businesses: Building strong, local business networks, is not “hard to accomplish”, but it requires focus and attention for success. In other words, it takes time, which seems to be in shorter supply than ever these days!
Thanks for reading,
The HermitCrab Team
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