The first punch from Covid-19 was a near-knockout blow for U.S. manufacturing. Factory output dropped precipitously and millions of American workers across all industries were furloughed or laid off. The jury is still out on how many of them will actually return to work. More than 1.3 million manufacturing jobs – roughly 10% of the total – vanished virtually overnight due to the pandemic which completely shut down global supply chains, the majority of which relied to a greater or lesser extent on suppliers in China.
This, in turn, has generated a great deal of debate over whether and how to repatriate supply chain operations.
There is a simple economic approach that many corporations take when considering the issue of shortening supply and value chain operations: will it be cost-effective? Globalization provided the opportunity to seek out the cheapest labor rates possible and, quite often, cheaper raw materials. Many firms found suppliers offshore in China, a nation that was ready-made to become the factory to the world; it had a highly educated workforce and a low cost labor base. The fact that transportation costs rose due to the need for ocean shipping was more than offset by low base wages. The global supply chain structure was born.
Repatriate Or Relocate?
However, the coronavirus uncovered glaring weaknesses in the structure. Hubei province, along with the city of Wuhan, are home to Tier 2 and 3 factories that serve a vast number of global manufacturers. When they shut down, so did the chains they supplied and, ultimately, so did American producers– which brings us back to the question of cost-effectiveness. Will it be beneficial in the long run to repatriate a global supply chain or find the next cheapest labor force, likely Thailand or Vietnam and still have to deal with supply routes that stretch halfway around the world? Are these the most efficient options?
A growing number of firms have opted to shift operations to suppliers in countries in South East Asia but to move or not move them remains a question with no easy answer for manufacturers.
How Smart Factories Can Impact Supply Chains
There is another way to look at the difficulties exposed by the coronavirus and it may contain the solution – at least, on a long-term basis: the smart factory.
A smart factory can have different definitions but there is one common element – technology. A smart factory is digitalized to such an extent that production equipment contains sensors providing critical machine data to a centralized computer which then analyzes that data using artificial intelligence to determine problems before they become problems. However, that’s only half the story. Smart factories allow for smart manufacturing. In turn, smart manufacturing connects the factory with other elements in the digital supply network, or chain, thereby allowing a constant, uninterrupted flow of analyzed data back and forth.
Such a system gives manufacturers a clear view of what is going on up and down the supply chain and, more importantly, can signal when there’s trouble ahead, giving the manufacturer at the end of the supply chain time to contact customers regarding possible production or shipment delays, reconfigure production schedules and adjust raw material and component deliveries.
While a smart factory coupled to a smart supply chain can’t predict a black swan event like a pandemic, it can certainly predict other kinds of negative impacts to business. Smart factories also have the means to pivot quickly to produce goods that may suddenly be in demand. Software technology is so powerful that a manufacturer can create a product digitally, called a digital twin, before producing it physically and do so in a matter of days, rather than months.
The Cost Benefits Of A Smart Factory
A fully digitally-connected supply chain means capital expenditures, not something that many are willing to undertake at the moment. So where do the cost benefits lie? First, through a clear view of what demand looks like so that steps can be taken to speed up or slow down production as needed. Manufacturing Cloud from Salesforce provides the means for such a heads-up on shifting demand trends, by connecting the sales force in close contact with the customer to the teams who schedule plant production and vice versa; a sales rep who can access historical customer data from an ERP is better positioned to create more accurate sales forecasts, forecasts that can be adjusted quickly, if necessary.
A manufacturer that is slow to see shifts in demand is going to suffer either increased overhead costs due to over-production and the need to liquidate inventory at reduced prices if demand drops or lose out to competitors if demand suddenly rises because the manufacturer lacked the ability to see it coming.
Bear in mind that what demand changes a smart factory can see is passed down through the digital supply chain so all suppliers can see the same data; when costs are controlled at the manufacturing end, they can also be controlled throughout the supply chain.
Create A Roadmap With Strong Technology Partners
Deloitte maintains in a recent report on the smart factory, that an investment in a smart factory should start by focusing on specific opportunities and then gradually expanding outwards to incorporate the entire factory and, ultimately, the entire supply chain. This takes careful planning to create a manageable and realistic roadmap. The smart factory concept is growing rapidly around the world and it may provide the most sensible solution to the question of repatriating supply chains or not.
Either way, it’s incumbent to talk to technology experts who can create the kind of digital roadmap necessary to make it all happen. Gerent has been working with the manufacturing industry extensively for over a decade, architecting and implementing Salesforce solutions that continue to benefit our customers, year after year. Contact us today to find out how we can help your company gain traction and emerge from the worst economic downturn since the Great Depression 90 years ago.