Nearshoring Approaches, Opportunities and Challenges

Rob Garrison (Managing Director, WiseTech Global) joins Karl to discuss global onshoring and nearshoring trends.

Details #

Rob Garrison (Managing Director, WiseTech Global) joins Karl to discuss global onshoring and nearshoring trends. Listen in to learn about three nearshoring approaches, the intersection of innovation and nearshoring, and what industries may benefit. Then hear from George Holland (VP of Business Development, JT Logistic), Jordan Lawrence (Flexe Director of Logistics Strategy) and Ben Dean (Flexe Sr. Director of Network Strategy & Optimization) as they discuss supply chain bottlenecks, hybrid nearshoring strategies and new solutions over the next decade.

Some of the topics explored:

• Post-pandemic trends and supply chain bottlenecks

• Three approaches to nearshoring and their strengths and weaknesses

• The intersection of technology, innovation and nearshoring

• Industries interested in nearshoring strategies

• How nearshoring increases supply chain resilience

Logistics Leadership Podcast legal disclaimer

Episode Transcript #

Rob Garrison 0:00

Every company, no matter how easy it is to do business in China for them, has to take a cold hard look at if that's still the right strategy or if it should be China plus or no China.

Karl Siebrecht 0:11

I'm Karl Siebrecht.

Jordan Lawrence 0:12

I'm Jordan Lawrence.

Ben Dean 0:14

And I'm Ben Dean. This is the Logistics Leadership Podcast.

Karl Siebrecht 0:27

Welcome back everybody to the next episode of the Logistics Leadership Podcast. Once again, I am joined by my colleagues, Ben and Jordan. Guys, welcome back. It's good to be with you again.

Jordan Lawrence 0:39

Good to be with you as always, Karl. Ben, great to see you. I'm really looking forward to this conversation with Rob Garrison.

Ben Dean 0:45

Yeah, should be an exciting one.

Karl Siebrecht 0:46

I am, too. So Rob has a great deal of experience in onshoring and nearshoring. That's what we're going to talk about with him. And Ben, I know you're going to be out talking with some of our operator partners in the logistics space. So I look forward to getting back together here and comparing notes. We'll see you on the other side. My guest today is Rob Garrison. Rob, it's great to have you here. Would love to just kick us off by hearing a little bit about your background for context, please.

Rob Garrison 1:18

First of all, thanks for having me. I always look forward to meeting you, Karl, and you run a great company there. I'm really happy to be on this podcast. My background has always been in the global supply chain. I'm from Chicago originally. I just kind of backed into a job with an ocean carrier. So that's how I got my start. That led me down this path that's taken me around the world, literally. I think I've been to 50 countries now. But after I left that ocean carrier, I went to work for two large importers: Michaels Arts and Crafts here in Dallas, and then the now-defunct Kmart up in Troy, Michigan. And then after Kmart, I went on the 3PL side, first with UPS when they were creating their supply chain solutions division, and from there went to FedEx when they were creating their trade networks division. An interesting journey. And then I went to work for a small privately held company. But it was great because I worked for three entrepreneurs. And that gave me the courage to start a business in the global supply chain space, and now I work for WiseTech Global.

Karl Siebrecht 2:23

That's a great round set of experiences, both geographically, stage of company, but all sort of centered in supply chain. Folks from our organization met you a little while back and picked you out as someone who's got a particular area of depth around onshoring and nearshoring, which is what we would love to dig into today. There's a lot of activity going on. There's certainly a lot of talk going on out there across the industry and I think much of it is, in part, reaction to what we all faced through COVID. But if we could start, just give us the high level, set the stage for what is going on in terms of onshoring and nearshoring out there across the industry.

Rob Garrison 3:06

Yeah, I think I would take it back just a little bit before the pandemic. I like to kind of joke that at the time, our President Trump picked a fight with the Chinese President Xi and slapped a bunch of tariffs on. And that was, I think, for the first time in a long time, people had to rethink their China strategy. China had been very easy, Karl, in that it was supply chain ascendant. China poured a ton of money into infrastructure and suppliers and capital. And so a lot of people built their supply chains there and then didn't really feel compelled to leave because things were good. But when Trump slapped the tariffs on China, it really sort of woke people up, because all of a sudden, there was a ripple and there was increased cost. And so they were starting to look and then to your point, when the pandemic hit, it really blew up, because the first wave to hit the pandemic was the suppliers in Asia all shut down. So all of a sudden, it's not just a tariff increase, I can't get my product, and then so forth. And then I think the latest wave, maybe wave three, is now there are a lot of, around the world, geopolitical tensions. And so when you couple all those things, just to first start scratching your head and questioning whether or not China only makes sense to begin with, to then having some big shocks because of the pandemic, all kinds of shocks, actually. And then lately, geopolitical tensions. Every company, I would say, no matter how easy it is to do business in China for them, has to take a cold hard look at if that's still the right strategy, or if it should be China plus or no China.

Karl Siebrecht 4:41

Right. Got it. So the original kind of driving force was really cost-related in the form of tariffs and then another driver comes along, which is global uncertainty of supply chains. And so there's a need to try and find ways to be more resilient. And one of the levers you can pull is, all right, let's diversify our supplier base and/or move some of those manufacturers or suppliers closer to home, or at least, the point at where the goods are consumed. Is that a fair way to characterize it?

Rob Garrison 5:19

You should have said it first, I liked your summary better. China was easy. They went all in on supply chain and so they became not just the U.S. manufacturing hub, but the world's manufacturing hub, and was very good at what they do. So people were reluctant, they now have to, but they were reluctant to change for that reason. And when they looked to change, in my view, they really had three options. One is what they are calling friendshore. So leave it in Asia, but find a friendlier country to do business with, for example, India, or the Philippines or Taiwan. So that was option one. Option two is onshore. So bring it back here, make it here. For a lot of people, that'd be the best of all worlds. And then the third option is nearshoring. For a lot of people, that really means Mexico, but certainly Latin America as a whole is an option, as well. It could be Brazil, it could be Guatemala, it could be any number of places. But in broad strokes level, those are the three options that people, I think, for the most part are looking at.

Karl Siebrecht 6:28

Got it, makes sense. Okay. And then the benefits? Maybe it's pretty obvious, one is there's potentially a cost benefit. That was one of the drivers, at least in the form of tariffs, there's a presumed potential cost benefit. And then the other is a resilience benefit, and not putting so many eggs in one basket. Are those right, are those the top two? Are there other expected benefits from any one of those three?

Rob Garrison 6:56

Yeah, I think I would put the resilience one ahead of the cost one. I haven't met anybody yet, Karl, that even despite the tariffs that went on to China, that can still match China's cost. So it is a factor, for sure. And that's why they have to look at those three options. That's one of the things we'll talk about, I guess, in a bit in terms of exploring each one of those options, and the pros and cons of each. But resilience was definitely the primary driver. You can't afford as a business to take the risk of having your manufacturing in a place that suddenly now, at a minimum, is being questioned. Some people take an even stronger position, but at minimum, China's sourcing is being questioned. Let's just say that.

Karl Siebrecht 7:40

There you go. Yeah. Okay, that makes tons of sense. I was going to come back to, 'I thought it was really cheap over there' and 'how expensive are these tariffs?' It's primarily resilience and maybe there's something close to cost parity, or maybe you don't have to pay too much more to get that resilience.

Rob Garrison 8:02

Another big one that people think about, especially if you're talking about onshoring or nearshoring, is when you can move your supply chain out of Asia and somewhere on this hemisphere, you have a couple of advantages. One is the same time zone. I can't tell you how many phone calls I have to attend at eight or nine o'clock at night in order to communicate with my Asian partners. So time zone, sometimes language barriers. So there's some benefits there. And then there's a perceived, and I'm saying perceived intentionally, cost savings from transport. So everybody logically says, well, if I'm putting it on a boat and going 8,000 miles, it's going to be a lot cheaper to put it on a truck and go 1,000 miles. I think those are two other benefits. Time zone, language and the time zone also allow you to go see your supplier a lot easier. So all of those benefits of having your supply close to your demand would also be perceived benefits.

Karl Siebrecht 9:03

Great. Okay, cool. Let's keep going. What are the challenges, the drawbacks? What makes this hard? And if it's easier to answer it this way, maybe there are some differences between the three options. You talked about the pros and cons, but let's talk about what's difficult about this? What are the challenges people face?

Rob Garrison 9:22

So let's start with the most obvious, polar opposite, which is onshoring. Bringing what was made in Asia somewhere, China or somewhere, back to the United States. There's a couple of things. The most obvious one is, it's a lot more expensive to do things here. We have a lot more regulations here than there are in Asia, for sure. And you're going to have to bring capital because the infrastructure to support that manufacturing doesn't exist. And so you're going to have to bring capital in the front end, you're going to have a larger expense to operate, and you're going to have increased regulations, which can also lead to another increase in cost to operate. I think the fourth one I would throw in there, and maybe you have a better handle on this than I do, Karl, given your business, but I think the other one that people have to think about is available labor force, because typically the people working in those factories, making those products, are on the lower end of the scale in terms of skill set. So you need a lot of low cost labor to man those factories, right? It's not a highly skilled, high-paying profession.

Karl Siebrecht 10:40

How would that compare to, let's talk about nearshoring. Mexico or Latin America sounds promising, a lot of benefits to it. In your experience, what are some of the challenges or the watch-outs for folks who are embarking or want to potentially embark on that path?

Rob Garrison 10:58

When you're going to Mexico, it's the same as the U.S. in terms of you've got to bring the capital. There's not a whole slew of manufacturing capacity down in Mexico for the type of things that we buy in Asia, particularly consumer product goods. Mexico is not going to supply the capital for you, whereas China did do that. China put the capital into it, they gave the suppliers incentives, tax credits, to do this because they wanted to employ lots of people. Remember, China has 1.4 billion people and when they started on this journey, just as a little history lesson, back in the mid-80s, they still had 400 million people who were subsistence living. So they had a huge incentive to bring all of those people who were starving, I'll just say it plainly, up to a middle-class level. Most of these other economies don't have that scenario. So there's not a huge labor force and/or existing infrastructure in this area. So you've got to sort of start a little bit from scratch. And then depending on the country in Latin America, of course they've got very different rules and regulations than, say, we do and/or that they do in Asia. So you really have to understand those because some of the stories I'm going to tell you a second had to do with just not quite understanding the landscape. And so, let me jump to there. We talked about the benefits, it's closer by, I can call them on my same time zone for the most part, I can fly down there and go see them whenever I want to. So those are some of the benefits. But let me just tell you two stories because I think they're pretty compelling. One, someone made the decision quickly to move down to Mexico, hadn't really thought through the ramifications. But one of the things the gentleman said was, the supplier in Mexico offered to give me 90 day lead times, and I was having 180 day lead times from China. So I thought right off the bat, I'm going to gain 90 days, this is going to be great, right? Even if there are hiccups, we'll get my product to market twice as fast. What he wound up sharing, long story short, was that the Mexican supplier was still relying on parts manufactured in China. And so he actually wound up with 270 days. Cutting it to 90, he's actually at 270 because the parts have to be imported still from China to Mexico. And by the way, everybody should keep in mind that Mexico and China have a good trading relationship and they buy stuff from China, as well. So that's what wound up happening in his situation. So he hasn't yet gotten those gains. Now, he is optimistic that over time his supplier in Mexico will be able to store up enough inventory, even though it comes from China. I don't know that even building inventory that was made in China and stored in Mexico solves your problem of resilience. Because if that's still the source of supply, and there's an issue, you have the same issue. So I thought that was an interesting one. And the second example was, a company that went down to Mexico, and that's why I brought up the regulatory, didn't really understand all of the regulations. So she jumped in on the point about a lot of the raw materials were still coming from China. But she also said that at times, they were at a complete standstill, because one regulation or another was preventing them from getting the product into the United States, just for lack of understanding or sometimes the rules would change on them. So I don't want to say that there was anything nefarious going on there but sometimes the rules would change. And so both of them are having a tough time. Both of them, at this point, one is four months into it and one is a year into it, are really questioning if they made the right decision, if they were too hasty in that. Now, I'm an optimist, I think both those issues over time may sort themselves out, save the one issue of the raw materials still coming from China because that still poses the same risk. So that's sort of the onshoring and nearshoring story. Unless you've got any other questions, I think that's at least a high-level summary of the pros and cons of each.

Karl Siebrecht 15:16

Very helpful, very helpful. And I love the stories, it helps bring it to life here. Another question for you. How long is this journey in terms of, if I were to decide, yep, I think I want to move manufacturing from China to Mexico, what's the project timeline of that? If I'm a big enterprise with a fairly complex supply chain, am I taking on a two-year project, a three-year project, a six-month project, what is this?

Rob Garrison 15:55

It depends on what you're trying to do and if you've got some established people making some part of what you do, then it's obviously going to be faster. If you've got to start from scratch, I'll share one more story with you. This one happens to be a story of a Chinese supplier. They manufacture in China currently, furniture, lots of it. They supply to lots of furniture importers in the United States. And when they saw what was going on, they saw the same risk to their business as everyone else. So they decided to move their manufacturing to Mexico. They made that decision almost a year ago. They got an agreement from, I can't remember which province it was, but it's near our southern border. And so they were building a logistics park there specifically for manufacturing. So they got approved to get into that zone. And they applied for it, put the capital into it. A year later, they still haven't broken ground on that facility. I don't know all the details as to why, but that was one year just to get the approvals in place and the right location in place to even be able to make that move. So from the sounds of those first two stories, they were both able to move relatively quickly, because there was some existing infrastructure that they kind of tapped into. I think one said three months, the other one said six. Here's another story, though, where somebody started in greenfield and a year later, they haven't even broken ground on a facility.

Karl Siebrecht 17:25

Yeah, there you go. And I'm sure it makes good sense. It's all very scope dependent, right? But to your point, unless there's existing infrastructure there that you can kind of turn the lights on and get it going, it's capital intensive and it's going to take a while.

Rob Garrison 17:46

I love the way you're going. I really hadn't thought about the question and the timing just to get there. But I also have a client who owns their own facility in Mexico and they make one of their products in Mexico. Everything else they buy from abroad, but they make one specific product in Mexico. They bought a facility that already made this product and was a big seller for them so they bought it. The challenges that they talk about, even though they own the factory and it's closer, the quality levels and the productivity levels aren't the same as what they experience in other places. So they still have quite a bit of management challenges to make that facility more productive and more efficient so they can get the cost down. And that's not easy either. Even though you think, hey, it's Mexico, going into a factory that's native language is Spanish, unless your native language is Spanish as well, is also no easy feat.

Karl Siebrecht 18:45

That makes sense. How do companies think about the distribution and logistics element that is paired with the actual manufacturing movement? So I've got manufacturing happening in place A, let's call it China, and I intend to move it to either the U.S. or Mexico. Okay, well, I've got flow of goods currently in place, going from China, across the ocean, through a port deconsolidation, down outbound logistics XYZ to my customers. But now I'm moving the manufacturing part and now I've got to reroute the goods. Sometimes that would include both the raw materials, now I've got to get from somewhere into this new location and then my outbound. So how should one think about that part of the move, in terms of whether you're onshoring or nearshoring?

Rob Garrison 19:37

It is quite complicated because many of these people have fixed infrastructure surrounding where they've typically sourced it. I know so many people that have built or are long-term obligated to facilities in, say, Southern California or the Northeast, where all the people are. It's not just a matter of, I get these containers and then I sell the product. Many times, because there's such a long lead time, they're storing them and then they're actually doing their sales out of those distribution facilities. Sometimes they've got showrooms attached to them. So there's quite a bit that has to be thought through from a distribution standpoint, but mostly related to sales. The distribution challenges can be overcome. But to your point, should I leave my facility in Southern California because that's sort of maybe a meshing point for Mexico and Asia, is that the right answer? And then I've got all kinds of timing challenges. So it does make it more complicated. Now, if I was going to go wholesale Mexico, I would still say, there's plenty of available industrial space on the southern border, just like there is on the West Coast and East Coast. But there's a lot of capacity from Asia to the East Coast and the West Coast.

Karl Siebrecht 20:56

Yeah, makes sense. In your experience, what have you seen out there in terms of, are there particular industries that are more interested in making a move like this than other industries? Or is it pretty widely spread or evenly spread?

Rob Garrison 21:14

I'm going to share maybe a personal bias with you. And then you can tell me how you think about it, Karl. I study the history of trade, too. I'm truly all in as a global trade geek. You'll remember that there was a time when most of this stuff was manufactured in the U.S., going all the way back to, I used to speak at an MBA class, and I'd always get a lot of grief for the China thing. I put up a picture of 25 women hunched over a sewing machine, and it was in New York, when that's where we used to make shirts and sweaters, right? I like to think that we progressed up the manufacturing chain to where we had more complicated manufacturing, which meant that we could afford the regulations and pay people more to do that work. Like automobiles and airplanes, and so forth. So when you ask the question about those types of commodities, I still stratify it the same way. When you've got low cost products, almost every consumer product, we pay at stores for stuff, it's ridiculously cheap. Which means that if you bring it to United States, can you profitably afford the regulations and the cost of labor? And/or do you have to double the price to accommodate that? So I'm answering your question the long way, but just to give you a picture, I would say, in general, the lower the cost of the product, the more difficult it is, and then the opposite could be true. So if you go all the way up to semiconductors, I think we've agreed to spend $5 billion or something to build fabs in the United States. But that makes perfect sense because you can sell semiconductors for lots and lots of money. I would look at it as much that way as people are just really thinking about, how can I possibly afford to move the supply chain to such a higher cost manufacturing place, which is why Mexico makes sense. But even Mexico has higher labor costs than a lot of the Asian places. So those are all the trade-offs. You're thinking all about all the right questions.

Karl Siebrecht 23:19

Makes sense. Okay. Here's another question for you. We'll do this as a scenario. A CEO of a big company in a boardroom board says, What are we doing about supply chain resilience? The CEO gets out of the meeting and goes to the Chief Supply Chain Officer and says, What are we doing about supply chain resilience? Should we be thinking about nearshoring or onshoring? Go figure that out. Where do you start? I want to now head down this path of, should we do this? Should we not? How do I think about it? Where do I get started?

Rob Garrison 23:53

There's a story of a very large retailer who's struggling with that exact same issue right now. This is a major retailer brand name that most people would recognize. So the first thing they had to look at was just to really map out the landscape of where they were at today. In their case, 86% of their sourcing is currently in China. 86%. So they have to look at the things that we just talked about at length. Firstly, what are my alternatives besides here? Then once you start looking at those alternatives, we didn't talk about friendshoring, but let's just say we decide India. You look at those and then you have to study what are the differences between those. I gave you really high-level stuff about distance and language and time. But you've also got to look at the tariffs and the regulations and the rules, because all that stuff matters. I can't just move from China to India and say, hey, I'm done. India is going to have completely different regulations. We have different trade relationships, it's very, very complicated. So you go through all of that. Then you're going to say, you know what, India looks like a great alternative. They've got the same labor pool I think even greater than China. A very friendly country, there's big investment happening. Modi is great, he's hot, he's pro-business. However, then you have to start to think about, is the product that I make in China even made in India? So to your point, now I've got to start from scratch, right? And in many cases, these companies are finding that they can't get gas grills manufactured anywhere else these days besides China. Why? Because China has the steel. So even if you could make it in India, you'd still have to get the steel from China and/or from the U.S. Now your grill, that we're gobbling up 200 bucks for a Weber, is now 600 bucks. So it's just really complicated. The story that I hear from people, not this particular retailer, but from people that have these complex supply chains, and all this stuff being made, is that their best guess is that they could get fully out of, but not even fully, sorry, halfway out of China, by 2030. So their correct answer, as for the board, we're working on it, we've done this evaluation, we've done the study, here's the pros and cons, here's the economics. We know we have to do it. But if we did it quickly, it would burn our business down. So we're going to do it in a measured way. So people are now calling that China plus one or China plus two type strategies, where they're moving either part or all of it as quickly as they can, but still slowly, out of China and into other areas. I think that's going to be ultimately where we land, Karl. Unless something goes really awry with the relationship, I think that's where we're going to land, we're going to say, China is still a great partner for this, they may not be a great partner for other stuff., and we want to keep them in the mix, we just can't be solely dependent on them for all the reasons we talked about.

Karl Siebrecht 27:03

That's right. Again, for a big company, in particular, this is a multi-year journey, right? Set a target by 2030, we want 50%. And I've heard that as well from other big companies. That resonates. It's like, boy, start down the path, understand the options, put a stake in the ground about the outcome you want by a certain time period and then it's just a lot of very detailed work.

Rob Garrison 27:30

To your point, when I'm talking about those considerations, I gave us some simple ones, like tax regulations or labor regulations or U.S. government regulations. There's also the considerations of another big trend that's really hit the U.S. in a big way, which is ESG. Simultaneously with this resilience, there's a big call for people to be more transparent in their supply chain. So you're also having to think about, who are these new suppliers? Are they any greener than my current suppliers? Are they less green? It's a very complicated business environment for folks because the world is changing very quickly. There's a lot of risk out there. And because China has been a center for 25 years, it was easy. I'll just say it was just easy.

Karl Siebrecht 28:22

Now, not so much. There's no longer an easy button. Last question for you here. Where do you see this in three to four years? What will be in front of us in terms of the trends in onshoring and nearshoring?

Rob Garrison 28:35

One of the trends that I think will have a major impact on this discussion is what's happening in technology. The advancements in technology could change the entire landscape here because if we can do things more efficiently, more effectively, with more information and insight, with, in some cases, robots, then it changes the equation of almost everything that I talked about completely. Most of those current state situations are because we have a very largely people business, both in terms of the manufacture of the product, to people who manage the product, the people who transport the product. There's just a ton, a ton, a ton of manual, in that whole process that you could see, just like we're seeing here in the United States, change the landscape of this business. So that's the wildcard that I throw out there. If I had a crystal ball, I would predict that technology will play some role in these types of decisions that we're talking about now as to where's the best place to manufacture product.

Karl Siebrecht 29:36

Yeah, it makes tons of sense. Going back to where we started, what were some of the downsides of coming onshore, our labor force is expensive. If you can change that equation through technology and automation, it starts to make the relative business case a bit stronger to bring it home. Makes total sense.

Rob Garrison 29:57

I should have mentioned one more positive, the obvious one, which is time to market. On average, it takes us about four months to get product to market from China. Well, if I'm making it here, and I can make it in a month, I just carved three months off my time to market, which is huge.

Karl Siebrecht 30:11

Makes tons of sense. Rob, this has been fantastic. I really appreciate you joining me here. I learned a lot. And just really appreciate your experience, your stories, and your time here with us today.

Rob Garrison 30:24

Thank you very much, Karl. Pleasure to be here.

Karl Siebrecht 30:29

Okay, well, quite a conversation with Rob. The guy has tons of experience over decades in onshoring and nearshoring, and offered both some general perspective, and also some great stories and specific examples. I thought that was really compelling. And I certainly learned a lot. Ben, how did this compare to some of the other conversations you've had?

Ben Dean 30:55

It's interesting that you mentioned decades, because in talking with JT Logistics, George Holland, their VP, this is something he's been talking about, hearing about for decades. What came out of the conversation with Rob is that, rather than talk, it's now finally happening. And I think George at JT Logistics had a really good point of view on this. Let's listen.

George Holland 31:19

I'm such a big advocate for nearshoring because I think it's not only good for organizations, especially in the retail environment, getting those inventories closer to the consumer so that they can hit their sales, but also the risk mitigation of a company. I don't think anybody wants to live in that world that we all had to experience two years ago of toilet paper shortages, paper good products, you name it, and a lot of that had to do with our supply chain and a handful of bottlenecks.

Ben Dean 31:53

So all that talk is turning into action. It's interesting to hear that George is talking about bottlenecks. For us in supply chain, we're always looking to find and remove bottlenecks. And in the case of the new bottlenecks that were discovered in that East Asia trade route over the last couple of years, that forced the hand of supply chain leaders to find new solutions. But it feels to me in what I've heard here, customers, shippers, are maybe on the first or second step of a really long journey. Is that what it's looking like to you, Jordan?

Jordan Lawrence 32:23

Yeah, I really like the narrative here that this is a secular trend. We've had many years of a hype cycle where nothing real happened, then we had a bit of a forcing function coming to us economically and from exogenous events. And now we're probably just in the first or second innings. I think, Karl, really a key to this at the end of the conversation in talking about how long it actually takes to implement these strategies, and especially for large enterprise organizations, what this actually means. So I think we're in the very early innings of what is going to be a multi-decade trend. There's a lot to look forward to and there's also some patience required.

Karl Siebrecht 33:04

That's right. That's right. Rob, I think, used the phrase, companies that he's seeing, they're approaching it in a very measured way. Of course, that makes good sense, right? There's an operating business that is ongoing, serving customers day in and day out, and going through a strategic shift of moving, in most cases, a portion of that manufacturing base, closer to home. This is something that takes time so companies are approaching it in a measured way. Jordan, you'd mentioned some challenges, particularly for big enterprises. What do you think about the dynamics for other businesses out there, say, others in the mid-market, or in the, call it the Russell 2000?

Jordan Lawrence 33:49

This is purely speculation on my end, but very curious to see how this unfolds, especially over the coming years, when we're in the second and third inning. A mid-market or the Russell 2000 constituent companies, mid and small companies, really have the ability to move a lot faster and to act in a more agile way. I will be curious to see, as this unfolds, if they're not the first movers, where you don't have as much infrastructure, and you don't have the degree of capital required to shift something that's very complex, a large manufacturing base, from one side of the world to the other. I think it just really hinges on how flexible and how agile is your supply chain. The tendency for flexibility and agility is a little bit stronger in these mid-market companies. A speculation on my side and I'm very curious to see how this unfolds.

Karl Siebrecht 34:44

Interesting, right. And did you guys touch on this, Ben, in your conversation as well?

Ben Dean 34:48

I think you're right on that mid-market companies are better positioned to be more agile and implement some of these changes quicker, but it doesn't mean that the largest companies aren't moving in this direction. So George speaks to this, about the speed with which this is going to happen. Let's listen.

George Holland 35:07

Any organization that's reviewing a nearshoring option has to really be focused on the long term, the seven, the 10-year trend, which is hard to do for any publicly traded company because you have your fiduciary duties, but really understanding that it's going to cost a little bit more in the beginning, possibly. But as these trends stabilize, as security improves in Latin America, you're going to see a greater emphasis and shift to nearshoring. It's going to be a gradual, slow increase of more and more manufacturers when they have to put pen to paper, and they're going to decide that it just makes business sense to move a little closer. Our retailers want to have the ability to be nimble. And if they see market trends, they want to be able to shift. And some of this new world that we live in of sales channels via Instagram or Twitter, these trends go up and down really fast. Our retailers and manufacturers, they need to be able to produce to meet the demand of the time, and then to be able to shift and be nimble to scale up and scale down. Unfortunately, unless you're selling something that has a really high dollar amount where you can afford airfreight, then anything that's going to be sourced over Asia, you're going to have to have a forecast and a plan rollout that's going to be months in advance. You're probably going to miss that nimble aspect if you were able to shift up and down based off of demand.

Ben Dean 36:52

Yeah, it's funny, I think I've heard nimble two or three times here, and that what we're doing is a multi-decade process to speed things up and be more flexible and nimble in the short term. So those things are contrasting a bit. Absolutely agree with Jordan that companies that are in their DNA nimble are going to be more successful at this. But I was surprised coming into it because it sounds like the reshoring, nearshoring, friendshoring, is all euphemisms for subtract China. But what Rob said was China plus, right? You need that, whether it's grills or other things that can't be done elsewhere. You need to supplement and create resilience, create defense in depth through additional means. And that makes a lot of sense for a company that's trying to rebuild the airplane while flying. You're not going to jump out of that plane, but you're going to look to build additional features and resilience within that.

Karl Siebrecht 37:47

Right. And that came through really in two different ways from Rob, I think. Way one was, look, the primary driver here is resilience. It's creating some optionality in addition to China. And the reality is that the cost basis for most products, at least many products in China, is still, just has a structural advantage, you know, all the capital investment that has gone in to the manufacturing base over decades is very real. And sure, the costs of labor have been going up as that economy has matured. But the cost advantage is still there. So in the name of resilience, move some of your base closer to the U.S., or as Ben said, sort of out of China. You're effectively buying resilience at a bit of a premium relative to the cost profile of what's still available in China.

Ben Dean 38:43

It's important to remember there's different demand signals and different supply production schedules and minimum order quantities that need to be treated separately. So it's not take your entire basket of eggs and just move it somewhere else. It's move your eggs into more baskets. That's the only way to create resilience. George says this in a much more compelling way than I can. So let's take a listen.

George Holland 39:06

I know the premise of the discussion is about nearshoring. But that's not to say that it's a one size fits all. It could be, as we go through this gradual approach, it could be kind of a hybrid of really looking at, with the help of great technology that's really doing a lot more demand planning and forecasting, shifting a lot of the hot SKUs into a forward stocking location for that direct to consumer.

Ben Dean 39:38

And that's something we've been doing domestically for years, right, taking moving SKUs for deploying them, making them faster. Now we're applying that to global production environments. I'm just wondering, resilience has been a watchword of the last couple of years. If we don't have another disruption event, does that hold out for five to 10 years that companies prioritize that? Or do they start cutting again and getting efficient and not effective?

Jordan Lawrence 40:06

You know, China really has transitioned from a pure cost play to almost a pure quality play. I think one of the really interesting points that Rob Garrison brought up was that the manufacturing cost in Mexico often looked cheaper. But it was hard to replicate the quality outcomes that were coming out of China. And so I do think that where we are in the whole China story is towards the end of the story that started from a cost perspective, and now it's more of a quality perspective. The appreciation is going to be met by other economies in Southeast Asia, by India, and certainly by Mexico as well, just given their proximity and the total cost to deliver from Mexico to the United States. I did like the complexity discussion around what does it mean when you manufacture in Mexico, but raw materials are still being sourced from China. And what that actually means for your cost, in reality, is maybe very different than what it looks like on a spreadsheet upon initial review. So just a lot to unpack there, and probably speaks to the length of time that it takes for a lot of this cost savings to be realized.

Ben Dean 41:13

I think we should try to bring a new acronym here in BYOC: bring your own capital. One of the things that I was surprised by was that China's competitiveness was driven a lot by the fact that they provided the infrastructure to allow you to outsource, whereas other countries that are cheap labor plays, frankly, don't have any of that infrastructure and brands need to build that for themselves with cost and lead time attached.

Jordan Lawrence 41:39

Certainly something that's on all the headlines about people that are developing and moving production to Mexico is, the challenges around electricity, the challenges around road infrastructure, the challenges around warehouse infrastructure and getting new warehouses developed. These are very serious headwinds to making any immediate move into Mexico. It's just important details that are maybe lost on the headlines when you're talking about reshoring or nearshoring into Mexico.

Karl Siebrecht 42:10

Absolutely. One other thread I'd like to pick up on here is for onshoring. So placing manufacturing facilities here in the U.S. He mentioned regulation, of course capital investment. But he also mentioned the competition for labor, which we certainly hear quite a bit is that there's an overlap between the labor market of folks who might work in a new manufacturing facility, and folks who will work in the logistics part of the supply chain, as well.

Ben Dean 42:39

Yeah, that featured prominently in my conversation with George at JT Logistics. When you look at both the type of space you need for a manufacturing environment and the type of labor force you need for that, it very closely parallels what you need for distribution and fulfillment workers, whether that's within the four walls or carriers in transportation. There's a headline risk here, if you're a 3PL in the supply chain space domestically, is that it might get to be a little more crowded labor market, a little more crowded capacity market. And I know we'll talk a bit more about that in upcoming episodes. But I think it's much outweighed, and George speaks to this as well, by the opportunity that creates the ecosystem around domestic manufacturing production demands that you bring tier one, tier two suppliers closer, and the supply chains that those entail is an opportunity for 3PLs to get more into those value added activities.

Jordan Lawrence 43:36

You know, initially, when you look at labor and the labor situation in the United States, we're seeing wage appreciation in the frontline labor areas, specifically. A lot of that we see born out in what's going on in the negotiations with the auto workers, etc. And that at first feels like maybe an intractable problem for bringing manufacturing back to the United States. However, what was brought up at the end of the interview with Rob that was very interesting to me was how automation and robotics can be an equalizer. And I think it's important to remember the United States is a leader in software. And software is an enabler of hardware. And it's the way automation and robotics work in the context of logistics and supply chain broadly. And so it does feel like as this trend unfolds, somewhere in the future years as automation continues to improve and the cost of automation continues to come down, that could be the great equalizer that ultimately spurs traditional reshoring back to the United States, not just the friendshoring to our nearby neighbors.

Karl Siebrecht 44:40

It's such a great point, Jordan, and we heard that from Rob, we've heard that from some of our other guests. And frankly, we hear that from many of the companies that we interact with, as well. How quickly that will become real is another question but it's happening. It's becoming real as we speak, certainly on the logistics side, and also on the manufacturing side. It's a different calculus to say, should I move my manufacturing base from China to the U.S.? It's a different question to say, should I do it given that I can build fresh manufacturing capacity with the latest advances in technology, which creates a completely different calculus on the cost per unit of output, so to speak.

Ben Dean 45:29

Really strong points on the automation side. I think this is something meriting its own standalone episode in the future, if I can plug for that.

Karl Siebrecht 45:41

Ben, I was thinking the same thing. So let's plan on doing that. This has been another great episode. Once again, Jordan and Ben, thank you both for your contributions here and your insights. And let's keep this conversation going.

Narrator 45:58

You've been listening to the Logistics Leadership Podcast presented by Flexe. If you'd like to learn more about the podcast or join the Logistics Leadership community, check out this episode's show notes and visit flexe.com/logistics-leadership-podcast. Keep the conversation going: Email us at leadershippodcast@flexe.com. The Logistics Leadership Podcast features original music by Dyaphonic. The show's producers are Robert Haskitt and Adam Kapel. Here's a quick pro tip: Instead of chasing down the next episode, why not just follow the show and have it appear in your feed automatically. Thanks for joining us!