The pandemic exposed the fragility of our global supply chains and how vulnerable they are to disruption. A more regionalized model would create greater flexibility and speed, allowing companies to be more nimble when problems arise.
The backlogs of ships at the ports, the overseas logistics delays, and the subsequent supply chain snarls of the past two years have been covered ad nauseam. But while issues at U.S. ports are beginning to stabilize, the pandemic has revealed an even bigger issue that has yet to be resolved: our overdependence on an overseas supply network and a lack of visibility into where our goods and materials are sourced. We believe the pandemic has revealed the risks of a globalized supply chain and the need to start shifting to a more regionalized sourcing model.
There’s a host of compelling reasons why business leaders must act now to start making this shift—from national security to the health and safety of medically vulnerable Americans to sustainability. It’s time to start restructuring our supply chains so that we are sourcing more from our allies and democratic countries, especially those in the Americas. Indeed, the Biden administration has set a goal of making critical sectors of the U.S. economy less dependent on China. For the U.S., this endeavor will require public-private partnerships and hundreds of billions in government investments, subsidies, incentives, and sourcing mandates. It will also require us to leverage our neighbors to the north and south and set up manufacturing and logistics capabilities across the Americas.
Overseas dependence: a look at how we got here
The pandemic woke us up to the vulnerabilities baked into our historically lean, cost-optimized supply chains. Over the past several decades, we have optimized our globalized sourcing and procurement practices around reducing labor and other input costs. The result is a system that is designed to deliver goods and commodities at the least cost. But this cost-optimized system comes with a high price: we have created fragile supply chains that are vulnerable to disruption and manipulation.
For example, early in the pandemic, we saw shortages of personal protective equipment (PPE) including isolation gowns, medical-grade gloves, and masks, as well as ventilators. Between an overnight increase in demand for these items (70% of which came from the country where the pandemic originated) and just-in-time inventory management aimed at reducing stock and cost, the supply chain in the United States couldn’t keep up. This was followed by shortages of critically important drugs, including those needed for treating COVID-19 patients.
Follow-up research from Washington University in St. Louis also revealed longstanding problems with U.S. dependence on foreign manufacturers for active pharmaceutical ingredients (APIs) for essential medicines and generic drugs.1 Consider this: 97% of all active pharmaceutical ingredients (APIs) for antiviral drugs and 92% of antibiotic APIs have no U.S. manufacturing source. The Drug, Chemical & Associated Technologies Association blames this weakness on a “race to the bottom” mentality that drove manufacturing to low-cost manufacturing countries that provided structural advantages that the United States did not, such as greater government subsidies, lower input costs (such as a lower minimum wage), and lesser regulatory burdens.
Currently, India and China are the largest global suppliers of APIs, and this overdependence puts the U.S. in a precarious position of being vulnerable to price hikes, as well as supply chain disruptions. In 2021, for example, manufacturing delays from these countries accounted for 11% of all drug shortages in the U.S.
The pharmaceutical industry is not alone in its overdependence on overseas suppliers. Currently half of all global manufacturing is located in Asia. As a result, when U.S. consumers—many still stuck at home and flush with cash from stimulus checks—began buying electronics, vehicles, exercise gear, and other products on a scale that demand modelers couldn’t have forecasted, it resulted in severe port backlogs and delays. The more recent factory shutdowns and logistics delays caused by China’s extreme quarantine policies and its current energy crisis continue to demonstrate how vulnerable the globalized supply chain is to disruption.
A Pan-American supply network
Instead of the current global supply chain with an overdependence on Asian manufacturing, we believe that the United States would gain many financial and strategic benefits from a Pan-American supply network. Consider that in supply chains, speed translates into cash, and flexibility translates to resilience. A regional, “near-shored,” land-based supply chain would accelerate movement across the Americas, substantially reducing transit times. Less time spent in transit would mean less cash tied up in inventory. This equates to reduced working capital requirements and healthier balance sheets.
Creating a Pan-American supply network would require a mix of private investment and public funding and incentives. For example, governmental funding could be used to build a transportation infrastructure that linked the U.S., Canada, Mexico, and Central and South America. This would create a robust and resilient supply chain corridor that would allow products to flow through the two continents faster and with fewer impediments. By investing in railways, bridges, and highway infrastructure from Canada through Mexico and into Central and South America, we would have a more seamless supply chain infrastructure. Goods and critical resources could be transported by ground from low-cost locations in Central and South America to the U.S. and Canada quickly without requiring water or air transportation (two of the worst offenders when it comes to pollution).
At the same time, we could work to create a Pan-American manufacturing ecosystem. The cost of labor in Mexico and Central America rivals that of China. Additionally, countries in Central America have the population and demographics to support a large-scale manufacturing and logistics footprint (the average age across Central America is 28). Local manufacturing opportunities would be welcomed by Central American communities: They would create jobs, build wealth, reduce the pressure to migrate, and promote political stability in countries such as Guatemala, El Salvador, and Honduras. We have seen in Asia that supply chain opportunities have the power to uplift hundreds of millions out of poverty. Why not try to replicate that model in troubled countries closer to home?
Initiatives by the U.S. apparel and footwear industry, with support from the Biden Administration, are already beginning to have an impact in developing Central American supply chains. For example, U.S. manufacturer Parkdale Mills recently announced that it is building a multimillion-dollar yarn-spinning factory in Honduras. This investment will enable Parkdale’s customers to shift one million pounds per week of yarn sourcing from Asian suppliers to Honduras while also creating new jobs.
In addition to subsidizing upgrades in transport infrastructure, U.S. trade officials can facilitate this regional shift by providing technical assistance and training to U.S. original equipment manufacturers (OEMs) on how to navigate Central American regulatory structures and business cultures. This might involve advising on key challenges including maintaining compliance, achieving track-and-trace visibility, clearing customs, and best practices on how to reduce risk with carriers.
Of course, a strategic reset of this magnitude will take time and come at a great expense. It would be up to the United States, along with more developed countries like Canada, Mexico, and Brazil to lead the Pan-American initiative and persuade others. But it’s likely other countries in the Americas would be willing to help share the costs given the clear economic, political, and social benefits.
Roadmap to regionalization
We believe that we should fund and provide incentives for supply chain regionalization and diversification for critical industries first. This includes the four sectors prioritized by the Biden Administration in its 2021 report on improving supply chain resiliency: high-capacity batteries, semiconductors, critical minerals and materials, and pharmaceutical APIs. To those sectors, we would add telecommunications, energy, and food.
Pharmaceutical and health care companies are already taking on this challenge. For example, the health care improvement company Premier Inc., an alliance of hospitals and health care providers with extensive pharmaceutical supply chains and distribution networks, has worked with partners and even competitors over the last two years to increase domestic production and sourcing of PPE and APIs.2 Premier is leveraging its supply chain data to identify supplies that are most at risk and investing in those categories with “Buy-American” commitments. Masks, isolation gowns, and exam gloves are all examples of products with such commitments.
Premier recognizes that there are many reasons why the U.S. cannot aspire to become anywhere close to self-sufficient in pharmaceutical API production. For example, there is still a shortage of skilled manufacturing labor in the United States, and there are several key raw materials that region does not produce. The company argues, however, that both U.S.-based and geographically diverse manufacturing is needed to reduce overreliance on a single country or region.
A balanced approach, like the one Premier is taking, is a good first step to help keep costs in check while also helping to alleviate U.S. health care supply chain dependence on foreign nations. Still, this will not be easy nor inexpensive, and the company is urging the U.S. government to fund incentives such as zero-interest loans and tax incentives to “help close the cost gap between domestic and foreign drug manufacturing.”3
It should be noted that in some market segments and industries, it will not pay to invest in a significant re-engineering of supply chains to be more regional and less dependent on Asia. There are some cases where consumers will continue to choose less costly options over items with higher prices due to domestic or regionalized manufacturing. What’s more, China is the world’s largest economy with a vast and growing consumer market. So large global OEMs will want to maintain and, in some cases, continue growing their China-centric supply chains to serve this market as well as the rest of Asia.
Another alternative to supply chain regionalization is what is sometimes called “ally-shoring”—shifting procurement to democratic countries that are reliable U.S. allies. One model for this is how the United States cooperates with its closest allies—Australia, Canada, and the United Kingdom—through the National Technology and Industrial Base (NTIB) to produce and supply defense technology.4 Another is the cooperative work between the U.S. and Canada on critical minerals production.5
Mapping out the first step
How do you begin to understand where to start the journey of diversifying your supply chain? For supply chain managers, corporate leaders, and even the Biden administration, the journey to a regionalized, risk-adjusted supply chain network strategy begins with mapping your supplier network. While historically it’s been costly for companies to develop and maintain an accurate map of their supply chain, today, with the right partners, the process can be much more streamlined and efficient. Rapidly evolving technology, cloud adoption, and enterprise networks have made mapping cost effective, scalable, and rapidly achievable. What’s more, the new generation of software companies providing mapping capabilities go far beyond what could be accomplished with emails, phone calls, and spreadsheets.
Multi-tier visibility into the entire supply chain—which includes second and third tier suppliers and goes down to the part level—can help identify the most optimal supply chain design. This is because mapping provides a complete picture of the current supply chain. It can also provide visibility into any alternate sites within the network that might be available and where parts and raw materials could be sourced.
The visibility that mapping provides may show to you that it is possible to move your supply chain without having to switch suppliers. Imagine if you mapped your tier one, two, and three suppliers in China. What you’d likely find is that 30% of them have manufacturing sites outside of China.6 Instead of onboarding new suppliers, which is extremely labor and cost intensive, you’d be able to easily shift to an alternate location with minimal disruption.
A sense of urgency
We need to start approaching supply chain regionalization with a sense of urgency, as regionalization is the first step toward addressing the risks and vulnerabilities affecting our supply chains.
However, this shift to more regional supply chains will not be easy. It will take significant investment and cooperation across both private industry and the public sphere. It will also take time. It took more than 30 years for China to become the dominant manufacturer to the world. Building this kind of capacity in other countries and regions will also take decades—which is why we need to start designing the supply chain for the next 50 years, now.
4. Heidi M. Peters, “Defense Primer: The National Technology and Industrial Base,” Congressional Research Service (February 3, 2021): https://sgp.fas.org/crs/natsec/IF11311.pdf
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
National nonprofit Wreaths Across America (WAA) kicked off its 2024 season this week with a call for volunteers. The group, which honors U.S. military veterans through a range of civic outreach programs, is seeking trucking companies and professional drivers to help deliver wreaths to cemeteries across the country for its annual wreath-laying ceremony, December 14.
“Wreaths Across America relies on the transportation industry to move the mission. The Honor Fleet, composed of dedicated carriers, professional drivers, and other transportation partners, guarantees the delivery of millions of sponsored veterans’ wreaths to their destination each year,” Courtney George, WAA’s director of trucking and industry relations, said in a statement Tuesday. “Transportation partners benefit from driver retention and recruitment, employee engagement, positive brand exposure, and the opportunity to give back to their community’s veterans and military families.”
WAA delivers wreaths to more than 4,500 locations nationwide, and as of this week had added more than 20 loads to be delivered this season. The wreaths are donated by sponsors from across the country, delivered by truckers, and laid at the graves of veterans by WAA volunteers.
Wreaths Across America
Transportation companies interested in joining the Honor Fleet can visit the WAA website to find an open lane or contact the WAA transportation team at trucking@wreathsacrossamerica.org for more information.
Krish Nathan is the Americas CEO for SDI Element Logic, a provider of turnkey automation solutions and sortation systems. Nathan joined SDI Industries in 2000 and honed his project management and engineering expertise in developing and delivering complex material handling solutions. In 2014, he was appointed CEO, and in 2022, he led the search for a strategic partner that could expand SDI’s capabilities. This culminated in the acquisition of SDI by Element Logic, with SDI becoming the Americas branch of the company.
A native of the U.K., Nathan received his bachelor’s degree in manufacturing engineering from Coventry University and has studied executive leadership at Cranfield University.
Q: How would you describe the current state of the supply chain industry?
A: We see the supply chain industry as very dynamic and exciting, both from a growth perspective and from an innovation perspective. The pandemic hangover is still impacting decisions to nearshore, and that has resulted in a spike in business for us in both the USA and Mexico. Adding new technology to our portfolio has been a significant contributor to our continued expansion.
Q: Distributors were making huge tech investments during the pandemic simply to keep up with soaring consumer demand. How have things changed since then?
A: The consumer demand for e-commerce certainly appears to have cooled since the pandemic high, but our clients continue to see steady growth. Growth, combined with low unemployment and high labor costs, continues to make automation a good investment for many companies.
Q: Robotics are still in high demand for material handling applications. What are some of the benefits of these systems?
A: As an organization, we are investing heavily in software that will allow Element Logic to offer solutions for robotic picking that are hardware-agnostic. We have had success deploying unit picking for order fulfillment solutions and unit placing of items onto tray-based sorters.
From a benefit point of view, we’ve seen the consistency of a given operation improve. For example, the placement accuracy of a product onto a tray is far higher from a robotic arm than from a person. In order fulfillment applications, two of the biggest benefits are reliability and hours of operation. The robots don't call in sick, and they are happy to work 22 hours a day!
Q: SDI Element Logic offers a wide range of automated solutions, including automated storage and sortation equipment. What criteria should distributors use to determine what type of system is right for them?
A: There are a significant number of factors to consider when thinking about automation. In my experience, automation pays for itself in three key ways: It saves space, it increases the efficiency of labor, and it improves accuracy. So evaluating which of these will be [most] beneficial and quantifying the associated savings will lead to a “right sized” investment in technology.
Another important factor to consider is product mix. With a small SKU (stock-keeping unit) base, often automation doesn’t make sense. And with a huge SKU base, there will be products that don’t lend themselves to automation.
With any significant investment, you need to partner with an organization that has deep experience with the technologies that are being considered and … in-depth knowledge of the process that is being automated.
Q: How can a goods-to-person system reduce the amount of labor needed to fill orders?
A: In most order picking operations, there is a considerable amount of walking between pick faces to find the SKUs associated with a given order or set of orders. Goods-to-person eliminates the walking and allows the operator to just pick. I have seen studies that [show] that 75% of the time [required] to assemble an order in a manual picking environment is walking or “non-picking” time. So eliminating walking will reduce the amount of labor needed.
The goods-to-person approach also fits perfectly with robotic picking, so even the actual picking aspect of order assembly can be automated in some instances. For these reasons, [automation offers] a significant opportunity to reduce the labor needed to fulfill a customer order.
Q: If you could pick one thing a company should do to improve its distribution center operations, what would it be?
A: Evaluate. Evaluate the opportunities for improving by considering automation. In my experience, the challenge most companies have is recognizing that automation is an alternative. The barrier to entry is far lower than most people think!