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Firms seek to reduce supply chain risks by bringing production closer

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Having gone offshore in recent decades to cut production and supplier costs, many U.S. companies now are looking to reduce their supply chain risks by moving those operations closer to the markets they serve.

Supply chain disruptions from flooding that hit Thailand in 2011 and 2012, political unrest in various areas of the world and increasing costs in many markets that have “emerged” outside the United States have been factors in companies' current thinking about “onshoring” or “nearshoring.”

“Thailand probably was the big wake-up call for people,” said Thomas A. Lawson, president of Johnston, Rhode Island-based property insurer FM Global. “It really highlighted the value of good supply chain analysis and then taking the mitigation steps that that analysis led you to.”

For some of those companies today, “it's almost like the reverse supply chain,” Mr. Lawson said of firms trying to shrink their supply chain exposures. “It's a critical process of understanding what your hazards are based on where your facilities are.”

General Electric Co., Caterpillar Inc., Ford Motor Co., Master Lock Co. and Apple Inc. are just some of the U.S. companies that have moved previously offshored manufacturing operations back to the United States in recent years.

“I have been seeing some of my clients thinking more about onshoring,” said Michael LoGiudice, managing director of insurance and litigation support at valuation consultant CBIZ Valuation Group L.L.C. in Chicago.

“One (factor) is definitely the policing of quality,” Mr. LoGiudice said. “The other thing is you have to factor into your supply chain the cost in terms of time that it takes for the pieces to get from one location to the next.”

Geoff Taylor, executive director and global client advocate at Willis Ltd. in London, agreed that quality considerations are driving some companies' onshoring decisions.

“I think often it can be a quality issue that drives” changes in suppliers, said Mr. Taylor, who is former director of risk management for Nike Inc.'s Europe, Middle East and Africa region and manager of risk financing and business continuity for Levi Strauss & Co. In addition, “there is more political uncertainty out there.”

While reducing costs was the major reason companies moved production out of the U.S., wage inflation in many areas has shifted some supply chain deliberations to factors associated with dealing with overseas suppliers, such as disaster risks, he said. In addition, “I think risk management has become much more broadly understood across the business” in the past 15 to 20 years, he said.

David J. Closs, the John H. McConnell chaired professor of business administration in the Department of Supply Chain Management of the Eli Broad School of Business and the Eli Broad Graduate School of Management at Michigan State University in East Lansing, agreed that many businesses understand that costs in places such as China have increased considerably since they first sought suppliers there.

“They're starting to realize that that perception of low cost hasn't really been delivered, and the inventory and related risks are significantly higher,” Mr. Closs said. “The other risk is getting product from companies they don't totally trust,” including components that might be flawed, compromised or counterfeit.

Mr. Closs said research by some Michigan State faculty members has shown that some firms are seeking suppliers or moving offshore operations to Mexico, the Caribbean or Latin America to get closer to the markets using the products “and not have to deal with the ocean shipping.”

“There's some increase in the price of goods (largely because of wage increases) when they do this, but I think people think this is less of an issue than the risk of supply chain disruptions,” he said.

Bringing production closer to home also “brings a lot of clarity to the supply chain,” said Philip Reardon, director at Aon Global Risk Consulting in Chicago. Locating operations in the company's home country, for example, helps avoid some of the legal and language risks they might face abroad.

“You could assume that a firm operating in the U.S. would be more familiar with the legal climate,” Mr. Reardon said.

He said he's seeing many electronics and technology clients with Asian operations now opening U.S. facilities using U.S. employees, reflecting growing cost parity with many formerly emerging market countries.

In addition, “there's a push to bring the jobs back, so to speak,” Mr. Reardon said, citing political reasons and public opinion.

Gary S. Lynch, CEO and founder of consultant The Risk Project L.L.C. in Mendham, New Jersey, said he sees some companies moving production and sourcing closer to their markets in North America and Europe. “I think this continues to be a trend as long as it's not overcome by a significant cost differential,” he said.

“Obviously, it raises a whole slew of questions from an insurance standpoint and a risk management standpoint,” Mr. Lynch said. Sourcing or producing near ultimate markets might mean dealing with smaller producers or less mature businesses and in-creasing “the total number of participants in the supply chain.”

Additional complexity can enter the picture when the local operations producing for local markets suffer a disruption, as their priorities often differ from those of the parent company, Mr. Lynch said.

“The performance they care about is really their own performance,” he said. “When an event happens, the question (for the supplier) is how much effort should we put into it and how quickly should we bring that back on line vs. resources we're using elsewhere,” he said.

Others note that while onshoring or nearshoring can reduce some supply chain risks, it doesn't eliminate them.

“You're going to have risk no matter what you do from a supply chain perspective,” Mr. Reardon said. “Bringing it back onshore, you may be facing that additional people-type risk (such as employee benefits) that you wouldn't otherwise face.”