MOVING THE CHAINS

Trade, tech and disease have CEOs rethinking their supply networks. Some strategies. BY DALE BUSS

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ATERLOGIC AMERICAS HAS BEEN MANUFACTURING workplace drinking-water machines in China for 25 years and shipping them to the United States, but the company is moving output of its products for the domestic market to a 110,000-square-foot plant it just built in Dallas. Manufacturing costs will be as much as 15 percent higher there, but lower transportation outlays will offset much of that. The imposition of a 25 percent U.S. tariff on Waterlogic’s imports from China played a big role in the decision, which came way before the coronavirus epidemic began jangling global supply chains in January. “We’d been considering building another plant for most of a decade, and 18 months ago we began researching whether it was feasible,” says Casey Taylor, CEO of the U.S. arm of United Kingdom-based Waterlogic. “Then the tariffs kind of pushed it over the edge.”

Waterlogic’s move is an apt illustration of the new dynamics of the supply chain. President Donald Trump’s tariff war with China, overhaul of the long-standing trade pact with Mexico and Canada

and saber-rattling against other countries shook up CEOs’ global decision-making, as the president tried to skew every aspect of U.S. trade relations to favor domestic companies—and American manufacturing.

“Whatever your view of the president, he wanted to ingather manufacturing by creating greater investment in the United States,” says Clifford Sosnow, co-chair of the trade and investment group at Canadian law firm Fasken. “And he’s achieved that.”

But Trump’s geopolitical gambits—and now Brexit in Europe—only added to factors that already were prompting chiefs to examine and refine corporate supply chains at every point from the farm field to the ocean freighter, from the factory floor to the front stoop of an e-commerce customer. These dynamics include rising labor costs abroad, pressures to shorten transportation lines, disruption by digital transformation and demands to incorporate “sustainability” in every link of the chain. China’s coronavirus added yet another factor.

“The more CEOs get into it, the more they realize that the key challenges they need to solve are more driven by consumer trends and industrial revolution than by tariffs per se,” says Arun Kochar, a partner in A.T. Kearney’s strategic operations practice. Chief Executive reached out to CEOs and industry experts across the countryto get a read on where all this is going and how they’re handling issues impacting supply chains.

TRADE TURMOIL The $250 billion in new tariffs on Chinese imports that Trump began phasing in during late 2018 prompted Tom Shorma simply to tack them onto invoices for the industrial belts made by WCCO Belting. Sales flattened out, and long-time customers hesitated to place new orders. “They don’t want to be on the wrong side of a change if the surcharge goes away next month,” says Shorma. “This makes things much more difficult to manage, and lead times are shorter.” After 26 years manufacturing in China, Waterlogic moved its output to Dallas, where higher overhead will be offset by lower transportation costs.

Shorma has been searching for new sources of quality belt materials, “but when you have custom-engineered fabrics that also are patented,” he says, “you’re very careful about sharing all of the proprietary designs.” At least Wahpeton, North Dakota-based WCCO has cut in half the five years it used to take to verify a new supplier—if any can be found.

The dilemma illustrates a truism. “Some small and mid-size companies are feeling pain to a greater extent than large companies because they have fewer resources to quickly source products in another location,” says Lisa Walker, managing partner of the global industrial practice for executive recruiters DHR International. Despite the reduction in tensions embodied in Phase One of the U.S.-China trade deal signed in January, more CEOs are resigned to tariffs as a prominent policy feature, at least as long as Trump is president. “Many believed that the trade war was going to be temporary, maybe six months or so, to send a message,” says Rosemary Coates, a supply-chain consultant and executive director of the Reshoring Institute. “But now they have to plan for it being semi-permanent.”

In fact, she fears that popular new manufacturing sources such as Vietnam also “may be subject to tariffs in the future. The Trump administration may go after these other countries one by one to try to force companies to evaluate bringing manufacturing back to the U.S.”

“Traditional tooling is cheaper in China, but it takes longer. Now with 3D printing we can do the tooling in the United States.” —James Tu, CEO, Energy Focus

AFTER CHINA Tariffs, of course, aren’t the only reason American companies are rejiggering their supply chains. Energy Focus, a Solon, Ohio-based supplier of LED lighting, imports from China as well as Taiwan but hasn’t faced additional tariffs. But CEO James Tu is still steering production of an important new wireless lighting-controls line to the company’s plant in Cleveland. “Traditional tooling is cheaper in China, but it takes longer,” explains Tu. “Now with 3D printing we can do the tooling in the United States. It’s more expensive, but we shave two to three months off time-tolaunch. And that will be important because we’ll have rapid iteration in these products.” Rising labor costs in China relative to the U.S. and to other low-cost countries are another reason CEOs are shifting. And many CEOs want to bring crucial technologies closer to the vest through U.S. production, given continued Chinese flouting of intellectual-property protections.

Overall, China is just less welcoming to foreign companies than a decade ago, “when they were hungry and poor,” says Harry Moser, founder of the Reshoring Initiative. “Now, they’ve gotten more or less what they wanted, and they’re trying very hard to have their domestic Chinese companies become dominant world players, which means they can’t help Americans.”

Thus, more companies are scouring other Asian countries looking for new low-cost sources of supply. But they can be hard to come by. Vietnam’s industrial capacity is only a fraction of that of China’s, for instance, while India remains a land of manufacturing opportunity but still woefully underdeveloped.

Many CEOs instead are “nearshoring” output to Mexico if possible. About 40 percent of the content of products assembled in Mexico now originates in the U.S. and is then shipped south of the border for assembly into finished goods, while there is only 5 percent of such content in Chinese-made imports to this country, according to Moser. “Either U.S. manufacture or the Mexico solution works well for American companies,” he says.

ADAPTING TO TECH As technological advances revolutionize supply chains, companies must keep up. Warehouse staffing firm Atlanta-based ProLogistix, for instance, came up with a program to train operators of new standup forklifts that can save up to 30 percent of the aisle space in a large warehouse, compared with traditional sit-down forklifts that have a relatively huge turning radius. Then there’s big data and digitization, which can greatly enhance efficiencies and drive down costs. Applications include using the IoT and machine learning for predictive asset maintenance to avoid unscheduled down times, optimizing delivery routes, minimizing delays and providing more precision in inventory management. Amazon’s tightening grip on e-commerce and the supply chain necessary to support it is one of the ultimate applications of big data and, of course, is trans-

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Get flexible: “It used to be a fairly simple game, but you’ve got to build in flexibility for the long term now,” says Geoff Pollak, managing director for Alvarez & Marsal Corporate Performance. Andi Owen, CEO of office-furniture maker Herman Miller, finds himself doing just that. “We watch every tariff announcement closely, and it’s made us more proactive,” he says. “We’ve been contingency planning for Brexit for years now, for instance.”

Be patient: Signs suggest the tariff merry-goround between the U.S. and China may be winding down. A CEO’s strategy still could be, “Pay the tariffs and ultimately see what happens because your business growth is still offsetting the risk of rising costs,” says Larry Harding, Head of North America, TMF Group.

Make new calculations: CEOs should consider changing their “total cost of ownership” calculus from “point solutions to a scenario-value-planning analysis,” Pollak says. “Before, you could say, ‘This widget is going to cost me $4.50, maybe $4.58 if tariffs inch up. Now, something could happen in the political or economic environment that could make the cost $7.50. And that could hurt not only you but others in your supply chain and your competitive set. You’ve got to look at it much more from a 360-degree point of view.”

Appeal for exemptions: Allegheny Technologies CEO Robert Wetherbee got so desperate for a Section 301 U.S. tariff exemption on materials his company imports from Indonesia that he wrote a Wall Street Journal op-ed to plead with President Trump. The exemption process can be a slog and, ultimately, fruitless, but small and mid-market companies can have an edge. “What often is a successful argument is the financial impact on companies of increased tariffs,” says Laura Siegel Rabinowitz, a supply-chain expert at the Greenberg Traurig law firm.

Sniff out incentives: Waterlogic got big incentives from Texas to consolidate its U.S. operations there, for instance, while Canadian auto supplier Axiom received financial help from Ohio to build a plant in Toledo. Other countries offer sourcing incentives, too. “With a bigger national initiative to get manufacturing, there can be lesser taxes and help with the work environment,”

ISlides CEO Justin Kittredge recently switched sourcing footwear production from China to Vietnam.

says Justin Kittredge, CEO of ISlides, who recently moved his company’s output to Vietnam from China.

Beware issues elsewhere: However, CEOs can run into thickets of complications in new countries, such as whether China remains the ultimate country of origin in cases where only component manufacture is moved out of it. And there are proper labor standards. “U.S. Customs is taking those issues very seriously and making spot checks in places such as Bangladesh and Cambodia,” Siegel Rabinowitz says. “Labor is cheap, but companies have to be very careful.”

Use any downturn: While capital investment in supply chains may look less inviting at a time when the threat of an economic slowdown looms, any deceleration in business could present an opportune time for it. “Most CEOs want to use their supply chain for competitive advantage and want to innovate during a downturn so they come out of it in a more powerful position,” says Jonathan Eaton, lead of the supply-chain practice for Grant Thornton consultants.

Get help: Supply-chain challenges such as cybersecurity and international e-commerce usually mean mid-market and small-company CEOs should seek outside help. Do they understand, for example, how value-added taxes apply to their online sales in EU countries? “Many CEOs know how to spell ‘VAT,’ but that’s the extent of their expertise,” Harding quips.

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“We took an existing facility and, instead of tearing it down and putting all the rubble into landfill, we decided to repurpose and rebuild it using the framework we had.” —Michael Watt, CEO, Daiya

forming business for manufacturers and retailers alike. Its Prime subscription service is just Amazon’s latest—but perhaps most effective—lever. “For many customers, if it’s not Prime and free delivery in two days, you’re not buying it,” says Nicole Reich, director of Retail Bloom, a Rochester Hills, Michigan-based e-commerce consulting firm. “That’s forcing all other dot-com sites and all marketplaces to play by Amazon’s rules.”

Integrity of data also is increasingly crucial across the supply chain, sometimes in surprising ways. Banks, for example, have grown concerned about cyberattacks on ATM machines as they’re manufactured and shipped. “Malicious actors can build back doors into the technology, collecting and analyzing the data for fraudulent purposes or even prompting the machine to dispense cash in an unauthorized manner,” says Kelly White, CEO of the risk-monitoring company RiskRecon.

GETTING GREENER Up and down the supply chain, environmental sustainability has become a sine qua non. “Customers are wanting to understand what part of supply-chain sustainability is part of your argument for business now,” says Larry Harding, head of North America for professional-services firm TMF Group.

Much of what’s required is new sourcing of commodities—and the need to provide the “traceability” and transparency customers are now demanding. Mars recently committed to a “100 percent sustainable supply chain” via projects such as collaboration with advocacy organizations to develop new cacao varieties with higher yields, increased disease resistance and higher quality—so the chocolate giant can cut back on deforestation and environmental degradation.

Meanwhile, Matthew Wadiak, co-founder of the Blue Apron home-delivery service, has launched Cooks Venture, a “next-generation food company rooted in regenerative

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DONALD TRUMP HAS MADE a rhetorical punching bag out of the auto industry for supply-chain decisions during the five years of his first campaign and presidency, variously picking on GM, Ford and Toyota. But make no mistake about it, the industry has been moving his way on the ultimate economic issue of his administration: American jobs.

Expect the next big example at June’s North American International Auto Show in Detroit. Toyota will be cutting way back on traditional activities that promote its fresh models and technologies, says Ed Laukes, group vice president of marketing for Toyota in the U.S. “Instead, we’ll focus on an Americanization message about our investment in the U.S., our plants, supply chain, our dealers. That continues to resonate with consumers.”

Consider also Ontario-based Axiom Industrial opting to build its first facility in the U.S.: a $20 million plant in Toledo, Ohio, specializing in thermoplastic injection molding that will create 250 jobs.

Japanese transmissions producer Aisin Seiki is reportedly sniffing out U.S. locations. “If they want to stay in the business, they have to invest in factory locations in the U.S. so manufacturers here can fulfill their content requirements,” says a top automaker executive.

Brembo North America is “trying at all costs to localize some major components that we import,” reports Dan Sandberg, CEO of the U.S. arm of the Italy-based brake maker, which employs about 800 people in Homer, Michigan. “It’s just easier at the end of the day,” he says. “If you’re close to suppliers and they’re reasonably compet

itive, we think any difference in cost can be made up quickly by logistics and transportation advantages, and they’re front and center to you here in North America.” Replacing decades-old NAFTA, which Trump said was unfair to the U.S., is the U.S., Mexico, Canada Agreement that was finally approved by Congress and signed in December, boosting U.S.-content requirements in cars sold in this country and guaranteeing more hours by highly paid American auto workers will go into the vehicles.

According to the Center for Automotive Research, U.S. auto production is expected to increase by more than 7 percent over the next four years, while Mexico output will be down by nearly 4 percent and Canadian output will decline by nearly 10 percent.

Thomas Doll, president of Subaru North America, identifies a potential speed bump. “Unemployment is so low, it is difficult for us to find good workers for the production line” in Lafayette, Indiana. “We’ve got to get more creative to bring in workers from other locales.”

agriculture and transparency” that sells poultry raised in a newfangled supply chain.

There’s also pressure to support sustainability via other links in the supply chain. And companies like Daiya—which quadrupled its capacity to make plantbased cheese-analog products in a 400,000-square-foot plant in Burnaby, British Columbia—are responding.

“We took an existing facility and, instead of tearing it down and putting all the rubble into landfills, we decided to repurpose and rebuild it using the framework we had,” says Daiya CEO Michael Watt. The company also made the plant LEED-cer

CE tified, meaning that an international third-party organization verifies it was designed and built using a range of green tactics. “It was an expensive and complex choice to make, but it was the right thing for the environment.”

Doing the “right thing” for sustainability looms large indeed. For the past few years, for example, Procter & Gamble has been packaging shampoo and hair conditioner in bottles made from 25 percent plastic waste collected on beaches.

“From an economical standpoint, it doesn’t make any sense,” concedes Virginie Helias, P&G’s chief sustainability officer. “But it’s such a big brand idea.”

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