Supply Chain Security Costs Money. Is Industry Willing to Pay?
In November I was invited to join the “disruptors” of the industry – also known as Mark Goodwin and Gene Weiner – on a panel to discuss the derisking of the supply chain.
Against the backdrop of the biennial Productronica trade show, the largest of its kind for electronics manufacturing in the West, and hosted by my media colleague Trevor Galbraith, we attempted to delve into the issues at hand when it comes to ensuring supply chain resiliency.
As Goodwin, the chief operating officer of Ventec, correctly framed the situation, the vast majority of materials originate in Asia, particularly China, and while parts of the supply chain are being moved back to the West, a full-scale migration won’t happen in our lifetimes. Given that, what needs to happen at the margins to ensure at least a minimal degree of secure chains?
The role of government naturally came up, and it was suggested that legislators are driving reverse migration. I pushed back on that notion, opining instead that commercial businesses lead the way and governments are reacting both to the years-long industry impetus and the post-Covid realization that supply chains are not secure. (For more on that, see our interview with David Schild of the Printed Circuit Board Association of America in this issue.)
If the problem that must be solved is the derisking of the supply chain, certainly government regulations and incentives can play a huge role. India, Thailand, Vietnam and, yes, China (remember them?) are prime examples of how quickly infrastructure can be established in areas that are open to investment. But what they also have in common are domestic policies that align with domestic goals.
In the West, by contrast, the heavy burden of patchwork environmental laws, credit availability, and NIMBY-ism (not in my backyard) conspire to constrain even the most ardent supporters of PCB manufacturing. For a new plant to come online, permits are needed at every level from federal down to municipality. There’s an inherent incongruity between the expressed desire at the federal or state level for more manufacturing as means to ensure product availability and a source of long-term careers and the near-unnavigable maze of local regulations and hostility many business owners experience when trying to expand. It’s not by accident that the most recent board shops to be announced or come online are in mostly rural areas (New Hampshire, Idaho, upstate New York, Michigan) or very business-friendly states (Texas). Factories cannot be built where regulations effectively prohibit them.
Then there’s the working capital issue. With dual stocks or multi-sourcing in place, more corporate funds will be tied up in inventory. Are we ready to reset our expectations for what working capital will look like when we have buffer stocks all over the world? That’s a finance decision that has nothing to do with government but everything to do with Wall Street and banks and private equity and others who control the money trees.
Furthermore, the industry needs much greater visibility up and down the chain. I recall a conversation in the early 2000s with Viasystems’ vice president of supply chain, who told me their goal was to see five layers in either direction; e.g., from the mines to the end-of-life recycler. Twenty years later, do companies have the right tools to manage an increasingly distended supply chain? Do those tools even exist? If the carbon and environmental costs of your product must be tracked in order to do business in a market – as legislation coming to Europe could require – will you be able to do so? (As an aside, the Responsible Business Alliance has developed a Scope 3 GHG emissions reporting tool that might help.)
The talent shortage is also at hand. The irony, however, is that regionalizing or localizing supply chains almost invariably means moving infrastructure away from the largest populations, which generally go hand-in-hand with the lowest costs of labor. Are the industry’s finances solid enough to withstand double-digit increases in labor expenses?
For the record, the panel laughed when I rhetorically asked if customers are willing to pay for all of this.
I think Goodwin’s assessment about the reorienting of the supply chain is correct. (And sorry Mark, but I hope we are both mistaken!) But I also think that the conversations over what a truly secure chain would look like – and who will pay for it – aren’t yet taking place at the level or degree needed to prove us wrong.
P.S. As 2023 draws to a close, a word of thanks and gratitude to our members, customers, board of directors, and other friends and colleagues, of which there are far too many to cite, for your support this year. Pursuit of the ideals encapsulated in our motto – “Collaborate, Educate, and Inspire” – starts with each of you, and we at PCEA draw from your energy and passion every day. Thank you.