How to manage reshoring risks - a US case study

The pandemic was a supply chain cautionary tale and a clarion call for the U.S.’s waning economic domination, especially with regards to raw materials for pharmaceuticals and critical minerals used in industries from renewable energy and electronics to batteries.

The share of modern semiconductor manufacturing capacity located in the U.S. stood at only 12% as of last year, according to the Semiconductor Industry Association.

The US has responded with the CHIPS Act that aggressively aims to redomicile manufacturing to its shores, and it has already started to make an impact.

The reshoring of manufacturing will be hugely beneficial for the US economic competitiveness, national security, and ensuring healthier supply chains.

But the question must be asked how does this dramatic shift in global trade affect risk management postures, and what new challenges will emerge for current resiliency models?

Pandemic and war exposed obsolete risk models

We have learned the hard way that supply chains are longer and more interconnected than we imagined, with far more individual nodes and linkages in a long chain, vulnerable to a plethora of risks.

Enterprise supply chain and risk leaders need to increase their competency to manage supply chains effectively, expanding their views of supply chains to include critical people, technology, trade routes, and customer priorities.

“We have learned the hard way that supply chains are longer and more interconnected than we imagined”

Risk vectors are interrelated like never before; climate, supply chain, cybersecurity, data privacy, crypto, geopolitical, and environmental, all mandate that enterprises execute risk transformation.

We need a deeper understanding of our suppliers and those that supply those suppliers.

Made in the USA

After the CHIPS Act, over 50 new semiconductor ecosystem projects were announced across the U.S. and construction of new manufacturing facilities increased 116% over the last year.

U.S. investments in chips and EV batteries accounted for 53% of 2022’s record manufacturing job announcements.

Another monumental piece of legislation, the Inflation Reduction Act, calls for the US to cut greenhouse gas emissions (GHG) in half by 2030.

To make that possible, the US will need to wrestle control of critical minerals markets from China, by tapping its own reserves of lithium, graphite, rare earth elements, and cobalt to manufacture clean energy systems.

“Numerous decisions need to be made on a risk-adjusted basis to locate suppliers and build manufacturing facilities”

Mining of such minerals comes with a litany of ESG concerns for responsible sourcing, from Indigenous rights and biodiversity to pollution.

Further, the SEC’s upcoming new requirements for Scope 3 emissions means that enterprises must carefully account for emissions of their suppliers, which make up more than 70% of businesses’ greenhouse gas footprint.

This diversifying and redomiciling of supply chains is having a global impact on labour and supplies. Mismanagement of risk can be substantially damaging to companies’ viability.

Numerous decisions need to be made on a risk-adjusted basis to locate suppliers and build manufacturing facilities. Legislative pressure, ever-increasing costs, and supply assurance factors muddy those decisions further.

As the US proceeds in reshoring, nearshoring, and “right-shoring” manufacturing, we will see companies challenging the norms of ESG and other regulatory policies against their ability to meet their re-shoring goals.

Calls to increase collective competency in supply chain management

Manufacturers are mitigating this uncertain risk environment by deploying more digital tech solutions which produce their own compliance issues including data privacy and cybersecurity.

Customers, shareholders, and boards of directors are demanding increased transparency. Additionally, insurance companies are willing to reward those businesses that have a granular understanding of their exposures.

All signs point to the need to increase our collective competency in supply chain management.

Without a consistent capability to calculate and understand the real global impact on profit margins, including knock-on effects from losing a single site, production line, boiler, trade route, supplier, or technology system, companies cannot effectively prioritise investment in supply chain protection.

“By discarding outdated models, risk managers and business executives can be better prepared to anticipate risk and achieve better outcomes.”

Risk leaders need to implement dynamic, real-time risk assessment processes, moving from static annual awareness to dynamic living awareness.

We must improve upon the traditional method of validating risk controls based on finite standards for a particular risk issue.

By discarding outdated models, risk managers and business executives can be better prepared to anticipate risk and achieve better outcomes.

An intentional approach to managing supply chains, understanding dependencies, and thinking through recovery options can enable companies to better allocate precious resources to focus on the optimal risk treatments.

Andrew Tait, P.E. Integrated Risk Leader at Sigma7, is a 30+ year risk management veteran. He is a risk and resiliency expert, playing significant roles internally as a Risk Manager in the Chemical & Pharma space, and as a risk strategy leader at JLT and Marsh. Tait started his career at FM Global and Johnson & Higgins and has consistently worked at the intersection of risk management and risk financing.