What to Consider When Determining an Optimal Sourcing Strategy

In an era of shifting global trade dynamics and geopolitical uncertainties, US importers and corporations face complex decisions regarding their manufacturing strategies.

The ongoing trade tensions between the US and China, coupled with the potential for higher tariffs regardless of election outcomes, have prompted many to reevaluate their reliance on Chinese manufacturing. However, the decision to onshore, nearshore or reshore operations is far from straightforward, as evidenced by cases like Foxconn’s recent decision to invest $137.5 million in China, including construction of a new headquarters in Zhengzhou.

To navigate this challenging environment, companies must conduct a comprehensive analysis that spans multiple functions. Following are some key factors to consider.

Labor cost. Companies need to compare not only current wage rates but also long-term trends in labor costs across potential destinations. It’s crucial to consider that while wages in some alternative locations may be lower than in China, differences in productivity and quality could offset these savings.

The end-to-end supply chain. The costs of raw materials and components can vary significantly between regions, and companies must ensure that reliable suppliers are available in potential new locations. Transportation and logistics costs and disruptions such as weather, wars, strikes and force majeure events are other critical factors, dramatically impacting shipping expense and lead times to end markets.

Tax implications. Corporate tax rates, available incentives, and the overall impact on a company’s tax liability must be carefully evaluated for each potential location. In some cases, special economic zones or tax breaks for relocating businesses could tilt the balance in favor of a particular option.

Operational considerations. Supply chain resilience has become a top priority for many businesses in the wake of recent global disruptions. Companies must assess the vulnerability of chosen locations to natural disasters, geopolitical risks and other potential disruptions. Diversifying manufacturing across multiple locations can enhance overall resilience, but it also introduces new complexities that must be managed.

The regulatory environment. Stability and predictability in regulations can be as important as the regulations themselves. Companies need to consider not only current requirements but also potential future changes that could impact their operations.

Workforce availability, skills and training. A cheaper workforce that lacks necessary skills or experiences high turnover could ultimately prove more costly than a more expensive but stable and skilled labor pool.

Market access. Manufacturers must assess how different locations might impact their ability to serve key markets efficiently. Trade agreements can provide significant advantages in certain locations, and should be factored into the decision-making process.

Global trade agreements. Pacts such as the USMCA, ASEAN, and RCEP may affect US importers’ decisions as to whether they should manufacture domestically or make product in China, Southeast Asia or Mexico. The global trade and business environments are constantly evolving, requiring continuous reassessment of manufacturing location strategies. Companies should consider hybrid approaches from different strategies.

Intellectual property protection. The strength of IP protection for companies with valuable proprietary technologies or processes varies significantly across regions, and they must assess which additional measures might be necessary to safeguard their innovations.

Brand perception. While “Made in America” ​​labels might resonate positively with some consumers, others might be more price-sensitive.

The long-term geopolitical outlook. Companies must assess the political stability of potential locations, and consider how changing geopolitical dynamics might affect their operations in different regions of the world in the long term.

Financial analysis. This includes not only a detailed assessment of relocation costs and projected return on investment, but also scenario analysis to understand how different tariffs or other potential changes might impact costs in each location. Companies need to compare these projections against the baseline of maintaining current operations in China.

Implementation considerations. The complexity and time it takes to transfer operations to a new location must be carefully analyzed. Companies should have a plan in place that minimizes or eliminates production disruptions, as well as the effects that the production transfer will have on existing supplier and customer contracts, commercially and legally.

Quality assurance. Companies must ensure that they can maintain or improve production standards in new locations, which may require significant investments in quality assurance systems. For those adopting a multi-location strategy, ensuring consistent quality across different sites adds another layer of complexity.

Customer impact. Changes in manufacturing location can affect service levels, lead times and the ability to offer customized products. Companies need to assess how these changes might impact customer relationships, and whether they can maintain or improve their competitive position.

Sustainability and environmental, social and governance (ESG) compliance. Companies must consider how relocating manufacturing might affect their carbon footprint, and whether there are opportunities to improve sustainability in new locations. Social responsibility considerations, including labor practices and community impact, also play a role in these decisions.

Risk management. This includes assessing commercial, exchange-rate and geopolitical risks, and the potential for supply chain disruptions in different locations. Companies need to develop comprehensive risk mitigation strategies for each potential scenario.

Technology and innovation. Companies need to assess how relocating might affect their access to technological innovations and R&D capabilities. The potential for increased automation in different locations can significantly impact labor costs and productivity projections.

Legal and compliance issues. Companies must be highly knowledgeable about different legal systems and contract-enforcement mechanisms such as arbitration. The complexity of the legal systems may vary drastically.

Cultural aspects. Sometimes overlooked, these can have a significant impact on the success of nearshoring and offshoring. International business practices, communication styles, and potential language and dialect barriers must be taken into consideration prior to making and implementing any relocation decision.

Government relations. Companies need to assess the level of support offered by local governments in potential new locations, including incentives and other forms of assistance. The stability and continuity of these incentives over time are important considerations.

Existence of competitors. Companies must understand how others implemented their own relocation initiatives, and the accompanying advantages and disadvantages. Understanding broader industry trends and emerging manufacturing hubs can provide priceless insights into potential opportunities, and even motivate a change of course altogether.

Workforce availability and quality. Consideration should be given not just to immediate requirements, but also to the future needs of the workforce. This should include the relocation’s effects on employees and leadership development.

Inventory management strategies. These may need to be adjusted in line with new manufacturing locations. Companies must consider how changes will affect optimal inventory levels, and whether lean manufacturing practices can be maintained or improved.

Partnerships and alliances. Companies should explore potential strategic partnerships or joint ventures, especially in China, to facilitate market entry and reduce risks in new locations.

Physical and technological infrastructures. Companies must assess the technological capabilities of new locations, and what investments might be necessary to ensure continuous connectivity. Can the new location to support new technologies? The answer will have a significant impact on a business’s ability to remain competitive.

The successful implementation of any relocation strategy requires long-term planning, a capable and experienced executive team, and continuous monitoring of the global economy and geopolitical events. By asking the right questions, conducting due diligence, and having contingency plans, companies can position themselves for long-term sustainability and resilience in a world where complexity and volatility have become the modus operandi.

Omar Kazzaz is chief executive officer of Kazzaz Advisory Group.