When Mike Newman began hearing warnings of delays at US West Coast ports due to labor talks earlier this year, the threat of more chaos in the supply chain “was the final straw for us.”
So the chief executive of New York-based Returnity Innovations has moved about two-thirds of its production of reusable shipping bags and boxes to Mexico from China to reduce the amount of goods passing through congested docks in Los Angeles and Long Beach, California.
Although manufacturing costs in Mexico are 30 percent higher than in China for returns, the absence of tariffs and the speed of the trucks give customers a rarity in today’s chaotic global trade arena: more certainty about when their shipment will arrive. Newman plans to keep much of its production in Mexico for the long term.
“That kind of flexibility,” he said, “is really necessary and valuable.”
Several years of supply chain instability are prompting a growing number of US retail companies to shift production from China to North America. There is no one-size-fits-all strategy, and some options are faster and cheaper than others. But adding suppliers outside of China becomes a better short-term solution than more expensive investments such as building a new factory close to customers.
“People are definitely looking at the supply chain and customs policy of the National Retail Federation, which is based in Washington,” John Gold said. “It’s happening, but it’s not happening right away.”
About 70 percent of 1,610 executives surveyed by engineering company ABB in June said they plan to move at least some of their operations closer to home to address current supply chain challenges.
Over the past few years, barriers to the easy and cheap flow of goods have continued to mount, including former President Donald Trump’s tariffs on Chinese imports; months of delays during the pandemic for goods to be unloaded at designated US ports; and, most recently, the intermittent shutdown of major factories in China due to the country’s Covid Zero policy.
The ongoing challenges have convinced some executives that it’s time to rethink the corporate advice of the past few decades.
“We need to look at China not as the global factory as it used to be,” said Jean Madard, chairman and CEO of Inter Parfums Inc., which produces and distributes fragrances for brands such as Oscar de la Renta, MCM and Donna. Koran.
“China is the store of the world,” Madar said. “Selling to China is more interesting than buying from China.”
Inter Parfums plans to cut production of components for perfume bottles made in China and sold in the U.S. to about 25 percent by 2023 from about 70 percent in 2020, Madar said, as the company moves to produce in the U.S. as well as Europe. He added that replacing the wiring will roughly halve the volume of goods that Inter Parfums sends through the ports.
Although it costs about 20 percent more for Inter Parfums to make parts in the U.S. than in China, Madar said it’s worth it. Last holiday season, Inter Parfums missed out on sales to American buyers because some of its containers were stuck in port.
“If you can’t get the product on time, how good is it to be 20 percent off?” he said.
But moving much of Inter Parfums’ production to the US was not seamless. The company still faces potential delays this holiday season because U.S. factories in states like New Jersey can’t find enough workers, Madar said.
This limits the number of shifts that factories can run compared to China, meaning that the manufacturing process in the US takes longer. As a result, Inter Parfums will start producing components for holiday fragrance packages in January instead of May.
“America is not 100 percent ready to reindustrialize the country,” Madar said.
Likewise, Newman, Returnity’s CEO, said setting up production in Mexico took longer than he expected, added costs and required “a few late-night, difficult phone calls.”
For this reason, many American companies have chosen to expand their supply chains elsewhere in Asia rather than closer to home.
There is an “increase in production going to Southeast Asia via Vietnam, Indonesia, Thailand and Malaysia,” said Mario Cordero, executive director of the second-largest US port in Long Beach, California. “You had big conglomerates and corporations that followed the China plus one policy.
High-end retail companies are more likely to move their production to the US and Mexico first because their margins tend to be higher.
Jenni Kayne, the Los Angeles-based luxury apparel and home goods company, will move production of all of its furniture from Asia to the US over the next two years. The company is fed up with repeated delays, CEO Julia Hunter said.
A four-month delay
For example, in early 2021, the company ordered a series of patio furniture from an Indonesian factory. While Jenny Kane didn’t plan to sell products for another year and a half, Hunter said he wanted to get ahead of the growing delays at California ports. But the furniture arrived four months late — and without pillows.
“We continue to build in longer lead times, but it’s still difficult to get products when we want them,” Hunter said. It is beginning to partner with factories in North Carolina and Oregon to produce furniture that includes $4,395 beds and $5,995 sideboards.
Other narrower-margin brands are on hold over increased U.S. production.
“For that to be viable, the economic equation has to change pretty significantly,” said Andrea O’Donnell, CEO of apparel and accessories company Everlane Inc. – We will wait and see how other large enterprises will really cope with this.”
Nearly two-thirds of CEOs surveyed by consulting firm Kearney said they could be affected by other U.S. companies moving to the clamps. That’s partly because executives are waiting to see if more companies moving production closer to home will push manufacturers to “reach enough critical mass to build supplier ecosystems,” Kearney said in a report published in April. This will make it more cost-effective for other firms to follow suit.
However, higher manufacturing costs in the U.S. and Mexico compared to China may ultimately push some companies to raise prices to preserve profits.
“In a broad sense, globalization has reached its peak. We will no longer import as much from China,” said Wells Fargo Chief Economist Jay Bryson. “It’s still cheaper to produce there. But when everything comes back to shore, you will have the opposite.
Augusta Saraiva and Jeanette Neumann
Read the latest BoF Insights report for BoF’s perspective on the state of the fashion industry’s supply chain model, as well as data-driven guidance on how companies can strengthen their supply chains in the face of pandemics and geopolitical challenges.
https://www.businessoffashion.com/news/retail/us-retailers-looking-past-china-for-suppliers-see-costs-jump-30/ U.S. retailers see 30% cost increase when sourcing from China