The localization of low-cost labor has largely shaped today’s global supply chains. But that has changed dramatically in the past five years. Technology is finally ready to replace human labor in a wide range of supply chain activities, which will provide companies with more opportunities to operate where they want and reduce their dependence on Asian screw.
Savvy companies are actively exploring how they can use a host of new technologies to make their end-to-end supply chain much more resilient while remaining competitively profitable. Those who succeed will adopt an artificial intelligence and human intelligence (AI + HI) approach. They will re-examine what customers really value and bring supply chains closer to higher margin products first.
The current challenge
Today’s global supply chains were designed to operate with high reliability, at the lowest possible cost, in a stable environment. Unfortunately, supply chains are unreliable lately (eg. shortage of microchips) and expensive (for example, more work, goodsand maritime transport costs) — mainly because conditions have been anything but stable. Current geopolitical tensions between Western democracies and the autocracies of Russia and China have led to calls for companies to reduce their vulnerability by radically restructuring their distant supply chains – a strategy advocated by US Treasury Secretary Janet Yellen.
Companies have long expressed their interest in relocation, near-shoring (switching to suppliers closer to the markets served) and friend-shoring (relying on suppliers located in countries with shared values) which all offer logistical, strategic and branding advantages. The biggest hurdle has been labor costs, labor availability, and deep manufacturing expertise. The largest and most affordable pool of skilled labor is in China and other low-cost Asian countries.
But advances in technology are beginning to reduce these barriers.
Here are some of the developments that are starting to make a difference. They help locate affordable factories closer to home. They also improve operations and reduce the time needed to train workers from months to days on tasks such as assembling various products, electrical or mechanical, on the same assembly line.
AI + HI. The maturity of AI, especially the ability of humans to use it, offers new ways out of the cost trap. Major advances in cobots — robots that interact directly with humans in manufacturing facilities — combine AI and HI to reduce labor costs while retaining the value of human oversight.
3D printing. Advances in additive manufacturing (3D printing) increasingly allow companies to produce a wide range of components and products at a lower cost. They allow them to shorten manufacturing processes in factories closer to home, reducing dependence on numerous and distant suppliers.
recognition technology. In manual manufacturing processes, such as automotive engine assembly, driven by AI action recognition technology combines live video with analytics to ensure workers follow complicated steps correctly without making mistakes. The result is better quality control, increased productivity, and data sets that can be used to improve processes.
Digital manufacturing solutions. These systems track product manufacturing across all workstations, enable real-time worker data entry, provide end-to-end traceability, and ensure only high-quality parts move downstream.
Three-dimensional simulation. They include metaverse applications such as Nvidia’s Omniverse. They allow manufacturers to create digital twins of their processes and simulate factory layout, workstation design and assembly design.
Logistics technology. Investment flocks to this area, especially in tools for warehouse management, matching freight loads to transport capacity, and cost-effective routing. The rate of investment from venture capitalists suggests that venture capital funding for “procurement technology” will overtake that for fintech before the end of this decade.
To take full advantage of these smart, labor-saving technologies, businesses need to start by doing these three things:
1. Rethink what customers really value.
Start with a thorough analysis of what customers will want, where and when. Many products are complex in ways that are not appreciated by consumers, but are labor intensive to produce – issues that mattered less when supply chains were stable and costs weak workforce. Recognizing this, some companies are moving towards manufacturing products in smaller batches that are tailored to refined customer preferences. Some are finding ways to adapt or redesign products for automated production without sacrificing perceived or actual value to the end user.
Consider an industrial tool manufacturer that had seen its products become increasingly complex with many sub-components such as motors, switches, controllers and wiring and many raw materials such as resins, plastics and copper. Before bringing manufacturing to Asia and moving closer to the preponderance of its customer sites in North America and Europe, the company took a hard look at what really mattered to its customers. He found that users above all wanted an engine that lasted a long time and a tool that could survive in a harsh operating environment. The company was able to eliminate many of the superfluous elements from its products, making manufacturing easier to automate and less expensive while delivering the attributes its customers want.
2. Rebalance machine intelligence with human agency.
Artificial intelligence, analytics, and robotics can significantly reduce reliance on human effort to move products through value chains and do so more quickly, reliably, and efficiently. But the goal should not be to completely remove humans from the process; it should be about freeing them to do what they do best: making critical judgments based on their experience and expertise. For example, these technologies can allow workers to spend more time investigating and learning from system failures and determining how to make the system more robust.
Consider a medical device manufacturer. In his industry, safety is the number one priority and timely delivery of product to the customer is the second priority. There is a tension between these priorities. Relocation would help speed product delivery to customers, but would increase labor costs. The company therefore adopted machine learning and state-of-the-art cameras to inspect anomalies in products and the manufacturing process. The company’s best human experts then identify the causes.
3. Bring new higher margin products closer to you first.
When companies started to shift manufacturing to low-cost countries, they typically focused on their high-volume, low-margin products first. Now, as they relocate production closer to home and customers, they should start with their higher margin products for three reasons.
First, because higher-margin products are often more complex (such as medical devices), using new technologies to produce them and manage their supply chains can yield the maximum benefit.
Second, in the face of current uncertainties in global supply chains, companies must consider the risks of supply chain disruptions for all their products and prioritize the repatriation of those that offer the highest return.
Third, low margins leave no financial room for experimentation, learning, and the initial capital outlay needed to maneuver in a world of new technologies and higher labor costs. As a result, it is difficult to justify a move and businesses remain paralyzed in place. But when relocation is considered in terms of the total amount of margin repatriated, rather than in terms of total cost savings, the business case becomes compelling. And as a company continually improves its manufacturing skills with higher-margin products, it can then focus on relocating the manufacturing of lower-margin products.
Admittedly, making all of these changes will take time. Companies will not be able to significantly reduce their dependence on suppliers in China and other distant countries overnight. But by aggressively understanding the capabilities of these technologies and investing aggressively in them, companies will be able to build resilience into their supply chains in the months and years to come.