Smart Warehouse,Inventory management system concept.Manager using digital tablet,showing warehouse software management dashboard on blurred warehouse as background

How reshoring is transforming the way supply chain models function

Companies are leaning toward reshoring to improve supply chain durability and effectively respond to customers amid evolving global factors.


In brief 

  • Decentralized manufacturing and asset-light models provide additional flexibility, helping companies adapt to market changes and reduce warehousing costs.
  • Government incentives and changes in trade tariffs are influencing the decision to reshore, leading to a resurgence of local manufacturing in some regions.
  • Reshoring requires strategic planning among both real estate and supply chain leaders, and a deep understanding of global market dynamics.

Supply chain networks have been severely strained in recent years, occasionally leading to system failures. Various challenges during the pandemic, including vital goods shortages, shipping delays, and rising business costs, laid bare the weaknesses of global supply chains. This situation has been worsened by other disruptions, such as persistent challenges in the Panama Canal and more recent restrictions on Suez Canal traffic due to conflicts in the Red Sea, leading to additional shipping delays and rerouting. These disruptions, coupled with geopolitical conflicts, tariffs, inflation, government incentives, adverse weather conditions, and other factors, are prompting supply chain and real estate leaders to rethink their overarching supply chain strategies and infrastructure, including real estate assets. Consequently, strategies like reshoring or nearshoring manufacturing operations to bring them closer to customers are now being closely examined.

Companies are focusing on cost efficiency and resiliency in their supply chain and agile flexibility in meeting customers’ evolving needs. Specific plans vary by sector, but many companies are leveraging reshoring to varying degrees as part of their overall strategy. Additionally, the concept of decentralized manufacturing continues to gain momentum as companies try to accelerate speed to getting goods to customers; achieve environmental, social and governance (ESG) emissions targets; and reduce warehousing costs.

 

Many industrial and manufacturing companies across subsectors continue to face unprecedented disruption given economic and geopolitical uncertainty, fluid labor markets, and both the challenges and opportunities associated with the rapid pace of technology and automation innovation in their ecosystems. Thoughtful consideration around where reshoring may fit with their overall strategies is important.

 

Companies that are winning the race to a stronger, sustainable, more agile supply chain network are taking advantage of government incentives and adjusting to recent geopolitical events, as well as the trade tariff environment, to shift their operating models. Tariff incentives, such as Section 321, help enhance nearshore distribution.¹ Government incentives and subsidies, such as the Inflation Reduction Act (IRA) in the US and the Green Deal Industrial Plan in Europe, as well as local tax breaks and incentives, are in some cases tipping the balance in favor of local manufacturing, leading to a resurgence of manufacturing in North America and parts of Europe.

  • U.S. Census Bureau data shows total annualized manufacturing construction spending in the US of nearly $200 billion in June 2023, the highest in at least two decades and double the amount since the end of 2021.²
  • Of the respondents to the EY European Attractiveness Survey 2023, 46% are thinking of reshoring to take activity back to their domestic market, up from 20% in 2021.
  • The Economist revealed that 31% of companies are using nearshoring (18%) or reshoring (13%) as their primary approach for geographical reconfiguration of supply chains, based on the 2023 Trade in Transition survey.³

In a recent CoreNet Global and EY survey, 24% of real estate leaders ranked economic pressure as the No. 1 external force reshaping their future real estate strategies. For some, it will be a source of competitive advantage: one consumer-focused brand that reshored its manufacturing operations to the US is now able to deliver custom-configured products to its customers within 48 hours of order placement. Many companies are also looking at utilizing shorter supply chains and sustainable infrastructure to reduce their carbon footprint and meet their global sustainability goals. This may help differentiate the leaders against competitors and better meet new regulatory requirements (e.g., the proposed Scope 3 emission disclosures from the U.S. Securities and Exchange Commission (SEC)).

Leading companies are also evaluating creative asset-light models; these include third-party manufacturing (i.e., contract manufacturers, tollers or agents) and logistics providers (third and fourth parties), to reduce risk, enable flexibility and scale within their manufacturing and distribution networks and real estate portfolios. This helps shift the cost burden of real estate ownership, such as property maintenance, insurance and regulatory compliance, to the third-party provider, freeing up capital and resources for core business activities. Companies with significant real estate spend are also collaborating with investment funds to look at Assets as a Service (AaaS) and Special Purpose Vehicles (SPVs). Leading organizations are instituting better governance models around footprint and creating avenues for supply chain and real estate leaders to engage more frequently around strategic trends in commercial real estate.

Several leaders have discovered, upon due diligence, that the current state network is a reflection of traditional paradigms and not necessarily reflective of future state business goals. The strategic decision to reshore goes beyond just operational cost considerations and economic pressures; it’s about future-proofing a supply chain so it can withstand disruption and become more agile and resilient. Companies are also seeking to better adapt to demand fluctuations and react more quickly to shifting customer preferences. All these shifts are leading to a manufacturing investment super cycle in developed economies around the world — and upending global supply chain networks.

With these thoughts in mind, the following are opportunities for real estate and supply chain executives to think and partner strategically:

  • Strategic vision: Understand the current and future ambitions of the organization and sources of competitive advantage, as well as risk.
  • Holistic cost view: Go beyond basic cost calculations to assess the long-term implications of reshoring, which includes evaluating the benefits of faster time to market, improved product quality and brand reputation.
  • Stakeholder engagement: Collaborate closely with key stakeholders across real estate, finance, supply chain and manufacturing, as well as external stakeholders, such as suppliers and customers.
  • Risk management: Evaluate current supply chain vulnerabilities and potential future risk areas.
  • Sustainability and ethics: Verify that operations adhere to high standards of sustainability and ethical practices, aligning with the company’s commitment to corporate social responsibility.

Abhi Ahuja, Amit Vijay, Jitin Chopra, Megan Wilson and Michael O’Leary of Ernst & Young LPP contributed to this article.


Summary

Now more than ever, it’s crucial for leaders in real estate and supply chain to collaborate closely. They need to work together to convince company executives of the necessity to reassess their supply chain footprint and its wider impact on the business. This requires far more than just logistical work — it’s a strategic necessity demanding a comprehensive grasp of global market dynamics, detailed risk evaluations, trade and tariff schemes, and incentives.

Related articles

Shifting to intelligent facilities management: pitfalls and strategies

Uncover the transition to intelligent facilities management (iFM), its benefits, pitfalls, and effective implementation strategies. Learn more

How can digital real estate transform the chemicals industry?

Disruptive forces are causing chemicals and advanced materials companies to look at digital real estate. Read to learn more.

3 corporate real estate strategies for a hybrid workforce

Goodwill impairment valuations are required for financial reporting standards and can also be valuable for strategic decision-making.