COVID-19 may no longer be a significant public health threat, but the global supply chain remains chock full of risk. The threats are seemingly everywhere these days: The Israel-Hamas war, which is sabotaging trade routes in the Red Sea; extreme drought, which is curtailing shipping in the Panama Canal, and China’s military aggression, which is threatening lawful commerce in the South China Sea. Although companies have become more resilient to evolving economic and geopolitical conditions in recent years, resilience alone is not enough to overcome the challenges facing suppliers. Companies must adopt flexible and dynamic supply chain risk mitigation strategies in order to survive and thrive in this volatile, post-pandemic, anything-goes environment.
Global Supply Chain Chokepoints
The global economy’s growing interconnection has had a ripple effect on international supply chains, whereupon disruptions in one part of the world impact conditions elsewhere, often in unexpected ways. Consider the Russia-Ukraine war, for instance. Economic sanctions on Russia has forced Europe to find new energy suppliers, prompting Russia to circumvent oil flows to India and China (together, both countries accounted for 90% of its crude exports in 2023, according to Deputy Prime Minister Alexander Novak). Food and commodity supply chains are still being impacted, too. The United States has restricted the supply of Russia-produced metals like platinum, titanium, and nickel, disrupting automobile, electronics, and medical device production.
Computer chip manufacturing also could suffer the same fate, thanks to increasing tensions between China and Taiwan. China has ramped up its aggression toward the island nation by performing military exercises, raising fears of a potential armed conflict in the area. Hostilities in the area would practically grind global microchip and semiconductor production to a halt, as Taiwan produces more than 90% of the world’s advanced computer chips and 60% of semiconductors. Like most industries, medtech is heavily dependent on microchips.
China’s aggression in the South China Sea also threatens the free passage of vital medical supplies in the area. The Middle Kingdom is a key access for the Western World products, even if it is not the primary manufacturing locale. Merchandise made in other Asian countries must frequently still be transported through the South China Sea.
Over in the Middle East, the ongoing Israel-Hamas war is wreaking havoc on container ship traffic in the Suez Canal. To avoid being caught in Houthis attacks in the Red Sea, container ships are being diverted around Africa’s southern tip, which adds about 10 days and 1,900 nautical miles to a typical trip from Asia to Europep. Container ships to the eastern United States, meanwhile now go through the Panama Canal or to West Coast ports. Price inflation has occurred as well.
The Panama Canal, however, is not a significantly better option. A severe drought in the country has triggered water depth and weight restrictions on ships passing through the canal, as well as additional container surcharges on shippers. Consequently, ship crossings have fallen by 36%, according to the Associated Press, as companies increasingly look for other passageways to move their goods. Naturally, price hikes followed.
Labor Pains
Labor issues continue to markedly affect suppliers. The strikes and labor unrest permeating global supply chains have been exacerbated by a high-skilled worker shortage. Manufacturers in most, if not all, medtech industry sectors are struggling to fill key roles but their efforts may be for naught: The National Association of Manufacturers predicts that 2.1 million manufacturing jobs could go unfilled by 2030. Other industries face a grim future as well—the current shortage of 80,000 truck drivers is expected to double by 2030, according to the American Journal of Transportation, and the seafarer worker deficit reached a 17-year high in 2023, as reported by the Maritime Executive. These shortfalls are not expected to improve anytime soon either, thanks to retiring baby boomers.
From Risk to Opportunity
The next decade will continue to be fraught with supply chain disruptions as geopolitics and unexpected events continue to occur. Between ongoing aggressions from China, Russia, Iran and North Korea; climate-induced weather events; labor shortages; and the complexities of extended supply chains; volatility and uncertainty will dominate the headlines. As countries struggle to incorporate the escalating prices due to limited supply, labor shortages and disruptions, countries are raising interest rates to dampen demand. Thus, companies are reluctant to invest in capital equipment, technologies, inventory, and talent to prepare for the future, creating a vicious cycle of supply chain misalignment.
Companies that refuse to change their supply chain strategies will be stymied by poor service levels and unhappy customers while firms willing to proactively invest in innovation, visibility, and resilience measures will thrive. Growth opportunities will exist in the next decade for organizations that are prepared to supply target customers and markets. Medtech firms can strengthen their responsiveness and resilience through reshoring and nearshoring.
Reshoring and Nearshoring
As global supply chains become more plagued with risk, smart companies are pursuing alternate strategies and expanding their sources of supply. In addition to sourcing additional regional supply chain partners, medtech firms are reshoring and nearshoring. According to Xometry’s Medical Industry Survey, medical device manufacturers are rapidly reshoring operations to strengthen their domestic supply chains. In fact, 67% of medical device manufacturers are in the process of reshoring operations within the next 12 months, survey data indicate.
Reshoring and nearshoring operations provide several benefits to the medical device industry. In addition to improved supply chain resilience, reduced lead times, and quicker product design cycles, reshoring and nearshoring allow for greater process control and quality standards. Reshoring and nearshoring also help reduce costs.
China is no longer considered a low-cost country due to increased labor rates, whereas Mexico and Latin America can provide affordable manufacturing, Reshoring Institute statistics show. However, automation and advanced technologies such as 3D printing, Internet of Things, and artificial intelligence are making labor costs irrelevant. Transportation and inventory carrying costs are actually becoming more significant, which is driving increased interest in reshoring and nearshoring.
Proactive medtech companies are reviewing the best way to transfer tooling. Forum Plastics claims that China adds about 20% to the overall price of shipping tools to North America in order to cover taxes and tariffs (equivalent to about 25% of the total cost). Transit delays/disruptions and domestic sourcing of medical-grade materials also have made reshoring and nearshoring an attractive solution for North American healthcare companies. Case in point: North America accounts for about 20% of the global plastics industry materials production, including engineered resins such as poly ether ether ketone for implants.
There is also considerable reshoring of semiconductors as the U.S. brings capacity online. This ramp-up is prompting the U.S. to reverse its semiconductor outsourcing trend—it went from 37% in 1990 to 12% in recent years with investments in Texas (Samsung, Texas Instruments), Arizona (TSMC), Ohio (Intel), New York (Micron), and others. Medtech firms will be more apt to reshore and nearshore as critical materials, components, and supplies become regionally available.
Medtech on the Move
Medical technology companies are rethinking their manufacturing and distribution network strategies in light of recent supply chain disruptions. Ascential Technologies, for example, expanded its domestic manufacturing footprint last fall by opening a 100,000-square-foot facility in Blaine, Minn. The opening occurred shortly after the White House designated Minnesota as a “medtech hub.”
3M has adjusted its supply chain logistics as well to minimize production disruptions. Four years ago, the company transitioned to a regional manufacturing strategy—i.e., made in the United States for the United States/made in Asia for Asia.
Nearshoring and contract manufacturing are prompting medtech behemoths like Johnson & Johnson, Medtronic, and GE Healthcare to switch their manufacturing operations from China to Mexico. Similarly, Costa Rica has become a popular nearshoring destination with its specialized labor pool and life sciences hubs, attracting the likes of Abbott Laboratories, Cardinal Health, and Boston Scientific Corp. Others nearshoring favorites include Puerto Rico, which has amassed the world’s densest concentration of pharmaceutical, biological, and medical device manufacturing; and the Dominican Republic, now the third largest U.S. medical device exporter.
Global supply chains remain mired in risk. Proactive medtech executives are getting ahead of the curve and positioning their supply chains to take advantage of future opportunities. Regional manufacturing hubs can support aggressive growth and resilience while minimizing risk.
Lisa Anderson is the founder and president of LMA Consulting Group Inc., a consulting firm specializing in manufacturing strategy and end-to-end supply chain transformation that maximizes the customer experience and enables profitable, scalable, dramatic business growth. She recently released “SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth,” an e-book on how to better navigate supply chain chaos and ensure profitable, scalable business growth. A complimentary download can be found at www.lma-consultinggroup.com/siop-book/.
Originally posted on Medical Product Outsourcing on April 4, 2024.