Skip to main content

Manufacturing Costs & Supply Chain Resiliency

May 28, 2021

Concerned about rising input costs, material shortages, or supply chain disruptions? Catch our newest TrendsTalk episode with ITR Economics Analyst and Speaker Taylor St. Germain for insights on trends surrounding these concerns.

 

 

Follow Us

SoundCloud   •  Spotify  •   iTunes   •   YouTube

← Back to list of episodes.

Transcript by Rev


I'm Taylor St. Germain with ITR Economics, and I'm excited to talk about manufacturing costs and supply chain resiliency. Based on recent surveys and conversations we've had with our clients, it's clear that there are a lot of concerns related to rising input costs, material shortages, and supply chain disruptions. So I wanted to address two things today, which is the cost competitiveness when we compare the United States to other countries around the world, and also the supply chain resiliency, again, comparing the United States to some other countries around the world. I wanted to first start off today talking about that manufacturing cost competitiveness and the data source that I'm using to discuss this today is the Boston Consulting Group's, global manufacturing cost competitive in NEC index. The index tracks changes in relative wages, productivity, growth, currency exchange rates, and energy costs. So essentially what the Boston Consulting Group does is they assign the U.S. a value of 100.

So anything above the value of 100 suggests it is more expensive to manufacture than compared to the U.S. Anything below that value of 100, would suggest it's actually more cost-effective to manufacture in that country. So again, the U.S. receives that value of 100. France receives a value of 122, the UK comes in at 108, Switzerland 120, Germany 116. So in general, Western Europe, it costs more to manufacture in Western Europe than it does here in the United States. That's probably not all that surprising to many of you. However, the data points I wanted to talk about were China in particular, which received a value of 95 to 97, compared to the U.S.'s 100. That's really only marginally more cost-effective to produce in China compared to the U.S. That gap has narrowed over the years.

When you look at some other countries, whether that's Mexico with a value of 86, Malaysia with a value of 83, Vietnam with a value of 94, those are all below the U.S. value of 100 and again, that suggests that there is a benefit from a cost standpoint to manufacture in those countries. So the high level findings from the Boston Consulting Group as it related to this index, was that essentially the U.S. overall cost competitiveness improved against 18 of the world's 38 biggest manufacturing economies. The European economies have under-invested in productivity and became less competitive from a cost standpoint. And then when we look at countries like Southeast Asia, the importance of the low cost manufacturing region is rising. So when we look at Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam, they offer some of the world's most competitive production costs, but that gap has been generally closing over time. So probably not all that surprising that it's more expensive to manufacture in Europe, marginally more cost-effective in China, and I guess the significant cost advantage to producing in some of the Southeast Asian countries.

However, I think there's a key variable that we all need to consider, especially in the times that we find ourselves in, which is the resiliency of the supply chain. Cost is certainly one important piece and that will drive a lot of the decisions we're making because of the impact on the bottom line, where are we sourcing those materials from? But I think we need to put a stronger emphasis on resiliency, especially in the face of all of these disruptions that we've encountered throughout the last few years, not just so far this year in 2021. So the data source I utilized to look at resiliency is the FM Global Resilience Index. What this index does is it ranks the overall resilience of business environments of 130 countries and territories and that's based on a dozen measures of economic, risk quality, and supply chain resiliency.

The measures that the FM Global Index is utilizing are based on data from third parties, like the UN, the World Economic Forum, the World Bank, the IMF, as well as some individual data points from the FM Global engineers. So it's similar concept. It's essentially what the FM Global Resiliency Index does is it gives a country a score from 1 to 100 where a value of 100 would indicate the most resilient and a value of one would be the least resilient. So when we look at some of the most resilient countries, some of our favorites, at least that I've handpicked, we have the UK coming in at 91.4, Germany at 88.3, Canada at 88, and Japan at 86. All very resilient supply chains. Again, based on the manufacturing cost competitiveness, those are typically countries that you will incur a higher cost to manufacturer, but they have a much more resilient supply chain. So that's fewer disruptions and headaches that you'll have to deal with.

The United States comes in not a value of 85.2, which is quite high. In comparison, China comes in on the value of 61.8. So here's where the real question comes. Yes, China is marginally more, I guess, beneficial from a cost standpoint, it does cost slightly less in China to produce compared to the U.S., however, the U.S. has a significant advantage in terms of the resiliency of the supply chain. And I think we need to weigh this factor with more importance. Sure, it might be more cost-effective to produce in China, but if you were constantly waiting on product and material as a result of disruptions and increased shipping costs, it might be more impactful to start looking at sourcing your supply chain domestically. Then when we look at some of the very low cost countries, if you remember Mexico, Vietnam were very low on the manufacturing cost competitiveness, but their resiliency scores are 50.5 for Mexico and 49.1. So even less resilient than what we're seeing come out of China.

So I think it's important as we look out to this very attractive economic growth that ITR has forecasted really throughout the first half of this decade, that we're not just weighing costs, but we're also weighing some of these resiliency factors. Again, this is all publicly available data. So I urge you to go take a look at some of these sources and start asking some of those difficult questions, which is that, do I need to look at sourcing material from other regions of the world, even if it's slightly more expensive, if it means I have a more consistent reliability on those countries in terms of their ability to get me product? So I think it's an important evaluation to make at this point, especially given all of these disruptions that have played really the first half of this year so far.

So that includes this week's TrendsTalk. Looking forward to talking with you all next time. I'm Taylor St. Germain.

About

Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.