From our CRE Service Delivery and Outsourcing Thought Leader Contributor, EY.

By: Nihar Satapathy and Michael J. O’LearyContributors: Abhi Ahuja, Amit Vijay, Jitin Chopra, Megan Wilson, Michael J. Golichowski

As global uncertainty persists, companies are evaluating the business imperative of shifting key operations closer to customer demand.

In brief:

• The cost advantages of maintaining manufacturing and distribution operations overseas have diminished with higher tariffs and longer lead times.
• With the likelihood of new reporting protocols on emissions and sustainability measures, companies are exploring ways to avoid fees and reduce their footprint.
• Supply chain and real estate leaders seek to deliver results while optimizing network operations to increase agility and sustainability.

Over the past several years, supply chain networks have been stress-tested to the point of failure in many cases. The challenges of the pandemic — shortages of critical goods, shipping delays and an increased cost of doing business — have exposed the fragility of global supply chain networks. Similar challenges are arising out of additional disruptions, such as the ongoing Panama Canal constraints and more recently, restricted Suez Canal traffic due to Red Sea conflicts, which have resulted in shipping delays and diversions of shipments. Learnings from the pandemic combined with geopolitical conflict, tariffs, inflation, government incentives, adverse weather events and other concerns are compelling supply chain and real estate executives to reconsider their long-term supply chain strategies and network footprint, including their real estate assets. One strategy that must be explored is reshoring or nearshoring manufacturing operations to be closer to customers.

“As we spend time with a wide variety of global manufacturing organizations, we are seeing companies focus on cost efficiency, resiliency in their supply chain and agile flexibility in meeting customers’ evolving needs,” said Michael J. O’Leary, Partner and Market Segment Leader, US-Central Region Advanced Manufacturing and Mobility (AM&M), with Ernst & Young LLP. “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 optimize 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.

Summary

Real estate and supply chain leaders must partner closely, now more than ever, to engage company leadership on the case for re-evaluating their supply chain footprint and the broader implications on the enterprise. This is not just a logistical endeavor, but a strategic imperative that requires a deep understanding of global market dynamics, nuanced risk assessments, trade and tariff schemes, and incentives.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.