What the Election Means for Manufacturing & Supply Chain

What the Election Means for Manufacturing & Supply Chain

Manufacturers have been in a bit of a slump lately with order backlogs being pushed out and delayed as inflation soared and demand dampened. Supply chains have been at heightened risk levels with wars and potential conflicts raging, labor negotiations and strikes fears increasing, and weather events creating havoc in the end-to-end supply chain. For example, refer to our blog articles about the Houthi rebels attacking ships in the Suez Canal, Hurricane Helene causing IV fluid shortages, Hezbollah pagers exploding in the Middle East, and the East Coast and Gulf Coast port strike/ potential strike and its significant economic impact.

Thus, the question on everyone’s mind is what does the election mean for manufacturing and supply chain? Will it be a continuation of the status quo, a surge for manufacturers, or a further dampening of the economy? To a large degree, regardless of the result of any election, knowing the result provides a stabilizing force as executives can pivot to expected future conditions. With that said, there are emerging themes for manufacturers, distributors and supply chain organizations with the decisive results of the election.

Key Themes:

• Manufacturing renaissance supported with several vital strategies including….
• Critical importance and control of natural resources
• Regionalization of supply chains with a focus on risk mitigation & addressing vulnerabilities

Breakthrough in innovation, advanced technologies, ERP, and artificial intelligence (AI)

Manufacturing Renaissance & the Path Forward

As we have been discussing for several years, the only successful path forward from a risk mitigation and natural security perspective is to create a manufacturing renaissance. For example, refer to our article, “Although Manufacturing Declined, the Smart are Planning for a Renaissance” to learn more. Why do we expect the election results point to a manufacturing renaissance? Let’s talk about the key reasons we expect this outcome.

 

• Risk mitigation: There is an abundance of evidence that there is heightened risk and vulnerabilities in the end-to-end supply chain. Clearly, the more reshoring, expansion of manufacturing, use of advanced technologies and automation, and vertical integration that occurs to regionalize manufacturing, the better control gained and risks mitigated. Refer to our article, “Supply Chain Vulnerabilities, Disruptions & Risks: Proactive Plans“.
• Tariffs: Although controversial, Trump has said that he supports reciprocal tariffs. This means that if China charges the U.S. a 100% tariff on their product, the U.S. charges China a 100% on their product. In addition, Trump has said that he sees tariffs as a negotiating tool. Thus, although he might threaten a 200% tariff on products from a country encouraging a war, he will reduce or remove the tariff if they agree to seek peace. Similarly in concept, he has discussed putting a big tariff on cars produced in Mexico vs. providing a tax incentive for manufacturers that move production to the U.S. Clearly, these statements will encourage domestic manufacturing. There will be initial inflation caused by the tariffs; however, as energy production and manufacturing ramps up, supply will expand and prices will dissipate.
• Regulations: During Trump’s first term, he signed an executive order that required for every new regulation, two must be revoked. The feedback we hear from manufacturers, especially in places such as California is that they are focused on being environmentally friendly and have made great strides that puts them FAR above their competitors in places like China, but they cannot survive in a heavy regulatory environment that puts them at a severe disadvantage to China and other competitors. In fact, as many strides as have been made, the technology does not yet exist to meet regulations already in existence. The bottom line: they are for common sense regulations to create a healthy environment and one that provides a less lopsided starting point. There is definitely hope that a more successful path forward will emerge and manufacturers will benefit (and have far less cost) as unnecessary regulations are lessened. In CA alone, if warehouses are no longer responsible for truck pollution that they cannot control as that is the definition of their key customer (trucks dropping off and picking up products), it will allow them to continue to do business.
• Natural resources including energy: Manufacturing cannot thrive without access to critical natural resources such as electricity, water, and rare earths. If access is more abundant, it supports a manufacturing renaissance. For example, AI will require between two to ten times the electricity to power depending on the survey/ researcher. Refer to our article, “Geopolitics, Natural Resources & Impacts to the Supply Chain” for more information on how natural resources impact just about everything in manufacturing and supply chain. Remember, at its simplest form, transportation is about getting from point a to point b which requires gas, electricity, or another form of power. On the manufacturing side, countless products from medical devices to diapers require significant natural resources to produce. The requirement for rare earths is overwhelming with advancements such as AI, electrical vehicles, and other products. We will need more rare earths in the next 27 years than we did in the last 3000 years.
• Tax incentives: The tax incentives Trump has discussed favor the worker and incentivize manufacturing. For example, he has said he would like to eliminate taxes on overtime, thereby incentivizing workers to increase manufacturing output. He has also said he supports no taxes on social security, thereby incentivizing recently retired workers to share their extensive knowledge with younger generations and supplementing workforces to increase output. And, Trump has said that he wants to incentivize manufacturing by stating that he will reduce taxes on companies that move manufacturing back to the U.S. According to the National Association of Manufacturers, for every $1 spent in manufacturing, there is a total impact of $2.69 to the overall economy.
• Peace through strength: As Ronald Reagan made “peace through strength” famous, Trump has said he believes in the same strategy. Because the U.S. has supported Ukraine, Israel and others with weapons, these stockpiles need to be replenished. Additionally, there have been many advancements in weapons and to support peace, the U.S. needs to keep up with the latest advancements, thereby requiring investment to modernize. Last but not least, Trump has said that he wants to build an iron dome similar to what Israel has done to protect the U.S., requiring additional production of weapon systems.
• Increasing supply: Trump & his economic advisors advocate for supply side economics. As SIOP (Sales Inventory Operations Planning) specialists, we see the value and celebrate the importance of the demand vs supply curves. In this case, they plan to turn up the spigot on oil and gas production to increase the supply of electricity, thereby increasing the supply to match and exceed the demand which will reduce the price of energy. They prefer to increase the production of environmentally friendly energy in the U.S. (vs the rest of the world) and sell it to allies, further mitigating supply chain risk and rebalancing demand and supply. According to Reuters reporting, European Commission President Ursula von der Leyen told reporters that the European Union could consider replacing Russian liquefied natural gas (LNG) imports with those from the United States. On the opposite spectrum, Trump and Elon Musk are focused on reduction of unnecessary government. Depending on how it is handled with the workers and to support government functions, it could offset increased costs elsewhere and free up workers to be upskilled to support manufacturing and supply chain roles. Of course, that is much simpler said than done!
• Focus on innovation & advanced technologies: There isn’t a lot of information on innovation yet although Operation Warp Speed turned a public and private partnership into a success story and the creation of Space Force shows an inclination for innovation, and so it is likely to predict where things will go. Clearly, there is also influence from people like Elon Musk, the support for leading the charge on AI and cryptocurrency, and so our guess is there will be a focus on innovation. Manufacturing will be more successful with innovation supporting its renaissance. In fact, manufacturers are already ahead of the game with the focus on automation, robotics, artificial intelligence, digital twins, modern ERP and advanced technologies.

Other Predictions

In addition to a manufacturing renaissance, we believe regional manufacturing and more condensed supply chains will prevail. There is simply too much risk to rely on non-friendly countries for vital products such as medical devices, food and beverage, defense, and infrastructure related equipment and technologies. With that said, even consumer devices can be subject to supply chain vulnerabilities with the internet of things (IoT). For example, the exploding pagers illustrated this risk. Refer to our interview on NTV news on these supply chain vulnerabilities.

Even for non vital products, there will be a trend towards regional supply chains to gain control over the supply chain. Friendly shoring / near-shoring will gain in popularity with regional trade agreements with low labor cost countries for commodity type products. The U.S. will be stronger with stronger allies and friendly countries growing and pulling in the same direction, and so we expect growth in these areas. Look for policies that encourage friendly country cooperation to build on peace through strength.

Although there will be a big focus on oil and gas production, we believe there will be a complimentary focus on environmentally friendly technologies that can produce results. Common sense strategies will be required to support this renaissance along with a critical focus on talent, process improvement, and advanced technologies. Larger organizations will not change course and will keep it as a core goal.

Scale will be an important factor. There is no way to transfer manufacturing from China to the U.S. or nearby countries at scale, and so forward-thinking organizations will devise strategies to maintain momentum and move to the future. For example, although nearshoring medical devices to Costa Rica is promising, it has a fraction of the capacity that would be required. The same is true for logistics. For example, the reason that Los Angeles and Long Beach continue to survive is not because of their cost structure, speed, or the use of automation as compared with global competition (to be sure). They have the advantage of scale and can bring in hard-to-imagine amounts of containers and are supported by a vast goods movement infrastructure of trucks, rail, warehouses, etc. There is a significant effort in goods movement to leverage advanced technologies. The investments required to offset cyber attacks, support advanced technologies and other improvements is not pocket change, thereby giving a leg up to those with scale. It also makes access to capital a critical component to watch. With that said, innovation can partially offset scale and so there is much to watch. After all, Amazon beat the big dog, Sears, at its own game.

Talent will remain a critical focus as the Baby Boomer generation has been retiring rapidly as the younger workers take over. Refer to our article, “Skills Gap Challenge for Manufacturing Success” as it illustrates the severe skills gap. We expect a strong focus on training, educating, retaining, and building talent to support these transformations, supplemented with temporary or contract older workers and other categories of workers transitioning from other careers. What will not change? The executives that engage and empower their employees and focus on common sense and strong organizational development strategies will thrive. Give me a strong leader with a rotten company any day vs. a weak leader and a strong company! New leaders will have to be created. Talent with supply chain, manufacturing and advanced technologies skills will thrive for decades to come.

Of course, I’d be remiss if I didn’t add that SIOP (Sales Inventory Operations Planning) processes will remain vital in staying ahead of the curve and bringing these strategies to fruition. SIOP will alert you to changing business conditions, responses to policy adjustments, and impacts on demand and supply. Maintaining an operational rhythm with SIOP will prove vital to navigating the landscape and achieving profitable growth amidst significant changes in the supply chain and likely consolidations and partnerships in the business landscape. Strategic inventory management (in some cases, increasing inventory to leverage opportunities and mitigate risk, and in some cases, reducing unnecessary inventory to reinvest in the business) will become key. To learn more about how to roll out the full SIOP process and read about case studies, read our book, SIOP: Creating Predictable Revenue and EBITDA Growth.

Bottom Line

There will be more opportunities for the proactive, innovative, resilient and forward-thinking manufacturing and supply chain organizations than ever before. The only question will be if they take prudent risks to prepare and leap forward as the opportunities arise. On the other hand, the status quo will no longer be viable. We predict owner operators ready to retire will sell to forward-thinking companies that want to build scale, and weak organizations will deteriorate and be absorbed, providing an opportunity to those poised for success.

If you are interested in reading more on this topic:
Reallocating Manufacturing & Supply Chain Capacity to Mitigate Risk & Ensure Success