Manufacturers are moving facilities closer to home, which presents an opportunity to upgrade to smart factory infrastructure. It also means making critical decisions about facility investments, strategy, technology, and people.
For decades, the story of manufacturing was globalization. But, in recent years, manufacturers have begun to move production closer to home. This means new or expanded local facilities, which makes the opportunity to upgrade to smart factory infrastructure at these facilities irresistible.
Upgrading to a smart factory infrastructure, however, is a complicated endeavor. Should you build new (a greenfield approach) or upgrade an existing facility (a brownfield approach)? What strategic and technology considerations should guide your planning? How should you evolve your workforce? Finding answers to these critical questions is key to realizing the opportunities inherent in the recent reshoring and localization trend.
The last decade has witnessed many global supply chain disruptions—an earthquake and tsunami in Japan, floods in Thailand, a US-China trade war, the COVID-19 pandemic, and, more recently, blockage of the Suez Canal.1 The push for reshoring, to minimize supply chain disruption, started long before COVID-19, but it accelerated during the pandemic as the importance of supply chain resilience came to the forefront.
A survey of global analysts in August 2020 found that more than 80% of industries experienced supply chain disruptions because of the pandemic, and about 75% of companies are planning to accelerate their reshoring initiatives by building smart factories closer to home locations, or their customers’ point of need.2
Also, in recent years, many lower manufacturing cost regions have experienced wage inflation. This has reduced the labor arbitrage opportunity, especially when balanced against supply chain risks. For example, labor costs in China have been rising greatly in past years, and overshot those in Mexico about five years ago, which makes US locations much more attractive to native companies.3
In addition to lower cost, reshoring (bringing production to a home country or points of demand) and localization (bringing production closer to a home country or points of demand) offer other benefits through geographical proximity, time zone alignment, shorter lead times, and better service delivery. It also helps manufacturers tailor products to local preferences, and in some locations offer more intellectual property (IP) protection and a more talented local workforce.
Reshoring and localization can also be driven by customers’ perception of a brand and its purpose. Approximately, 65% of global customers (including both consumers and industrial buyers) said they would prefer products made in their country, prompting many companies to localize production by building nearby smart factory capabilities.4
Over the years, customers’ need for trustworthy supply chains has been an evolving and accelerating trend. Beyond pandemic-induced drivers, rethinking where manufacturing occurs and how supply chains are structured will likely be ongoing considerations. Customers will likely continue to look for trustworthy supply chains that exhibit two broad dimensions: competence (being operationally excellent) and character (having a social conscience and being environmentally sustainable). These considerations will help determine what products companies manufacture and where they base their facilities.
As companies plan to move home or near home, they should consider embedding smart factory capabilities that offer opportunities to enhance both competence and character. Based on a Deloitte global study, companies running smart factory initiatives have, on an average, seen a 10% increase in production output, 11% increase in capacity utilization, and 12% increase in labor productivity.5 Smart factory capabilities can also speed new products to market by reducing innovation development time as much as 30%.6 In addition, smart factory capabilities create opportunities to make energy-efficient changes—over 80% of respondents in an August 2020 Deloitte MAPI survey said that they have invested in advanced technologies for plant consumption and energy management in the last two years.7
Given these performance benefits, many business leaders are investing in smart factories. In the Deloitte-MAPI survey, 62% of 850 global executives committed to continuing or accelerating their smart factory investments.8 And on average, companies allocated 20% more toward smart factory budgets in 2020 compared to 2019.
Beyond improving efficiency and mitigating supply chain risk, both greenfield and brownfield approaches offer significant opportunities for new digital, automation, and other smart factory capabilities that improve manufacturing and supply chain performance. Costs, benefits, and risks are associated with both brownfield and greenfield approaches, and leaders should weigh the merits of each strategy to determine which makes the most sense in each situation. Not surprisingly, in the Manufacturing Ecosystems study, respondents focused on balancing both: retrofitting their existing facilities with building new facilities in equal measure.
When weighing greenfield versus brownfield, leaders should consider many factors that are intertwined and impact each other (figure 1), making this decision complex and multifaceted.9
Broadly, choosing between greenfield and brownfield typically
hinges on three key corporate considerations: costs and timelines,
capacity expansion, and capabilities development.
Evaluating costs and timelines: Greenfield investments typically require higher infrastructure development costs than brownfield facilities given the need to build a factory from the ground up versus expanding an existing facility. With brownfield operations, companies can identify existing pain points and leverage smart factory capabilities in their existing operations more quickly than building a new factory.
Both approaches have financial and tax implications. However, an exact comparison of costs involved, and associated incentives depends on the location and the nature of the facility and requires a detailed assessment. But not all benefits will be tangible. Local job creation through a greenfield investment, for example, could lead to enhanced goodwill and brand presence in the new location.
Expanding existing capacity: If a brownfield facility exists, it’s important to assess its condition and whether it makes sense to expand the capacity in the current location. In a brownfield situation, there are inherent advantages associated with existing real estate such as an established physical supply chain, labor, and support functions, which can be extended to support the business expansion.
Ultimately, however, there could be more disruptions and limitations than initially assumed with a brownfield approach. Leaders of reshoring or localizing companies may feel confident with their physical flows and processes and believe that they just need a technology upgrade to acquire smart factory capabilities. Unfortunately, that’s often not the case. For example, there may be space constraints that limit the reconfiguration of assets and production lines. Moreover, the ability to integrate new systems with existing operations technology in legacy manufacturing sites can require extensive and sometimes expensive upgrades. Additionally, companies often underestimate the difficulty of getting workers to think and work differently. Finally, existing plants might not be close enough to new or expanding customer markets to encourage innovation and growth.
Establishing smart factory capabilities: Most business leaders find that there are two main objectives behind smart factory implementations: expanding current capabilities and building new capabilities. If the objective is to expand current capabilities, a brownfield approach could be suitable.In a brownfield setting, “making room” by deploying smart factory capabilities can look like other forms of digital transformation. Thus, many organizations can leverage brownfield investments to meet the following objectives:
If the objective is to build new capabilities and address deep-rooted process, asset, and technology challenges by rethinking established ways of working, a greenfield approach could be better suited.10 A new smart factory could be better aligned to the businesses' strategic direction as it's designed with these requirements in mind and could greatly enhance flexibility to meet rapidly changing customer needs of a dynamic market segment.
With a greenfield approach, it's important to assess the organization’s experience with a particular geographic location in terms of technical knowhow and understanding of the talent and customer segments. Additionally, there may be several methods to “go greenfield,” such as setting up your own facility, licensing it, or forging a new joint venture. However, locating, designing, and building a new smart factory from the ground up is challenging for even well-established companies. This approach generally requires significant capital outlays and construction timelines compared to other approaches. Real estate cost, tax implications, workforce recruiting and retention, and supply chain partners are important to address before building a new smart factory.11
Key smart factory considerations for a greenfield facility include:
Greenfield operations provide the potential to reimagine your business; however, moving forward without a honed and disciplined plan could be disastrous. It’s important to take all factors into consideration, simulate, and test using digital twins to ensure accurate construction and delivery. Before you bend metal or pour concrete, you should know exactly the capacity, capability, and cost of the expected facility by having an exact virtual replica (a digital twin), which permits comprehensive modeling, simulation, testing, and evaluation of the proposed factory. Additionally, this digitalization can be invaluable to help ensure detailed oversight of the product, production, and performance of your new facility for years to come.
Since there are many moving parts to a reshoring and localization discussion, creating a scorecard or checklist to closely examine factors and associated favorability scores helps compare options (figure 1). However, despite thorough planning, there will be uncertainties associated with changes in climate, political environments, and other factors that could impact the outcome of a decision in either direction.
Regardless of the choice between brownfield or greenfield investments, strategy, technology, and people are critical to building smart factory capabilities that are prepared to weather future supply chain disruptions.
Strategy: A “zoom out/zoom in” approach12 focuses on different time and space horizons for strategy and business planning. Iterating between the horizons can be helpful when looking at the overall reshoring or localization strategy. Zoom out and start with the organization’s long-term global footprint strategy. If you don’t have one, create one. Then zoom in and focus on the organization’s presence within the targeted local ecosystem. Finally, assess agility within the four walls of the factory. Reshoring and localization present opportunities to examine value creation across an organization, assess global supply chain security and future market trends, as well as evaluate the organization’s energy resiliency and climate change strategies. Ultimately, driving factors for both brownfield and greenfield approaches will likely depend on customers’ needs and preferences. Key strategic considerations include:
Bringing operations closer to home base also helps companies reduce transportation-related emissions from distant locations and gives them more control and visibility into their nearby suppliers’ compliance with and support toward climate change goals. Thus, companies could tackle their “Scope 3” emissions better. (These are emissions occurring in the broader supply chain such as those resulting from transportation and distribution, waste disposal, etc.)
Technology and data management: Parts of the supply chain may have been automated with different platforms that may be difficult to integrate. It’s important to identify how to remove or reduce these digital breaks, thus reducing the need for manual interventions, (so output from one system can automatically feed into another) thereby reducing errors and improving efficiency. Finally, maintaining data streams in a secure environment is critical to successful smart factory operations. Across technology and data management efforts, it’s important to remember that machines are not just for augmenting humans but unleashing and enabling greater human potential.19 Below are some of the key areas for leaders to consider:
Workforce: Investing in people is as important as investing in fixed assets and IP. Some key workforce considerations include:
Reshoring is easier said than done and it’s not a decision that supply chain executives can make in isolation. Multiple factors come into play and competing priorities can deeply affect the direction business leaders choose. Accordingly, there should be an understanding, evaluation, and consensus regarding the trade-offs among costs, risks, and resilience.
Both for brownfield and greenfield decisions, a comprehensive and thoughtful approach for strategy, technology, and workforce is critical for a successful reshoring or localization execution. Also, this is a long-term process depending on whether the entire supply chain, or parts of it, will be brought onshore or localized. Starting early is important. It’s also vitally important to review the overall impact that multiple reshoring and localization efforts may have on heightened demand for landed space and talent availability at target locations. Just as essential is the execution of current operations while reshoring and localization is occurring. Leaders should seek to minimize disruption to current work (as much as possible) and ensure that impacted people are involved early in open, two-way communications.
No two manufacturers will likely face the same conditions or decisions for reshoring, and organizations that cater to global customers may need to deploy complex localization strategies.
It’s not always as simple as ‘bringing production closer to home’
In the case of global companies, reshoring or localization may not be focused on a single home country; instead the effort could entail local-for-local manufacturing in regional production sites that are closer to where product demands come from.25 It’s important to note that when parts of the supply chain are brought back to the home country, typically, the assembly and Tier 1 operations may be reshored/localized, and Tier 2 and 3 operations may still remain in a foreign location, which makes external dependence a continuing concern.26 Many companies are also considering a “China+1” strategy to diversify their operations, with operations in another country that offers benefits akin to manufacturing in China.27 The challenge with this approach is that it turned out that many of the “+1” countries also got their supplies from China, so even those pursuing this strategy found their supply chains got disrupted during the pandemic. The bottom line is that many companies have realized their deep dependence on China. Even if they felt diversified, once they got below Tier 3, much of their supply chain came from just one place. For organizations to truly mitigate risk, they should ensure that their supply network is not dependent entirely on one area beyond Tier 2 levels as well.
And some industries are more likely to bring production closer to home than others
While popular media discusses reshoring and localization across industries in the same manner, the real activity is likely to happen in select industries with sound business cases.28 In response to COVID-19 and a general increase in global trade and national security tensions, many countries are focusing on rebuilding their domestic manufacturing capacity in critical supply chains such as pharmaceuticals, medical devices, and electronic products.29
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.
Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
Our Supply Chain and Network Operations practice can help you imagine, deliver, and run robust digital supply networks to address tomorrow’s challenges and opportunities. Our team of business consultants, engineers, and specialists can help you respond to disruption with confidence and agility, explore what’s possible with a hyperconnected network, and deliver enriched business value.