Please click here for the first post in this series.
In an article in MIT Sloan Management Review, supply chain academics and experts David Simchi-Levi, James Paul Peruvankal, Narendra Mulani and Bill Read offer up a number of hypotheses examining how global sourcing is changing. On Spend Matters, we have explored the authors’ second argument for a long time. As they word it, “Sourcing and production may need to move closer to demand.” Specifically, “as cheaper manufacturing costs are offset by higher transportation costs, it may be necessary to move more manufacturing and sourcing activities onshore. The merits of doing so can be determined by making total landed cost analyses that consider unit costs, transportation costs, inventory and handling costs, duties and taxation and the costs of finance.”
Yet we would add to this discussion that there are numerous additional arguments in favor moving sourcing and production closer to demand that can be incorporated into total cost and risk-based models. These include:
- Creating natural hedges against current volatility (sourcing locally and selling locally is the most fundamental hedge of all)
- Creating natural hedges against commodity volatility and avoiding negative arbitrage situations (commodity price points, as the MetalMiner IndXoften shows, can vary significantly in regional markets)
- Reducing inventory levels and associated carrying costs
- Reducing supply chain risk from potential supply disruptions based on distant, lower-tier suppliers that did not factor into higher-level risk analyses (e.g., not knowing specifically where tier 2, 3 and 4 production is occurring — and where alternatives exist)
The authors of the article do suggest, however, that three specific forces (transportation costs, labor costs and time-to-market pressures) have “inspired some companies to move manufacturing facilities from Asia to Mexico.” To wit, “Sharp, the Japanese TV manufacturer, for example, started moving its manufacturing facilities from Asia to Mexico as a way to be closer to customers in the Americas. This shift was driven by the need to keep shipping costs low and time to market short. With the prices of flat-screen TVs falling fast, executives realized that reducing shipping times from about 40 days (when flat-screen TVs were produced in Asia) to seven days (making the units in Mexico) would have a big impact on the bottom line.”
In our own work, we have seen numerous companies in industrial manufacturing make similar re-shoring decisions across metals categories: semi-finished products, stampings, forgings, machinings, etc. Yet the same logic holds across direct spend categories as well. Just make sure that there are lower tier suppliers locally to support regional production, lest the benefits of a localization move could go unrealized!