Catching up With Archstone on a Return to Domestic Sourcing in Manufacturing

A couple of weeks back, I had a rather useful conversation with John Ferreria, who runs Archstone Consulting's Manufacturing Industry practice. John and his team published a survey earlier in the year suggesting that manufacturers are indeed rebalancing their global sourcing efforts, bringing spend back onshore. These are companies that for a long time "had a perceived cost differential of 25-40% by moving offshore. But in the last few years, they've seen lots of new costs -- transportation, material costs, the cost of quality, extra inventory costs etc. and this savings has been eroded." As important, in John's view, many soft cost factors are also leading many manufacturers to once again get more serious about domestic supply options, especially for servicing domestic demand. Consider how global souring raises issues around the "customization of SKUs, frequency of delivery and inventory" which many companies previously took for granted when sourcing domestically.

John believes the time is right for a domestic sourcing resurgence. As volumes begin to climb after we find a bottom in the recession, he believes there will be a significant increase in domestic demand, not only because of the lower total cost factors involved with domestic sourcing, but also because companies will find better deals onshore given the domestic supply bases' thirst to fill capacity. Not to mention the fact that "manufacturing productivity is at an all time high" and the "cost of transportation is going down locally" -- additional arguments in support of a rebirth of domestic sourcing. Add these together and it looks like "a lot of the decisions made to push spend offshore were faulty decisions in the first place. [Now] the US is looking like a low-cost provider."

"Domestic" low-cost sourcing does not just imply US suppliers, however. Mexico -- once it gets its violence down to a reasonable level (e.g., the murder rate in Detroit) -- and Canada might also be potential beneficiaries of this trend as well. All in all, as manufacturers get more sophisticated and begin to create better total landed cost models that factor in many of the areas we've discussed as well as the cost of quality, warehousing costs, VAT and other related global costs, domestic suppliers stand to benefit. Domestic sourcing will also allow companies to specify more unique SKUs and to customize products closer to the time of order. Sure, they might lose out domestically on a unit cost basis for high volume products (perhaps significantly), but they could stand to make up for it in others. As John describes it, "if I'm managing containers and I'm getting marginal savings on hard costs with no savings on soft costs or capabilities, it can be very difficult to implement customer differentiation strategies and provide unique products and customer services, let alone justify the overseas investments necessary to support local demand."

In my view, these are the types of arguments that buy-American proponents should be making -- not just bloviating about and hurling forth protectionist, staid rhetoric. John makes the right argument for domestic sourcing. Is he right on all points? Not necessarily. There's absolutely a place for global sourcing and even global sourcing-based price arbitrage opportunities (in addition to serving local markets, a point John made). In addition, the prices from global suppliers have also come down as capacity has opened up (and transportation prices have come down in recent months -- a point John overlooks). Regardless, we both agree that manufacturers should increasingly consider the domestic option, looking at their overall spend portfolio both locally and globally -- and balancing it to not only reduce unit cost, but implement total cost savings and potentially revenue generating opportunities.

Jason Busch

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