Late last year, the MIT Sloan Management Review published a great piece that crosses over the academic journal line by offering some real pragmatic observations for global procurement and supply chain practitioners. Some of the points are clearly obvious, but the thinking behind them and the fact they haven't been articulated before in a similar manner makes the piece an indispensible reference for understanding the current (and future) state of global vs. regional sourcing. The article itself, authored by luminaries, David Simchi-Levi, James Paul Peruvankal, Narendra Mulani, and Bill Read, begins by suggesting that for the past fifteen years, the outsourcing or offshoring of manufacturing operations (whether one's own facilities or suppliers), was a major trend, made possible due to "one crucial enabling factor...cheap oil."
As a result, "long supply lines were economically feasible because transportation costs were relatively low." The authors argue that this resulted in three separate strategies that companies pursued. First, offshoring and outsourcing, in many cases to far away locales. Second, companies rationalized production at the plant level to take advantage of "production economies of scale and reducing capital investment." And third, organizations consolidated "distribution centers and warehouses to reduce inventory levels and minimize fixed facility costs."
The authors suggest that as oil prices have risen, the long supply equation has now been called into question, which in turn has resulted in "three new cost-optimization realities." The first is that "regional distribution centers" have "become more attractive," The second, which we've covered extensively on Spend Matters, is that "sourcing and production may need to move closer to demand." And third, another favorite topic of ours, "supply chain flexibility becomes more critical." Of these, we're most partial to exploring the second cost optimization reality, which we'll do in the second post in this series.
But there are two other angles to the transformation of global sourcing besides rising transportation prices, at least as we've thought about it in recent years: the fundamental need to respond more effectively to local changes in demand as well as managing commodity volatility effectively and on both a global and local basis (hint: they can be different). Stay tuned as our coverage continues.