In the first post in this series, we summarized some of the more salient points that sourcing pro Michael Lamoureux made in a post focused on the benefits and hard-dollar savings associated with re-shoring. In his column, Michael does a skillful job summarizing some of the arguments that BCG makes on the topic. For example, he notes that, "if the primary reason for outsourcing to China was labour savings, this is no longer a good reason; in some districts, the wage savings are less than 40%!" Moreover, if you're chasing the wage game, you're constantly shopping for the next low cost locale – which can result in moves into "often into unknown, or dangerous territory (as Africa will be next)."
Here at Spend Matters, we probably look upon Africa, especially the Sub-Saharan region, a bit more gently than Michael. Our current series (Part 1, Part 2) on Walmart's experience in South Africa shows that local sourcing is not only possible – it's also feasible to develop suppliers for global markets and export as well. Yet we take his point that labor-cost hopping to take advantage of wage differentials is fraught with its own set of risks.
Beyond labor alone, we can't ignore, as Michael captures, the "hidden costs" associated with global sourcing compared with re-shoring options. Consider not only logistics and inventory carrying costs in this equation, but also "inventory carry costs," especially in cases when "demand patterns shift." Moreover, "innovation and creativity can slash the relative cost of manufacturing at home if productivity is doubled (or tripled)." In other words, the wage differential only forms a small component of the overall landed cost equation.
Overall, these factors bode well for re-shoring analyses. Yet we shouldn't necessarily jump the gun. We'll explore some of Michael's recommendations (and ours) in the final posts in this series.