The Hard Dollar Costs of the Re-Shoring Procurement and Manufacturing Debate (Part 5)

Please click here for Part 1, Part 2, Part 3 and Part 4 of this series.

In closing out our re-shoring analysis on a hard dollar basis, it's also important to begin – or at least attempt – to quantify some of the softer costs and risks associated with longer supply chains. As we've noted previously, political risk is something companies worry about but it's usually associated with governmental stability. Yet as we've seen in the past with China, public policy is a form of political risk.

For example, tariffs, duties, rebates schemes and the like all contribute to political risk that we can quantify. In general, the more spend that is tied up in a tightly regulated market such as China, the greater the risk an organization faces from politically-driven micromanagement in specific economic sectors. Rare earth metals, of course, are a great example of this more recently, as China moved to reduce exports as a form of political sabre-rattling against Japan and other nations.

Beyond the political equation – actually, tied up within it to a large degree – is currency risk, especially in cases where a direct local hedge is not an option (i.e., buying and selling in local currency in local markets). Even if you hedge currency exposure in the financial markets, significant swings can have a wide indirect impact on costs and risks. For example, currency moves can impact the ability of suppliers to lock-in predictable raw material costs which in turn can strain relationships if proper escalation and de-escalation clauses, potentially even tied to currency movements, are not put into the contract equation in the first place.

It's impossible to capture all the elements of global sourcing and re-shoring analyses in a series of blogs, let alone an encyclopedic book on the topic. But perhaps Michael Lamoureux simplifies it the most when he notes that re-shoring and global sourcing "decisions should be made from a true TCO perspective, not just a manufacturing perspective." Just don't tell that to the plant manager!

- Jason Busch

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