Spend Matters welcomes another post by Joel Johnson of GEP.
The most definitive domestic manufacturing trend from the 1970s onward has been a shift of production from the United States to low cost countries. Labor arbitrage and the advent of global communication networks created an environment in which many firms were forced to transition a large portion of their manufacturing operations overseas in order to remain competitive. The implications of this transition were drastic, as it affected the supply chain. Increased lead times, augmented quality control measures, and political risk were just a few factors that professionals in the field now needed to take into account. While the trend was most drastically felt in mature industries with relatively low entry barriers, there were few global companies that did not feel the effects.
The conventional wisdom of outsourcing as a means to remain competitive is now being called into question. An ever-growing number of firms, including the likes of GE, Ford, Whirlpool, and Caterpillar, are undergoing re-shoring initiatives. The drivers behind this transition are multi-faceted and reflective of inherent challenges in the off-shore production model as well as emerging global trends. Some of the most prevalent forces are as follows:
Labor Arbitrage Reduction -- Wage rates in China are now four times what they were only a decade ago, and they continue to rise at a rapid rate. The differential between domestic and low-cost country labor as a contributing factor to the end-product costs is much diminished as a result of US unions being more willing to negotiate and ever-increasing labor productivity.
Logistical Challenges -- Despite recent stability in fuel prices, logistics costs have continued to increase over the past 15 to 20 years. The cost of shipping product from East Asia can contribute more than 20% of a product’s cost. These costs are in addition to long lead times that are difficult to justify in an environment where consumers tend to ask, “When can I have it?” And, “Can I personalize it?”
Collaboration with Design and Engineering -- Many organizations are now espousing the benefits derived from manufacturing, engineering, and procurement working side by side. Under the outsourced model, language barriers and time zone differences resulted in less than ideal levels of communication and collaboration between those designing the product and those manufacturing it. Manufacturing and design innovation was found to increase along with re-shoring, typically for those more technologically advanced, customer-facing product components.
There are multiple implications and challenges for procurement if the trend of re-shoring continues to gain momentum, but a lack of a strong domestic supply base is the biggest. Having personally worked with firms to bring back specific production lines to the US, I saw that the redevelopment of local and regional supplier networks was the most integral in ensuring the success of manufacturing operations from a procurement standpoint. Enabling such a transition may include more progressive procurement tactics such as direct supplier investment, vertical integration, and the development of knowledge-sharing frameworks. By tuning in to evolving manufacturing trends and remaining flexible in the face of supply base evolution, procurement teams can position themselves to realize the benefits associated with re-shoring.
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