The End of Global Sourcing as We Know It? The MIT/Sloan View (Part 2)

Please click here for the first post in this series.

In an article in MIT Sloan Management Review, supply chain academics and experts David Simchi-Levi, James Paul Peruvankal, Narendra Mulani and Bill Read offer up a number of hypotheses examining how global sourcing is changing. On Spend Matters, we have explored the authors' second argument for a long time. As they word it, "Sourcing and production may need to move closer to demand." Specifically, "as cheaper manufacturing costs are offset by higher transportation costs, it may be necessary to move more manufacturing and sourcing activities onshore. The merits of doing so can be determined by making total landed cost analyses that consider unit costs, transportation costs, inventory and handling costs, duties and taxation and the costs of finance."

Yet we would add to this discussion that there are numerous additional arguments in favor moving sourcing and production closer to demand that can be incorporated into total cost and risk-based models. These include:

  • Creating natural hedges against current volatility (sourcing locally and selling locally is the most fundamental hedge of all)
  • Creating natural hedges against commodity volatility and avoiding negative arbitrage situations (commodity price points, as the MetalMiner IndX often shows, can vary significantly in regional markets)
  • Reducing inventory levels and associated carrying costs
  • Reducing supply chain risk from potential supply disruptions based on distant, lower-tier suppliers that did not factor into higher-level risk analyses (e.g., not knowing specifically where tier 2, 3 and 4 production is occurring -- and where alternatives exist)

The authors of the article do suggest, however, that three specific forces (transportation costs, labor costs and time-to-market pressures) have "inspired some companies to move manufacturing facilities from Asia to Mexico." To wit, "Sharp, the Japanese TV manufacturer, for example, started moving its manufacturing facilities from Asia to Mexico as a way to be closer to customers in the Americas. This shift was driven by the need to keep shipping costs low and time to market short. With the prices of flat-screen TVs falling fast, executives realized that reducing shipping times from about 40 days (when flat-screen TVs were produced in Asia) to seven days (making the units in Mexico) would have a big impact on the bottom line."

In our own work, we have seen numerous companies in industrial manufacturing make similar re-shoring decisions across metals categories: semi-finished products, stampings, forgings, machinings, etc. Yet the same logic holds across direct spend categories as well. Just make sure that there are lower tier suppliers locally to support regional production, lest the benefits of a localization move could go unrealized!

- Jason Busch

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Voices (3)

  1. Pierre Mitchell:

    Dick is right about the "no sh*&" aspect of the modeling of inventory costs, transportation costs, and service levels using automated tools. My senior thesis in college in 1988 was built on top of such network optimization solvers! However, the impact here transcends such steady-state models, and a true lifecycle TCO approach used in the face of massively shortened product lifecycles and potentially broader product/service portfolios (with increasing levels of local customization) puts a much higher premium on short supply lead times. Companies who are able to "glocalize" (pardon the buzzword) better than others, especially in Retail markets in China, India, etc., are generally outperforming those who don’t, even some of the big brand box retailers and food retailers. Most of the examples we’ve seen in our latest reshoring research is about selectively moving certain products/services and parts of the supply chain locally.
    There’s also one element still missing from this discussion, and it’s the strategic nature of having suppliers with similar "demographics" as your customers, not only in terms of geographic proximity, but also with regards to cultural familiarity. For example, take supplier diversity. When you strip out the governmental regulations aspect of supplier diversity, the remainder of it is basically touting the fact to customers that your supply base demographics (race, gender, local presence, etc.) are aligned to their demographics. ‘Glocalization’ is no different, and even more powerful because, if done right (i.e., if you treat suppliers as partners and tap them properly to help you better serve your markets where they reside), then the demand pull grows the pie for both of you. And you are removing yourself as a buffer between supply market innovation and customer needs… which is great as long as you don’t get disintermediated!

  2. Vinay Bansal:

    "Globally local" This is what created by virtue of globalization.
    Due to involvement of traders and incompetent sourcing, organizations are still facing issues in offshore sourcing.
    Companies are bothered to partner with offshore sourcing experts. They feel comfortable in dealing with local traders.

  3. Dick Locke:

    Sorry, but it seems a bit obvious that as shipping costs rise, it’s increasingly beneficial to bring manufacturing closer to demand. Obvious too, is a landed cost analysis tells you when the time is right. Those models have been in common use since around 1990.

    What is puzzling is how a large company like Sharp can believe transpacific shipping takes 40 days. My team was moving Laserjet print engines from Japan to California routinely in 11 days…in 1987! Ships have gotten faster since then. Shanghai-LA is about 12 days on modern vessels. Add a day or two on each end and you’re still around 2 weeks.

    And of course, for high value-per-kilo products, air freight only takes an extra day or two compared to domestic if your logistics system is working properly.

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