Localized Supply Chains: How Not to Reduce Supply Chain Risk

supply risk

In a recent Industry Week column, Paul Ericksen, a consultant, makes a number of arguments about the importance of considering the extended supply chain when setting up new facilities or onboarding new suppliers. The basis of his argument cites the case of a large multinational manufacturer “with a factory located in the upper-Midwest United States” that opted to “expand a product line by opening a second manufacturing facility.”

The company ended up selecting a site in the Southeast instead of the Northeast for its new production facility. The new factory, Ericksen writes, was a volume facility focused on high throughput. From a cost standpoint, products comprised “approximately 80% purchased content, 15% overhead and 5% labor – a split not unusual in many new factory start-ups.”

One might argue the success of this model in generating local jobs, as many organizations do, given the tax breaks and incentives involved in opening new facilities. But, as Ericksen writes, “the economic benefit of this plant to its new state was at most 20% based on the labor and overhead percentages unless, of course, any of the purchased content – parts and assemblies needed in the production of the products being produced – were also sourced in that state. The problem was, very little was! The OEM found that the sourcing options in that state just weren’t up to the task of providing what was needed for its new operation.”

As part of the rest of his story and argument, Ericksen goes onto explore the odd set of economic expectations with companies and government that come with opening new facilities that often do not drive the potential economic impact legislatures and civil servants expect when offering incentives for such sites and programs.

Yet the fact that the manufacturer built this new facility in the US is not necessarily relevant to an argument that is critical to take into account when sourcing from – or manufacturing in – a new facility in a new location: supply chain risk does not necessarily decrease from hedging facility or site bets by having an alternative manufacturing facility located in a different geography. It can actually increase based on variables on the inbound supply chain, especially the location of sub-tier suppliers.

Said another way: chasing tax incentives for facilities or swapping out suppliers/facilities is a bit like chasing low cost labor. It’s a near-term arbitrage that can actually increase overall risk, as well as potential direct, everyday costs of logistics costs increase.

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