Why Reconsidering Your Extended International Supply Chain Makes Good Business Sense – Regardless of the Pandemic
The COVID-19 Pandemic has placed enormous stresses on global supply chains. Countries around the world have recognised the vulnerabilities in their supply chains, especially for critical medical supplies. As a result, there is a popular push in almost every developed country in the world to bring production closer to home. Particular focus has been placed on the global reliance on China, given it was the first country impacted by the pandemic and also because of the diplomatic tensions that have arisen between China and several western countries including Australia, Canada, the US and the UK.
In among the media hype, there is the occasional skeptical voice pointing out that once supply chains start to stabilise, businesses and governments will quietly drop the nationalist “make it here” rhetoric and supply chains will revert to normal. Products will be purchased from the cheapest supplier, wherever in the world that supplier is located.
However, at TXM we think that a reassessment of international supply chains is overdue and the pandemic just brings in to focus problems that have been obvious for at least five years.
The Five Reasons to Manufacture Closer to the Customer
We see five key reasons why bringing manufacturing closer to the end user make more sense now than ever before:
- For many products the economics of outsourcing no longer stack up: Businesses outsourced to low wage economies to save money. This increased demand for labour in those countries, especially China, and drove up wages. This is a good thing, millions have been lifted out of poverty and those developing countries have become huge markets in their own right. As a result, factory wages in China and some countries in South East Asia have increased by more than 500% over the past decade or so. Other costs such as energy, land and building expenses have also increased dramatically. This has closed the gap in cost of production. As well freight costs and hidden costs such as international travel to select and manage suppliers, compliance costs, quality assurance costs, translation of documents all erode the competitiveness of the imported product.
- Longer supply lead times bring considerable costs of their own: Taiichi Ohno, regarded as the father of the Toyota Production System, famously said that all Toyota were trying to do is reduce the lead time. This is the essence of #leanthinking. Sadly over the past 20 years, most companies have dramatically increased their lead times, by shifting production off shore. This has often had very negative consequences for customer service and inventory. Most companies face lead times of 12 weeks or more when they import products from low cost countries in Asia. This drives much higher working capital and warehousing costs. It also increases the consequences of a problem. So, when a quality issue is found, it is likely to affect months of stock already in the warehouse, in transit or in production overseas.
- The fickle customer: Today’s customers expect more, whether they are in a B2B or B2C space. As developed markets mature, companies need to offer better service, more customisation and newer, fresher products to compete and grow. Product life cycles have compressed, product ranges have expanded and customisation is being offered and expected over an ever widening range of products. Long supply lead times are the enemy of flexibility and responsiveness. When you add extended design and sampling times to long supply lead times, then it can easily take six months to conceive and execute a minor product change. This is simply too slow in many markets. Therefore, production is being moved closer to the customer to restore this responsiveness.
- Technological change: As has been well covered, we are in the midst of a fourth industrial revolution driven by advanced, internet enabled, digital technology. Manufacturing technology is becoming smarter, easier to use and, in many cases cheaper relative to the benefits it can deliver. This means that the know how and finance needed to increase local manufacturing capability in many sectors is more accessible and affordable than ever before.
- Geopolitical and supply chain risk: Sadly, over the past few years the world has become a more uncertain place. Political tensions are at boiling point in many parts of the world, leading to formal and informal barriers to smooth trade. Protection of intellectual property and governance remains an issue in many developing countries and in some notable cases is getting worse. As well, the pandemic has totally disrupted international trade and logistics. Airfreight has become difficult to get, expensive and unpredictable. Shortages have rolled across a number of sectors, exacerbated in some areas by hoarding and panic buying. Countries can also be expected to service local markets first before exports, for both practical and political reasons. As a result, previously reliable supply chains are likely to face some level of disruption for months if not years.
What Products Should Be Re-shored?
As I have explained in previous articles, not everything will be re-shored. For some product sectors such as consumer electronics, the competitive advantages held by countries such as China and Malaysia are simply too great. This is based as much on the scale, supply chain integration and sophistication of these industries in those countries.
The case for deciding which products might be top priorities for re-shoring can be based on the five points above. Therefore:
- Products where the cost margin has shrunk, particularly bulky items which are costly to transport or items where labour is a relatively small share of total cost.
- Low volume items or products with volatile demand as it is very hard to manage these with a long lead time. Products where a short lead time can be a competitive advantage.
- One-off or custom products or products with a short product life cycle.
- Products where technology means that they can now be manufactured more competitively using automated processes closer to market.
- Products where reliable supply is critical and disruption to supply chain may lead to impacts on human life and/or potential legal liabilities for the importer.
If you apply these rules and consider the total cost in your supply chain, then I expect you will be surprised at how many products you should source locally.
Our next article will talk about how you can go about re-shoring your production in order to deliver the best outcomes for your business and your customers.