Shoring up Sourcing Strategies

Q: What factors are driving reshoring/near-sourcing consideration?

A: A balance in labor rates between China and North America is warranting a second look at sourcing and manufacturing closer to demand. Mexico may be a first choice because of its labor cost differential, but the United States, with the promise of cheaper energy, presents another opportunity. There is also a matter of disaster preparedness and recovery. Following the Japan earthquake and tsunami, companies quickly recognized that single-sourcing production and supply was fraught with risk. These factors are driving manufacturers to consider bringing back some production to North America.

On a micro level, speed to market and the ability to react to the dynamic nature of customer demand are other important considerations for near-sourcing. Retailers used to want product with little differentiation. Now, retailers need to offer product with different configurations in order to compete against each other. This adds even more complexity and cost to longer supply chains.

Q: How does supply chain strategy factor into this shift?

A: As one example, in the past 18 months we’ve seen growing demand from customers to implement postponement strategies that bring more value-added activities closer to demand. Companies are still manufacturing the end component offshore, but they are moving specific retailer configuration to the United States.

There are a few reasons for this approach. Companies can reduce the total supply chain cost by shipping bulk quantities to the United States versus pre-packaging product with a lot of air, corrugate, or plastic wrap. Then that inventory can be built to a specific retailer’s requirement on demand. This reduces obsolescence if there is a change in consumer demand or order quantity. Companies can also react more quickly to demand changes if they have a U.S. footprint rather than single-sourcing from the Far East. No less important, elimination of CO2 emissions is inherent in cost reduction.

Q: Within this near-sourcing context, how are U.S. companies flexing their sourcing and selling strategies?

A: Some of our customers shifted manufacturing to Asia years ago, but never left the United States entirely. They kept a domestic footprint in case they ever needed to flip the switch. So they are able to capitalize on that presence, hire more people, turn up the volume, and manufacture in the United States. More companies will follow this example.

But the trend will be toward regional manufacturing. Consider the automotive industry. There was a time when cars were made in Asia and shipped to the United States. Now those automotive manufacturers have based production closer to demand to reduce transportation costs and react faster to changing market conditions.

We’ve also seen the reverse situation: a customer that has sourced components globally and manufactured domestically (because of intellectual property concerns) to serve Asian consumer demand, now taking a more regional production approach closer to the markets it serves.