Trends—January 2013
It’s a Smaller World After All
The shrinking distance between demand and supply is triggering a trend toward inter-regional supply chains and creating a globalization tipping point, according to research by Philadelphia-based third-party logistics provider BDP International, its Centrix consulting unit, and Temple University’s Fox School of Business.
Real-time communication technology has greatly increased global connectivity—even compared to just one decade ago. The Internet, e-commerce, social media, and other technologies have opened new doors for companies to source and sell seamlessly across borders.
But as developing countries emerge and developed economies mature, there’s reason to suggest globalization may be beginning to reverse course—and that some companies are reining in their supply chains to reduce costs, avert risk, and increase demand responsiveness.
Global trade flows from Eastern manufacturers to Western consumers are shifting to shorter inter-regional routes as companies seek to reduce the distance between production and consumption, reports the study.
BDP’s research surveyed more than 200 companies around the world with annual revenues ranging from $100 million to more than $10 billion. Of the supply chain executives polled, 87 percent indicate their companies are considering, or have already begun, moving production closer to end markets, sourcing and selling goods within the same hemisphere.
"The audience sample and respondents represent supply chain, logistics, and transportation decision-makers," explains Arnie Bornstein, BDP’s executive director of marketing and corporate communications. "So it’s not surprising that out of 12 different priorities, costs were among the highest considerations—specifically related to total landed costs, longer transit times, and rising wages in traditional sourcing countries."
BDP’s survey findings mirror results reported elsewhere. In 2012, Boston Consulting Group documented that more than one-third of U.S.-based manufacturing executives at companies with sales greater than $1 billion are planning to bring production back to the United States from China. The top factors for this strategy change include labor costs, product quality, ease of doing business, and proximity to customers.
Bornstein cites three main reasons for this shift: emerging countries are starting to trade with one another, shortening world trade flows; a growing middle class in Asia, Latin America, and the Middle East is driving demand for consumer goods; and it makes both operational and economic sense to maintain shorter supply chains.
Taking a Risk
Risk management is also driving some supply chain regionalization, but is a lower priority among respondents, and dovetails with demand for shorter transportation distances. Longer transit times increase the chance of potential anomalies caused by weather, labor disruptions, capacity availability, and countless other exceptions.
"Business continuity is a high priority," he says. "Recent natural disasters brought supply chain risk management into sharp focus."
Risk aside, cost remains a fundamental consideration as companies seek to align global sourcing networks with changing demand patterns. Increasing supply chain complexity only amplifies the value companies can derive by taking an inter-regional approach.
The automotive industry offers a good example, because car manufacturers have always been international in scope, sourcing and producing parts all over the world.
"While parts flows are largely global, and will continue to be so, there is an increased trend toward regionalization in terms of final assembly," says Bill Garrett, CEO of VASCOR, a privately held joint venture between APL Logistics and Fujitrans Corporation. The Georgetown, Ky.-based 3PL provides supply chain services to manufacturers, Class I railroads, and other key automotive industry players.
"More original equipment manufacturers (OEMs) are adopting a ‘make where you sell’ strategy, for reasons beyond the traditional logistics goal of reducing landed cost and increasing demand responsiveness," says Garrett. "For example, the persistently strong yen relative to the U.S. dollar and euro forced many Japanese OEMs to shift more production to the United States and elsewhere as they seek to increase vehicle profitability."
He also cites various free trade agreements between specific countries that lower, or even eliminate, import tariffs—a powerful incentive for OEMs considering sourcing and production decisions.
Some in it for the Long Haul
While many automotive companies and large multinationals are taking advantage of shorter transportation distances, some limiting factors remain. One in five survey respondents representing companies with revenues of more than $10 billion do not see this inter-regional shift occurring, according to BDP’s research.
"Nations, industries, and companies involved in global trade have invested trillions of dollars over the past 30 years in international and transcontinental supply chains on an east-west axis, primarily in the northern hemisphere," says Bornstein. "That’s not going away soon."
Companies that capitalized on countries such as China early on are there for the long haul. They may be inclined to take a more deliberate and long-term strategic approach toward structural changes in their supply chains. That’s less of an issue for smaller companies.
"The survey suggests small to mid-size enterprises are more aggressively pursuing inter-regional supply chains because they have less invested in sourcing infrastructure, and are newer entrants to the world of international trade," Bornstein notes.
The change in inter-regional, hemispheric trade flows is playing out on a global scale. It’s why North American companies are exploring Mexico and Latin America; EU companies are looking to Eastern Europe and Turkey; and Asian companies are trying to sell to growing consumer bases in Asia to hedge against sluggish export demand.
The ultimate tipping point for inter-regional trade and reverse globalization: the United States reasserting itself as a manufacturing and export-driven economy.
"Trade patterns are transforming to mirror the realities of low to no growth in the West, and the rise of the rest of the world," Bornstein explains.
Amid all this change is a major opportunity for U.S. industry to reinvent itself. It’s no secret that over the past two decades the United States has become a destination, rather than an origin, for manufacturing.
"The emergence of plentiful and inexpensive natural gas in the United States could be a real game changer," Bornstein says. "We already have solid transportation infrastructure, a skilled labor force, and a low-risk environment with regards to security compared to other regions that are far less stable."
Bornstein also sees BDP’s client base moving away from a transactional mindset toward a more strategic outlook that values visibility upstream and downstream in the supply chain, and solutions that empower companies to look at the breadth of their logistics activities, rather than just transportation moves.
Such an approach brings greater focus to total landed costs, and operational and regulatory challenges surfacing in countries that are taking a more protectionist approach toward economic and trade development. The ultimate tipping point for inter-regional trade, and reverse globalization, would be the United States reasserting itself as a manufacturing and export-driven economy. Some industries, notably chemical, are already moving in this direction and investing back into the United States.
"It’s almost as if the United States could become a new emerging economy," Bornstein concludes.
Google, Motorola Mobility Rewire Supply Chain
Both Google and Motorola have established reputations for enabling mobility. But Google upped the ante when it acquired the smartphone and tablet-manufacturing division Motorola Mobility in 2011. Now the search engine conglomerate is looking to adapt its manufacturing and sourcing footprint in a similar fashion by divesting assets to a third-party partner.
Flextronics, a Singapore-based electronics manufacturing services company, announced it will purchase Motorola’s production facility in Tianjin, China, and assume the management and operation of its Jaguariuna, Brazil, plant. The agreement also includes manufacturing and services for Android and other mobile devices.
"The agreement with Flextronics is an important step forward for us in transforming our overall supply chain into a competitive advantage for Motorola Mobility," says Mark Randall, senior vice president, supply chain and operations for Motorola Mobility. "Flextronics has been our partner for many years, and its manufacturing expertise and experience will enable us to focus on other areas of the supply chain where we can add the most value."
The Devil is in the Detailing
When Tata Motors unveiled the $2,000 Nano in 2009, the Indian automotive manufacturer demonstrated how stripping away amenities and safety features impacted the overall cost and complexity of sourcing and assembling a car. While Tata’s endeavor was extreme, in the wake of the U.S. automotive collapse, many manufacturers similarly focused attention on design and material tweaks to capture savings and address sustainability goals. Ford Motor Company is the latest example of this trend.
In a partnership with chemical company BASF, the auto manufacturer is tinkering with the trim around the window switch in the 2013 Ford Fusion—following similar changes the company has made in the interior design of other models as it transitions from conventional plastics to more sustainable materials. A little piece of polymer can make all the difference.
Traditionally, molded plastic pieces have been painted with a high-gloss finish to deliver both fashionable design and tough-as-nails durability. But thanks to a new breakthrough in materials from supplier BASF, Ford is able to skip that step, thereby saving costs and reducing the environmental impact during production of the 2013 Fusion.
The two companies developed a resin that replaces painting. The result is a 50-percent cost reduction in component price. But that’s only part of the story. Previously, the plastic was shipped from the manufacturer in Kalamazoo, Mich., to another plant in Grand Rapids, where it was painted, then shipped back.
The process change reduced volatile organic compounds (VOC) by eliminating the paint, and cut transportation fuel use, carbon emissions, and transit time by cutting out a 128-mile leg between the two facilities.
The sum effect? Each truck move uses roughly 18 gallons of diesel fuel. The trip is made three days a week, which requires 54 gallons of fuel. Fifty weeks per year of production means Ford is saving 2,700 gallons of diesel and eliminating 59,400 pounds of CO2 from Fusion production annually—all by changing the way it produces a small part.
"We need to leave no stone unturned in our continuous quest to make auto manufacturing as environmentally friendly as possible," says Robert Bedard, a Ford engineer. "This improved resin saves Ford significant money, but it also helps eliminate VOC from being released into the atmosphere, because the application of clear-coat paint is no longer required.
"As is so often the case with manufacturing, going green means saving green," Bedard adds. "We cut fuel usage, VOC, and carbon emissions, and we save 50 percent on the cost of these parts alone."
Supply Chain Ethicists, Cover Your Ears
Sustainability and corporate social responsibility (CSR) is the lowest item on the procurement agenda when choosing new suppliers, according to a recent study conducted by Office Depot’s United Kingdom and Ireland operating group.
The study, which questioned company representatives responsible for procuring goods and services, finds that only one percent of respondents rank CSR and sustainability most important. Twenty percent say it is least important of all—despite 80 percent agreeing that it will be slightly or significantly more important over the next two years.
"When choosing a supplier, a number of criteria have to be met and considered, but it is surprising to see how low sustainability ranked when it is expected to grow to significant importance within a few years," says Matt Smith, head of procurement at Office Depot.
"Cost reduction and greater efficiency in the supply chain are the biggest challenges that need to be overcome, and they are the key drivers for decision-making in the current climate," he adds.
Full Disclosure
In what may be a referendum on cultural mores, government policy, and consumer expectations, U.S. companies are more transparent in disclosing environmental issues than their Asian peers, suggests a new report by London-based sustainability analyst firm Verdantix.
Sustainable Supply Chain Benchmark: Consumer Electronics reviewed 12 consumer electronics companies with aggregate revenues of $977 billion. The companies—Apple, Canon, Dell, Hitachi, HP, LG Electronics, Microsoft, Nokia, Panasonic, Samsung, Sony, and Toshiba—contrast greatly in how much data they disclose regarding their supply chain sustainability programs.
Companies such as Canon, Hitachi, and Samsung not only fail to disclose their environmental supply chain issues, but are not auditing and engaging their suppliers to the same extent as leading U.S. firms, according to the research.
As examples of these disparities: all of the companies audit their suppliers’ materials and substances; Apple, Canon, Panasonic, Sony and Toshiba do not audit suppliers’ energy use; Canon, Microsoft, and Toshiba don’t cover air pollution; Toshiba doesn’t audit waste; and only Panasonic includes biodiversity when vetting suppliers.
"Investors, non-governmental organizations (NGOs), the media, and consumers increasingly hold global consumer electronics firms accountable for social and environmental issues in their supply chain," says Abbie Curtis, Verdantix analyst and author of the report. "Firms that aren’t prioritizing disclosure need to step up, because reputational risk will only grow given the increasing demand for transparency."
Overstock Sales Go Under
As the retail industry becomes more sophisticated in matching supply to demand, and new online re-sale channels emerge, liquidation sales and bargain basement-type flea markets are slowly becoming anachronistic.
Warehouse sales that once drew long lines of bargain hunters looking for unsold merchandise are on the decline, says the Minneapolis Star Tribune. Local company Thymes, whose sale on soaps and scented products once was an area attraction, announced in 2012 that it was stopping the event because it didn’t have enough excess inventory. Elsewhere in Minnesota, companies such as Manhattan Toy Co. and Illume Candles have also stopped sales, and greeting card company Stroke of the Heart and packaging firm Gage & Gage are considering it.
Panama Canal’s Trickle-Down Port Impact
Much attention has been paid to the Panama Canal-triggered container bonanza expected to hit South Florida ports such as Miami and Everglades and farther up the coast in Jacksonville. But the state’s smaller ports are likely to benefit as well.
Port Manatee, located on Florida’s Gulf Coast, benefits from direct shipping lanes to the Panama Canal, and has been gradually developing infrastructure over the past decade in hopes of growing its market share. The port has spent more than $250 million dredging its berths to 40 feet, extending docks, expanding container storage space, and improving rail connections.
Port Manatee invested in infrastructure improvements to help accommodate containerships seeking alternatives to larger ports congested with increased Post-Panamax vessel traffic.
Manatee will never compete with the likes of Miami, Everglades, and other Southeast container hubs, but officials see ample opportunity to feed off surplus demand and serve smaller vessels that will likely be pushed out as New Panamax ships come online.
"The big new ships will not be able to come into Port Manatee," says Larry Bustle, chairman of the Manatee County Port Authority, in a recent interview with the Bradenton Herald. "We’re not planning to dredge to 50 feet of water so they can come here.
"But those ships will go to places where containers are put on smaller ships," he adds. "It will be an overall business increase, and an opportunity Port Manatee can share."
Elsewhere on Florida’s panhandle, the Panama City Port Authority has similar designs. The port has created a niche by serving special commodities—such as copper, molasses, and wood pellets—and developing trade connections throughout Central America. Panama City has a "sister port" agreement with Port of Progreso, Mexico, to promote commercial activity between the two areas.
With the expectation of more containers coming through its port—albeit on smaller feeder ships—Panama City Port Authority has been working to expand its existing container handling space and equipment. It also recently broke ground on a new 150,000-square-foot, $6-million distribution warehouse, and is looking to create shovel-ready sites nearby as further enticement to manufacturers and other port users.