The trend to move manufacturing to low-cost regions is becoming pervasive. Companies of all sizes in nearly every sector of business in the United States and Europe are developing and implementing strategies not just to source from low-cost regions but also to actually produce goods in those countries. The reason is simple: low costs in high growth markets can create significant competitive advantage. There is one area of cost reduction, however, that has yet to be fully realized: ensuring that the supply base of a relocated manufacturing operation has been optimally localized.
Supply base localization is often the last of many operational aspects to be addressed when an overseas manufacturing site is established. Many companies place higher priority on activities such as greenfield-versus-brownfield investment analysis, hiring of local sales and service teams, relocation of manufacturing assets and technical resources, and the establishment of inbound and outbound logistics than they do on local sourcing strategies. Unless local content requirements, punitive import tariffs or logistics costs exist, it is very common for companies to maintain their current supply base in high-cost regions and simply have their suppliers ship to the new region, be it Mexico, China or Eastern Europe. While this is rarely intended to be a permanent strategy, it often stays in place for many years, essentially leaving a large savings opportunity on the table.
Weighing the Risks
In today's global economy, the opportunity costs of maintaining status quo are substantial, and the reasons to localize are compelling. First, a non-localized international inbound supply chain (be it Wisconsin to Mexico, Wisconsin to Shanghai, or France to Slovakia) creates a lead time and inventory cost burden on new manufacturing facilities. Second, as quality gaps for most components have all but disappeared in low-cost regions, a local supply base can deliver most components and inputs at a significant cost advantage over competitors in higher-cost regions. And third, a local supply base can grow from simply supplying the new facility in the low-cost region to supplying facilities on a global basis under preferred terms and conditions.
So why is it still common to find global suppliers in low-cost regions when alternate sources of local supply exist? In many cases, it's due to an "if it's not broken, why fix it" mentality. There is both effort and risk in re-sourcing any component, especially when internal resources, both technical and purchasing, may not exist or be fully ramped up in a given low-cost region. So even if savings of over 25 percent can be achieved, local manufacturing executives may not want yet one more task — and a potentially disruptive issue — on their plate, when their existing inbound supply chain is working well. Moreover, many companies simply lack purchasing staff that can look at all categories of spend across the manufacturing facility. While global commodity managers may be in place at corporate headquarters, they are equally challenged to find local supply alternatives.
When to Re-source
Despite these challenges, best-in-class companies are prioritizing supply base localization, either as part of the initial manufacturing relocation or in conjunction with an overall supply base optimization program that carefully analyzes total costs to determine whether local or global suppliers best meet cost and production requirements.
A tier-one automotive company, for example, prioritized supply base localization as it expanded manufacturing to China earlier this decade. The company recognized that qualifying parts from local Chinese suppliers in parallel with importing parts during the plant validation phase eliminated risk and future revalidation costs. Therefore this company placed a sourcing team on the ground six months prior to initial plant production, resulting in a highly localized supply base and maximum cost savings from the low-cost manufacturing strategy.