As developing markets continue to dominate the mindshare of manufacturing executives, how to profitably service those markets became the mission for supply chain executives. Evolving existing supply chains is the fastest way but often the result forces the supply chain into an unnatural shape.
A typical example is a manufacturer that had its roots in Detroit. In the 1960s, it sourced all components domestically, built final products in the U.S. and shipped primarily to U.S. and western European markets. In later decades, it followed the industry trends to introduce lower costs into the supply chain and began sourcing some key components in China; assembled final goods in Brazil; and sold primarily into the U.S. and western Europe.
Today, this same company continues to source components in China, final assemblies are done in Brazil but the end customer markets have changed. Although the U.S. and Europe continue to be target markets, the fastest growing market is in China. So the product starts in China, ships halfway around the world to Brazil and then is returned to China for commercial sales. A supply chain that requires complete circumnavigation of the globe is probably not an efficient one.
Emerging markets will be the driving force changing the shape of supply chains for the foreseeable future. As western markets suffer through various economic downturns, the growth markets are in the developing world. Nearly every manufacturer that we speak to depends on emerging markets for growth. Simultaneously they mention the need for nearsourcing, best described as manufacturing goods in the same market that you sell them. Usually, the reason cited for nearsourcing is the rising cost of labor in Asian markets, particularly China. Our supply chain data shows that is only one of the reasons and not the strongest one. Looking at the most successful supply chains globally, we found four reasons why nearsourcing separates efficient, profitable supply chains from their counterparts.
Rising Labor Costs in Asia, Especially China: When asked about nearsourcing, most companies cite rising labor costs in China. For decades, companies offshored the production of manufacturing components to Asia because of the vast difference in labor costs of the two countries. Today, this practice is increasingly scrutinized, largely because the cost of labor continues to grow much faster in China than in America and other western markets.
Total Cost-to-Serve Metrics: Rising labor cost is just one of the cost metrics that companies evaluate when selecting manufacturing sources. Many companies tend to myopically focus on piece-part price when selecting a component source, which is no longer industry best practice. So many other costs figure into the total cost to deliver a product from one market into another. Often, border crossings involve an accumulation of agent fees, consolidation/deconsolidation, drayage and other fees that need to be accounted and accumulated into total cost to serve. We have seen these unplanned fees accumulate into miscellaneous buckets that are never managed at an SKU level. Instead, an estimated landed cost rate is applied across all SKUs moving through a region. In recent years, manufacturers began scrutinizing these fees and, in many cases, have been astounded at the percentage of freight spend that is spent on landed costs. Nearsourcing removes all of those expenses and the fees are more predictable.
Shorter Supply Lead Times: Sourcing supply in the same markets that the final goods will be sold decreases the overall product lead time significantly. The trick isn’t how much of supply is locally sourced but rather how much of the critical path supply is nearsourced. Critical path items are those items that impact the overall lead time of a product. Supply chain leaders that we’ve spoken with have come up with new best-in-class ways to determine how long a lead time is tolerable and what percentage lead time the “long pole” critical path item can occupy. The longer the lead time, the more risk is associated with that item. To reduce overall availability risk, nearsourcing is selected as primary supplier with alternates sources potentially in other markets.