A Return to Profitable Proximity

It is true that there has been in the past a great deal of momentum around outsourcing and offshoring to low-labor cost (LLC) countries in Asia -- China in particular. The combination of increasing consumer pressures about pricing (and therefore cost) during a time of economic stress, along with country/regional incentives, lower corporate tax rates, relaxed regulatory pressures, and very low wages made this an attractive option for some companies. It became exceptionally attractive when coupled with a growing Asia-based demand.

However, there are macro-level elements that will drive some companies to more fully consider the impact of their outsourcing decisions. For example, China has seen a tremendous rise in labor costs in the last few years, supported by its burgeoning economy. Oil prices remain consistently high, adding pressures to the cost of transportation, along with some under capacity, for certain modal routes between Asia and their Western export markets.

Asia has also unfortunately not been immune to its share of natural disasters, such as the floods in Thailand and the tsunami in Japan, which raised concerns among finished goods manufacturers in the United States about being dependent on long supply chains. Even the economic fragility surrounding the Euro-crisis and its impact on the dollar can have impacts to the supply chain network design decisions taken by companies.

I have no doubt that Asia will remain a strong and formidable manufacturing engine to serve the needs of American consumers. However, there is evidence that companies are more often now doing an increased level of due diligence when considering their overall supply chain design -- and in doing so, some companies are reversing previous decisions and are making a move towards what we call "profitable proximity."

This simply means that companies are going further to understand their entire "cost-to-serve" model to better determine if a more local option (near-shoring, for example) might provide a more sustainable supply chain model that provides better economic, service, and ecological advantage than an Asia-based option. For higher-end, more value-added products with rapid innovation cycles, this could definitely be a better solution for some OEMs.