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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.

17 comments on “A Return to Profitable Proximity

  1. Susan Fourtané
    July 11, 2012

    Hi, Douglas 

    I wonder if all manufacturing applies a Profitable Proximity plan, what will happen then with Asia? I mean, wouldn't it all end up changing a problem from one place to another?

    What would it be the best strategy to balance the supply chain in order to have manufacturing sites distributed in all the continents in the best possible and convenient way to avoid unemployment?

    -Susan 

  2. Douglas Kent
    July 11, 2012

    Susan – 

     

    Thanks for your swift response.  With respect to “what will happen to Asia”?  I think Asia will remain a powerful manufacturing power house for many years to come – especially with their own domestic growing demand.  Signs of growth there however had slowed for sure.  I think its not about “transfer of the problem” but rather one of avoidance.  Utilizing the best practices of Informed Outsourcing Decision Making and a thorough and frequent Supply Chain Network Design should provide good lasting solutions if the Cost to Serve remains transparent and is actually used in the decision making process!

     

  3. Anand
    July 11, 2012

    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 

    @Douglas, thanks for the post. Has this process of adopting near-shoring already started ? And do you think outsourcing will again become lucrative option for the companies once the inflation starts coming down in Asian countries ?

  4. bolaji ojo
    July 12, 2012

    @Anadvy, Anecdotal evidence suggests more companies are actively reviewing their manufacturing strategies with a view to determining the cost-benefits of manufacturing in Asia versus the West. In some cases, some companies have actually moved production back to the West. This isn't a flood yet but the question is being raised more frequentily.

    On your question about inflation, this isn't the only area of concern to executives. It is one factor they look at but wage inflation isn't even a primary reason. Folks I have spoken with talked about the headache of finding and retaining technical workers. Job openings are hard to fill and often companies see freshly trained workers depart not long after their training. That's a huge cost.

  5. Douglas Kent
    July 12, 2012

    @anandvy – The percentage of products whose manufacturing is done by a 3rd party (EMS or ODM) continues to increase year on year. I do think we are getting smarter, using more data, and have more tools available to us now to not simply take a “leap of faith” in our outsourcing decision making process but rather to use more factual data to make those assessments.  This also allows us to re-assess frequently if there are changes in macro factors that drive our current supply chain construct e.g. oil price, demand shifts, geo-political risks, etc. 

  6. Barbara Jorgensen
    July 12, 2012

    Hi Douglas: Just when you think the argument regarding “total cost to serve” or “total cost of ownership” is falling on deaf ears, a ray of hope. My 15-year-old son, whose priorities in life run something like this:

    1. cell phone

    2. girls

    3. see items 1 and 2

    just laid this one me: “Mom, America is broken.”

    “Why?” I ask.

    “Because our US Olympic uniforms aren't even made in America” says he.

    Based on years of astute observation, I concluded they are probably made in China. The good news, my son made the connection. The bad news: he hasn't paid for a single t-shirt in…15 years.

    Total cost of ownership: priceless.

     

  7. bolaji ojo
    July 12, 2012

    @Barbara, Yes, the American Olympic team's uniforms were reportedly made in China. They were designed by Ralph Lauren, which should redeem the “made in China” anger in Congress after all the designer has put American designs on the global fashion map. (See: Lawmakers furious over China-made Olympic uniform.)

    What's everyone getting apoplectic about? If they were sewn on 6th Avenue in New York, that would make it better? But what about the cotton? Should they have been grown and picked here too?

  8. Barbara Jorgensen
    July 12, 2012

    Bolaji: I wasn't aware it's Congress that's fueling the fire. I figured it was more of the same-old, same-old. But it is an election year. In addition to the president, a bunch of senators are no doubt up for re-election. Nothing plays to the home crowd like Made in America.

    I'd be surprised if the unis are even made (entirely) of cotton. Someone must hold the patent for spandex, polyester and velcro. And there's nylon. DuPont is a US company…maybe the pols can salvage something here…

  9. Eldredge
    July 15, 2012

    Are they also considering marketing appeal (for Made in US) as part ofd the equation even if the cost is marginally higher? Or is that not much of a factor?

  10. Harry Moser
    July 17, 2012

    I agree re the importance of “informeddecisionmaking.” One element of the decision process should be use of total cost of ownership (tco) analysis instead of making decisions based on labor rates or price. The non-profit — Reshoring Initiative — provides for free a total cost of ownership software that helps corporations calculate the real p&l impact of reshoring or offshoring.

    When companies recognize that they will often be more profitable producing or sourcing here, they will come back. We also have a new tool for companies to report and post their reshoring cases and number of jobs reshored.

    Based on the 284 published reshoring articles in our reshoring library resource, we calculate that at least 50,000 manufacturing jobs have been reshored. Thus, reshoring represents at least 10% of the 495,000 manufacturing job growth since the low in January 2010 is from reshoring.

  11. Douglas Kent
    July 18, 2012

    @ Harry  – very intersesting data and statistics.  Is this information presented as a quotable stat?  Thanks to advise

  12. Douglas Kent
    July 18, 2012

    Marketing “Made in the USA” is a hot factor – particularly if you are making the uniforms for the olympics!  😉

     

  13. Douglas Kent
    July 18, 2012

    There is a certain degree of “elasticity” impact to the “outsourcing” and also “Green” themes….our ethical standards trump as long as we don't have to pay any more (or not much more) for the mental reward!  

  14. Douglas Kent
    July 18, 2012

    There is a certain degree of “elasticity” impact to the “outsourcing” and also “Green” themes….our ethical standards trump as long as we don't have to pay any more (or not much more) for the mental reward!  

  15. Barbara Jorgensen
    July 18, 2012

    Good point about the elasticity of “green” and “outsourcing.” I will admit that certain costs reflect my personal commitment to those ideals…a few cents for green cleaners: OK. $10K for an electric car? Not so much. I know corporations try to be consisent and hopefully the savings balance the costs. Maybe I just need a personal CFO.

  16. Eldredge
    July 18, 2012

    @Douglas – Not to beat a terminally ill horse, it does seem like “Made in USA” has become more fashionable (even outside the clothing industry). It will be interesting to see if it is sustained.

  17. Harry Moser
    July 28, 2012

    Users use the Opportunity Cost field or any of the blank fields for that factor.

    Surveys show a trend towards U.S. consumers prefering U.S. products.

     

     

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