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Is It Time for Near-Sourcing?

Both man-made and natural disasters have interrupted the electronics supply chain in recent years, from the horrific events of September 11, 2001, to the ongoing tragedy in Japan.

Each time, there's been an examination of how uncontrollable events affect not just humanitarian aid but also the overall flow of supply around the world. Each time, it becomes more apparent that a supply chain that relies on global outsourcing and lean inventory practices has significant vulnerabilities.

Vertical integration — the old model where companies such as IBM developed and manufactured everything in-house — clearly has its disadvantages. Maintaining a leading edge in all areas, from chip technology to after-sales service and support, requires a huge R&D investment by an OEM. Outsourcing various functions to subcontractors that are best in their field, whether it be silicon wafer fabrication or shipping packages all over the world, enables an OEM to focus on what it does best. Subcontractors, in turn, can leverage economies of scale to remain cost-competitive and reinvest in focused R&D.

These subcontractors have been able to enhance their cost advantages by moving to low-cost labor regions such as China. Leading-edge supply chain practices, such as just-in-time and lean, keep inventory levels at a minimum. It's a great system, until there's a catastrophe on the scale of Japan's.

A report by the Associated Press chronicles how the auto industry will be affected in the following months. It also includes a summary of some of the events that recently disrupted the supply chain:

    The 2001 terrorist attacks in New York and Washington froze global transportation. The 2003 SARS outbreak shut down production in southern China. The eruption of a volcano last year in Iceland stopped air traffic over Europe. And now a disaster is unfolding in Japan.

    [Stanley Fawcett, a professor of global supply chain management at Brigham Young University] says companies are starting to rethink the wisdom of depending entirely on supply chains that must cross oceans. In the mid-2000s, he says, some U.S. companies started moving factories from China to Mexico. There, they could still take advantage of cheap labor without having to contend with ocean crossings.

    He says he suspects the trend — called “near-sourcing” — will become more popular after the disaster in Japan.

The high unemployment rate in the United States has put pressure on both governments and companies to conduct business closer to home. The cost of doing business in the US has so far been considered prohibitive — or at least expensive enough to inhibit competitive pricing. The human cost of the tragedy in Japan is inestimable. But when companies are able to re-focus again on business, the impact of a disrupted supply chain will be significant. It's not just factories in Japan that will be shut down for lack of electricity, labor, or supply — the effects will be global.

Do you think your company will reassess its supply chain in the wake of the Japan disaster? Let us know on the EBN message boards.

14 comments on “Is It Time for Near-Sourcing?

  1. Jay_Bond
    March 17, 2011

    You make some excellent points. Many people fail to realize the global ramifications that are felt when disasters happen, natural and manmade. I for one know that my company hasn't made any drastic chains in the wake of the Japan disaster. We also have three locations in Japan, all hundreds of miles away from the damage zone. None the less, the disaster has caused problems for employees getting around.

    Until companies can get their profits in line and labor costs down, its going to take a lot of work to move their companies stateside.

     

  2. itguyphil
    March 17, 2011

    Until companies can get their profits in line and labor costs down, its going to take a lot of work to move their companies stateside.

    I think those 2 points are the crux of the argument: costs and the work involved. It may take years to bring an offshore shop back on due to regulations in both countries. In addition to the taxation regulations, etc. Then there's the cost factor. My guess is that operations where outsourced for the purpose of saving $$. Bringing them back essentially should cost more now, right? Then there's the fact that we're slowly climbing out of a recession and resource costs are creeping up (just look at the price of oil).

  3. Jay_Bond
    March 17, 2011

    You are correct on the rising cost of resources. Many people believe that as the cost of living and wages increase in these out sourced countries that companies will have no choice but to return stateside. What they don't realize is that costs are continuing to rise here also. You will find plenty of workers in need of a steady job, but the costs involved with moving back might outweigh the savings.

  4. Eldredge
    March 17, 2011

    What happens if the disaster stikes closer to home? Closer sources may be no help if they are impacted by a yet unforseen interruption. Multiple sources then? At what cost?

  5. Anand
    March 17, 2011

    Barbara,

      I am not sure how near-sourcing is full-proof solution. As pointed out by Eldredge , what if the disaster strikes at home ? Near sourcing will not help then.

     I feel better option would be to diversify the supplier base. 50% from far-sourcing 50% from near sourcing. I know this would add confusion to the supplier chain, but this would atleast reduce the effect on uncertainity.

  6. prabhakar_deosthali
    March 18, 2011

    In todays global scenario where the disaster can strike any corner of the world at any instant, be it a natural or man-made, the key to safeguard one's business is to be distributed. Be it your manufacturing, your warehouses , your suppliers or your markets. Everything needs to be distributed so that the effcet of any disaster will be minimum on your business. If we want to be specific about  the supply chain continuity then a conecpt called 'Share-of-business” is a very useful one. While heading the IT systems dept of a vehicle manufacturing company , I found this concept being very effectively used by our purchase people . We had built this concept into our IT systems where for each purchase item the purchase officer could enlist upto three different suppliers and also specify their share of business. The It system would automatically generate the purchase schedules based upon this share of business. In the dynamic situation the purchase people would tweak these share of business percentages to ensure that the supplies were automatically diverted from the disaster/troubled areas to suppliers in other safe areas.

  7. Barbara Jorgensen
    March 18, 2011

    Good points all, and I think flexibility is the key. We hear experts talk about this all the time, but true flexibility would mean a balance somewhere between near-sourcing and offshoring. I think the balance has tilted too far offshore which is why the Americas are so vulnerable to a disaster in the Asia-Pacific. There is nothing to guarantee we won't have a similar issue in the US–a decade ago, if a similar quake had hit Silicon Valley, disruption would follow.

    I actually think the supply chain is more flexibile than ever. And maybe consumers can adjust their expectations a bit: do we really need that iPad right now? In the wake of everything that's going on in Japan, I'm realizing that there are very few things I need right now.

  8. andyl999
    March 18, 2011

    I have no scientific basis for what I am about to say, I also cannot back it up with facts, however:-

    1) I feel that the world is underpaying for fuel, therefore goods are being shipped (flowers from Africa to the UK) without regard to the real freight costs. Therefore I feel that the shipment of electronic parts/modules/finished products from around the world to Asia and back is not properly accounted for, when fossil fuels are starting to run out and cost of shipping will become prohibited, what then?

    2) Once you start producing abroad, there is a tendency to start to loose in-house production expertise, eventually you may even start to loose the ability to understand production problems with your own product.

    3) If you produce in Asia (or equivalent), what you are actually doing is a Technology Transfer, sooner or later you will be faced with a product that will be competitive with you yet designed in that Country.

    4) I watch some of my customers (semiconductor industry) scramble over to a sub-contractors on a regular basis to resolve issues that always seem to grow, in other words production starts OK but someone has been screwed down on price and will try to recover profit by short cuts.

    5) We know that labour (at the moment) is cheaper, however what are the ethics of using a sub contractor that does not have:-

    Safety Standards like in the West,

    Medical Schemes

    Pension Schemes

    Sickness Schemes

    Retirement Benefits

    We seem to load ourselves up with Health and Safety issues, safety standards (like CE marking here in the EU) and what we are doing is just making ourselves more uncompetitive with respect to our low cost sub contractors, they must think us stupid?

    Sorry for this rant but when you take a cold hard look at what we are doing it's just trading profit for today with tomorrow, short term gains?

    Now you can all shout at me :0)

     

  9. t.alex
    March 19, 2011

    Perhaps this is more applicable to the US context. The simple question is if outsourcing to safer countries works, why not?

  10. Ashu001
    March 21, 2011

    Barbara,

    Most major manufacturers today are already near-sourcing(whenever and wherever it suits them) as per their convenience.

    I see so many cases today of companies move their call-centres,etc back from India,China,Phillipines back to America because they are able to hire Call-centre execs in the US at cost-competitve rates who provide pretty good service to customers as well(without having to deal with the hassle of language barriers,etc).

    This is a trend which is catching on and will develop further as we go along in the manufacturing space.Not just because of unemployment in the West but also because of growing uncertainty in the Supply Chain space.

    Regards

    Ashish.

  11. eemom
    March 21, 2011

    I totally agree with you.  We as consumers have gotten spoiled by wanting what we want the instant the thought enters our minds.  Companies, in an effort to stay competitive and gain market share are working to satisfy an insatiable finicky customer.  The result of all this is our dependence on factors that we may not be able to control.  I do not suggest that the IBM model is the one to follow, I just have always contended that we are headed in the wrong direction, outsourcing all we can in chase a dollar savings. 

    You state that the cost of doing business is prohibitive in the US, but does it have to be? Instead of increasing our trade deficits, maybe the government should establish some kind of tax credit program that would benefit companies who keep work in the US.  I know this is wishful thinking and I am digressing a little, however, part of our long term plan should be to improve the business model so we are not overly dependent on outsourcing, near or far.

  12. hwong
    March 22, 2011

    @eemom- I also agree with your points. As I have also stated previously in another article, moving jobs to other countries is not going to help the U.S. in the long run. If laws and regulations can discourage behaviors such as shifting job opportunites offshore, it would mean near term less profit increase. But in the long run, at least people will have jobs in the U.S and so our society will be a much happier/ safer place. People don't have to worry as much about of loss of employment. People will be more willing to spend. Spending will be a multiplier reinforcement for better economy. How about that.

  13. Tim Votapka
    March 25, 2011

    I think you'll continue to see more of this “near-sourciing” concept as expertise and service becomes senior to price and cost. I've seen the trend in other supply channels such as medical/diagnostics equipment, imaging and identification systems. This is what saved several smaller distributors and VARs back when the industry consolidation became so prevalent.

  14. maou_villaflores
    March 31, 2011

    As long as costing and manufacturing timing is critical, I think near sourcing should be the option in cases such as these.

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