Several factors – from rising labor costs in China, to the “Amazon Effect” and tough talk on tariffs – are accelerating the shift towards near sourcing as a viable manufacturing strategy, according to TOC Logistics International President Gary Cardenas.
Near sourcing, in-sourcing, and regional sourcing all mean the same thing: moving a business’ operations closer to where the end products are sold. Many refer to this practice as a trend, or a general change in direction.
But the term “trend” downplays the sincerity and thought behind this shift. Near-sourcing isn’t a trend, it’s part of an overall plan of action designed to streamline production and spur growth. In other words, it’s a strategy, and one that many supply chains have been taking a second glance at lately.
One reason for the growing popularity of this strategy is that near-sourcing creates a static spend line. Inventory carrying cost for a company that sources globally can be very high. Global sourcing requires companies to retain a certain amount of safety stock, 10-30 days available at all times, for example, in case of unpredictable disruptions in its supply chain. This adds to the cost of manufacturing and runs counter to the goal of shrinking product cycles.
In addition, near-sourcing allows companies to manage how long they own a product before selling it. There was a time when prices overseas were so low that the total landed cost equation (including shipping and customs) made more sense. But now, CFOs are focused on managing spending patterns and leveling out their overall spend to smooth out the peaks and valleys. Near-sourcing shortens the supply chain, creating a more predictable, autonomous financial management system.
And we can’t underestimate just how much the “Amazon Effect” has changed the supply chain game. Amazon has made demand for consumer products immediate. Their shipping model has pushed traditional retailers to shrink their own supply chain in response to a growing “need it now” mentality.
Placing manufacturing closer to the customer base makes it easier to communicate and manage changes in the supply chain. It brings an added element of flexibility, allowing suppliers to “roll with punches” and adjust production schedules quickly and easily to meet the ever-changing demands of their customers.
All of this has contributed to a rapid closing of the gap between regional and global sourcing.
While everyone used to consider China “low-cost central,” that’s simply not the case anymore. The rapid expansion of China’s middle class has put them in a much stronger position to negotiate. Labor costs are going up in China, but U.S. manufacturing wages haven’t increased in 10 years. In fact, Chinese wages are expected to reach parity with the U.S. minimum wage this year.
Even those companies that have chosen to remain in Asia are moving out of China and into places like Vietnam. But more often than not, near-sourcing price per unit costs are prevailing over the old global model.
A shaky shipping market is only adding fuel to the near-sourcing fire.
In order to increase container freight rates and remain viable, carriers have been consolidating left and right through mergers and vessel sharing alliances, meaning that the already unpredictable schedules and rates have become increasingly more volatile.
Last-minute changes that force BCOs to make last-minute decisions have put everyone on edge, pushing companies to at least test the waters of near sourcing if only to reduce their reliance on ocean carriers.
And make no mistake, the United States’ tough talk on tariffs sends a message.
Ongoing discussion surrounding a possible increase in tariffs on nations deemed to have an unfair advantage (e.g. China and Mexico) and U.S. companies that send jobs overseas represents more of a refocused perspective than an actual bite. As is the case with any negotiator, that perspective is often the most important factor in the outcome of the talks. Regardless of individual commodity tariffs becoming a reality, the message itself rings loud and clear: ignore the potential benefits of near sourcing at your own peril.
With that total cost of importing non-commodity products from Asia coming in line with what can be achieved in the U.S. or Mexico, near-sourcing keeps looking better and better, especially when customer expectations and cash impacts are added to the equation. But the choice to adopt a near-sourcing strategy should not be taken lightly. It requires a close analysis of global vs. regional cost elements such as fuel, labor, and materials, a knack for market prediction, and, as always, a bit of luck.
Cardenas is an accomplished logistics management professional with nearly thirty years of experience in domestic and international supply chains. He currently serves as president of supply chain solutions provider TOC Logistics International.