Exel: “Right-shoring” crucial for sourcing

Exel: “Right-shoring” crucial for sourcing

Exel: “Right-shoring” crucial for sourcing

   A white paper released this week by third party logistics company Exel stresses that companies should better examine their sourcing strategies as demand, wage levels, and fuel prices experience volatility.
   'For more than 10 years, offshoring has been a primary strategy for maximizing value in the global manufacturing supply chain,' said the report, Right-shoring: Claiming Competitive Advantage by Managing Complexity Across the Changing Global Supply Chain. 'However, new factors are driving a re-evaluation of this strategy, particularly rising wages in offshore locations, volatile fuel costs, and the global economic crisis. In addition, security issues and concerns continue to evolve post-9/11 and are impacting decisions about supply chain locations.'
   Exel pointed to a recent study of North American automotive suppliers by McKinsey & Co., in which Mexico surfaced as a prime right-shoring location based on labor costs and availability.
   'Latin America (including Mexico) provides an average hourly labor cost savings of about 75 percent, while more distant Asia offers 85 percent savings and Eastern Europe only 60 percent, on average,' the report said. 'Asia's slight advantage in wages can be offset by other costs of doing business there, such as transportation.'
   The soaring price of fuel in the first half of 2008 made the idea of near-shoring a de rigeur topic, but talk of manufacturing moving away from Asia soon quieted when fuel prices sunk in the second half of the year. But Exel argues the very volatility is as important to consider as the actual price.
   'Between 2003 and July 2008, the price of crude oil soared from $28/barrel to $147/barrel,' the report said. 'At that point, the cost to ship a 40-foot container had tripled compared with costs in the year 2000. Later in 2008, prices dropped dramatically. While some experts predict that prices will ultimately stabilize, businesses must assume continued volatility in the years ahead and plan accordingly. With every $10/barrel increase in crude oil resulting in a 25-cent/gallon increase in diesel fuel, this volatility can have a significant impact on supply chain viability.'
   Exel said one benefit of 'right-shoring' is reduction in inventories.
   'High inventory costs are perhaps the most significant hidden logistics expenses,' the white paper said. 'With production in Asia or other overseas locations, companies typically carry relatively high levels of inventory near the target market to guard against supply chain disruptions such as storms at sea, strikes at ports, and other issues. This approach also increases risks that the inventory will lose value if prices fall or the product loses popularity in the marketplace. In a challenging economy, lower inventories help companies reduce costs and adjust more efficiently to changes in customer demand. Manufacturers must consider whether the cost benefits of offshoring outweigh the benefits of shorter lead times when suppliers are closer and can deliver products and materials more quickly.'
   Lastly, the paper said shippers should think about the intangible costs of longer supply chains, not just the headline costs of fuel and wages.
   'Indirect logistics costs can represent a major portion of a product's total logistics costs,' the report said. 'For example, a recent Exel analysis shows that indirect costs such as obsolescence and lost sales represent 89 percent of the logistics costs of a shirt. Direct logistics costs such as transportation, warehousing and IT were a small part of the expense. The analysis shows that indirect costs also represent a significant portion of the logistics expense for cars and personal electronic devices. Without a complete understanding — and control — of total landed costs, companies experience 'value erosion' that undermines their strategy for off-shoring.'
   The white paper stressed that certain types of products are better suited for near-shoring — namely those that require complex manufacturing or assembly processes, those where there is a high risk for intellectual property theft, and those whose weight or size would make long transportation routes expensive. ' Eric Johnson