David Frentzel 2014-09-23 01:15:37
Apply total landed cost and a dose of skepticism as your sourcing myth buster. There are some widely circulated myths it’s fairly harmless to believe. There are others it’s wiser to take with a grain of salt, because they’re not only inaccurate but potentially misleading. In recent years, five global sourcing myths have gained significant traction — and understandably so, because they’re supported by several reputable facts or trends. Yet they also come complete with even more significant contradictory evidence, including many reasons that could have serious supply chain implications. Myth One: China has lost its mojo. Why many people believe it: Over the past few years, China’s manufacturing cost advantage has been shrinking due to rising wages, increasing property values and the highervalued Yuan. In fact, recent studies suggest that for some products, the cost gap between China and the United States has nearly disappeared, and countries like Mexico, India or those in Southeast Asia now offer superior cost advantages. Why you should question it: China has indeed lost its labor-related economic manufacturing edge for some goods. However, it has sustained that edge for many others, most notably high-end products or sub-components. In addition, thanks to increased skill levels, training and automation and a vast supplier base, its productivity continues to rise. China also has become a major consumption point in its own right with a growing need for a supply chain of its own. And it continues to have a vast untapped labor pool, a fact that will help keep its overall wage rate from accelerating too quickly, especially in the western provinces where pay rates remain low. Due to these things — as well as the improved infrastructure it has in place and a business-savvy government that understands it must continue to make economic changes for the better (including improving industrial infrastructure in the interior regions) — China should continue to be a favored sourcing point for years to come. It may no longer be the only game in town, but it still has mojo to spare. Myth Two: Follow rock-bottom labor rates. Why many people believe it: It’s no surprise that the world’s lowest-cost labor markets often wind up being its fastestgrowing sourcing venues. Low labor costs were a huge driver behind China’s and India’s economic growth, and they’re almost certainly fueling a good portion of the garment industry’s shift to places like the Caribbean, Southeast Asia and Bangladesh. They’re also a key reason certain African countries have begun to crop up on more companies’ sourcing lists. Why you should question it: Although labor is one of the largest components of product cost, it’s far from being the only strategically significant one. Many companies learned this lesson the hard way the first time they ventured into global sourcing and saw a big chunk of their manufacturing cost savings offset by higher-than-anticipated supply chain, compliance and risk-related expenses. A truly strategic sourcing decision weighs the potential benefits of a manufacturing move in terms of total net landed cost rather than just one piece of the equation. That means factoring in realities such as transit times (and the corresponding inventory carrying cost), expedited shipments, product hand-offs, import/export compliance, fuel consumption and carbon footprints. It also means carefully considering how a change of venue might increase (or reduce) the possibility of disruptive and costly events like geopolitical risks, strikes, political upheaval, factory disasters and potential damage to the brand. And of course it involves a detailed infrastructure analysis, because even the best labor rates in the world can’t compensate for an insufficient ability to get a product to market. Myth Three: Nearshoring is all about Mexico. Why many people believe it: According to several studies, Mexico recently surpassed China as the country offering the lowest total landed manufacturing cost for companies supplying U. S. consumers. Many businesses have either moved some of their production there or expressed plans to do so, largely because of the North American Free Trade Agreement (NAFTA), Mexico’s superior speed-to-market, competitive wage rates and lower post-production transportation costs. Why you should question it: While Mexico’s lower costs do indeed make it an appealing manufacturing draw for companies in the Americas, it’s still not what the locals would call “perfectamente.” Among other things, security there — while getting better — is still a daunting challenge, and even though the fluidity and connectivity of its transportation infrastructure are much-improved, they still have miles to go before they’re of the caliber that most U.S. companies are accustomed to. It’s also important to remember that Mexico is only a true nearshoring option for some of the markets that companies are trying to reach. For example, no matter how anyone tries to spin it, it’s still thousands of miles away from Asia’s growing consumer base. Because of these factors, many of the world’s savviest companies are now approaching their sourcing decisions in terms of rightshoring — using regional manufacturing locations that each offer proximity to a key market cluster. In some cases, those rightshoring plans justifiably include Mexico; in others, they just as logically don’t. Myth Four: Africa is the next China. Why many people believe it: Over the past 10 years, the highly populous African continent has doubled the value of its manufacturing output, albeit from a very small starting point. During that time, some of the world’s largest and most respected manufacturers have established or expanded operations there, including Chinese companies themselves. Additionally, analysts and economists have begun issuing studies about the possibility of Africa becoming the world’s next major manufacturing hub. Why you should question it: Achieving a production increase isn’t the same as becoming the world’s new manufacturing superpower. Although Africa and the China of several years ago have one very important attribute in common — a large population willing to work for some of the most reasonable wages on the planet — the strong positive parallels stop there. With 55-plus countries, Africa represents more of a niche value proposition due to limitations such as political instability, the world’s largest number of landlocked countries and product transportation costs that are considerably more than they are in other parts of the world. Transit times within the continent can be long. Internal road and rail infrastructure is poor, and cargo lingers in African ports five to six times longer than the global average. Plus, the specter of corruption, counterfeit products and product quality headaches still looms large. As companies grow and diversify, there will be an increase in Africa-based manufacturing activity, especially in venues such as Egypt, Ethiopia, Kenya, Morocco and Tanzania. However, those countries will face stiff competition from other emerging manufacturing venues such as Vietnam, Myanmar, Sri Lanka, Haiti and Peru, all of which will also be working diligently to shore up their own manufacturing advantages. Myth Five: The U.S. energy boom is a game-changer. Why many people believe it: In recent years, natural gas has become considerably cheaper in the United States, far cheaper in fact than it is in Europe or Asia. This has made the prospect of manufacturing energy-intensive products and petro-chemicals in the U.S. much more economical. Meanwhile many companies have begun to show increased interest in bringing production back to the U.S. Why you should question it: Don’t confuse a balance shifter with a game-changer. Like inexpensive wage rates, cheap energy is just one of many important attributes companies need to consider when comparing the merits of one sourcing venue versus another. The energy boom is undoubtedly an important selling point for U.S. manufacturing, but so are the advantages associated with rightshoring, higher quality and access to first-world infrastructure — and the fact that the large wage gap between the U.S. and “cheaper” countries has substantially narrowed in recent years. At the end of the day, total net landed cost still trumps everything else. Bear in mind that the U.S. doesn’t have a monopoly on good news either. There are plenty of current and possible events such as new trade agreements, developments in Africa and South Asia and even the possibility of an oil and gas boom somewhere else (after all, fracking isn’t isolated to the U. S.) that promise to keep the global sourcing game just as viable for other areas of the world, too. The Moral of the Story Issuing these caveats doesn’t imply that the geographies, practices or developments mentioned aren’t worth your full consideration. In many cases, they are. Nor does this myth-busting discussion overwhelmingly favor one area or practice over another. Successful supply chain management is never a one-size- or one-country-fits-all proposition. Instead, when a sourcing story seems too good, too bad or too absolute to be true, there may be a truly good reason. And that’s no myth. David Frentzel is senior vice president of Global Contract Logistics for APL Logistics.
Published by WorldTrade. View All Articles.