NEARSHORING TREND
by Mike Starling
May 2, 2013
Some companies are reexamining the landed cost of their imported manufactured goods and have found a disturbing trend. The costs are going up! Shazam! What a revelation! As a result, we are starting to witness a multi-industry shift of operations from Asia to the Americas (but not so much to the USA). What are the implications of this trend for operating cash flow improvement opportunities related to your import supply chain? And your current Transportation Strategy and Tactics employed? You do have a strategy, don’t you?
Many companies are now coming to the realization (whoa, beat me with a spoon!) that their import purchasing programs and their trendy overseas manufacturing production have a few drawbacks that affect their end-to-end supply chain operating cash flow. The difference now is that with the US economy in recovery (NOT!), cash is getting tight and the hunt for ways to improve operating cash flow has become a priority. Yep, that line-by-line analysis of the financial statement has come home to roost, forcing companies to take a realistic look at the cost of their Asian outsourcing programs, which were designed to bring cheap products to the US consumers.
And guess what? A recent survey pointed out a few of the costly drawbacks of the outsourcing-from-Asia movement from back when—drawbacks that are now being touted as the advantages of jumping on the nearshoring trend of participating companies. Oh, how savvy they are!
As Peabody used to say to Sherman on the "Rocky and Bullwinkle Show," “Sherman, turn on the Way Back machine and let’s go back in time.” Yes, let’s go WAY BACK to the year 2005, when it was all the rage for retailers, manufacturers, and wholesale distributors to establish a sourcing base in China. In that land of plenty, it was unusual not to find out that all the players in your Intra-China supply chain links (the buyer’s agent, the trucker, the forwarder at the port, etc.) were related to the guy who owned or ran the manufacturing plant. Let’s go back to a time when most of us were not familiar with the February Manufacturing Disruption, known as Chinese New Year. Back to a time that saw the awakening of enlightened steamship line owners to a heretofore unknown—nay, unrecognized—event that created yet another excuse for the lines to impose another surcharge on the shipper—Chinese New Year.
Let’s look at some of the benefits of changing your sourcing strategy to nearshoring (and dare I say, this may require you to consider some adjustments to both your Transportation Strategy and Tactics Employed):
1. With the rise in the cost of Chinese labor, comparable labor is available cheaper in Mexico, Central America, and Brazil (it probably was back in 2005 as well, but it was just not trendy to go there, if you know what I mean).
2. You can get your product to market faster from Mexico, Central America, and Brazil than you can from Asia. DUH! I suspect this was the case back in 2005 as well.
3. It’s easier to check on Production and Manufacturing. You can fly to Mexico in a few hours. Compare that to a minimum three-day trip for site visits to production in China. So you save on travel expense and personal productivity time, while helping to ensure the quality of the product being produced.
4. Little or no time zone difference makes for quicker and more productive communications with the production and sourcing facilities (not to mention the transportation providers involved with your inbound supply chain). How many of you really enjoy waiting until midnight to have that conference call with your contacts or counterparts in China? Not that it’s that inconvenient — they all speak and understand English perfectly, right? No problem!
5. Oh yeah, how about that intransit inventory? No negative impact on working capital or cash flow, right? So, lets see, which would you rather have? Inventory intransit for 14 to 30 days coming in from China? Or inventory intransit for one to three days coming in from Mexico? Go ask the CFO if you are not sure what the answer is!
So, as a transportation professional, what are the takeaways from this nearshoring trend?
⦁ Off the boat and onto the truck or train (direct contracts with land-based transportation may prove to be more reliable and predictable than ocean shipping, and with fewer applicable surcharges).
⦁ No more Chinese New Year! But you’d better check out the holiday schedule for each of your new nearshoring countries, and find out the duration of those holidays — a day? Two days? A week?
⦁ Smaller, more frequent shipments are more likely (MOQs will be reduced, hence the number and frequency of shipment will most likely increase). Are you prepared to handle an increased workload without any increase in staff or support systems?
⦁ Use of TMS will lend itself to optimizing shipment frequency, size, and expense. If you don’t have one, or use one, GET WITH THE PROGRAM!
⦁ Supply Chain Cycle Time is greatly reduced, hence shipment visibility will increase in importance. It will be used not only as a competitive weapon, but as a means to an end to improve Operating Cash Flow via reduced intransit inventory, and to reduce freight expense related to import shipments.
⦁ Expect expedited shipments to go up. (Piss-poor prior planning will come into play, and you will be the whipping boy on the hook to make that on-time delivery happen!)
⦁ International departments of your domestic carrier will provide a negotiating and service alternative to your global forwarder - something to think about and investigate.
⦁ I’m sure there are more, but I think you get the idea.
ENOUGH ALREADY! If your company is considering nearshoring, great for you! If you have already made the switch, excellent! But there is just one thing that still bothers me about all this. When do you think the trend will switch from nearshoring to returning-to-our-USA-shoring?
Articles in This Series
Call Us! 877-674-7495 info@dksco1.com