Rising currents

There are two currents contributing to the shape of the modern manufacturing supply chain, onshoring, and passing inventory costs onto suppliers.  One is a legacy of the days when non-U.S. labor and currencies were less expensive and less valuable relative to the dollar respectively, while the other is the natural next step of supply-chains that have been optimized to the bone.  Both of these trends are having a tremendous impact on the way supply chain networks are organized.

Although there are other key factors, the primary drivers of onshoring becoming feasible more recently has been the increases in southeast Asian, especially Chinese, wages and the huge spike in transportation costs caused by increasing oil prices.  When labor and transportation was cheap, the decision to move manufacturing processes overseas was an easy one.  Now, however, the cost advantages that could be found are shrinking.   Combine this with other international factors like taxes, trade rules, and macroeconomic trends, and the simplicity of Made in the USA becomes more than just a nostalgic notion, but rather a potentially good business choice.[1]

The other trend that has cropped up in articles both this week and last week has been in companies finding ways to foist their costs onto the suppliers in their supply chain.  Dell creates an incredibly well-orchestrated network by keeping its suppliers close and making sure that inventory is available at exactly the moment it is needed.[2]  However, the way the article is written implies that this is not merely good forecasting, but rather that its suppliers exist in a corona around the factory, effectively deferring the inventory costs beyond the “thin white line.” This week, under the guise of “just-in-case,” Ranger Steel has deferred a large amount of the shipping costs of its steel to its suppliers through the use of distribution centers.  Rather than operating their own central hub from the port of origin, suppliers instead ship the steel to Ranger’s locations around the country.[3]   Both of these cases likely have some extra costs incurred as a result of their strategy. However, the sheer size of a customer like Dell would allow it to dictate the terms of the arrangement with its suppliers. 

While deferring costs up the supply chain is a great way for companies to find more efficient ways to organize their network, what how might this scenario play out as the trend occurs further and further up the supply chain? Will the costs ripple back down from the raw materials providers? Concerning onshoring, how much of its former manufacturing strength can the U.S. regain in the face of the changing global landscape?

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[1] http://relooney.fatcow.com/0_New_3551.pdf

[2] www.fastcompany.com/51967/living-dell-time

[3] www.nytimes.com/2013/02/13/realestate/commercial/new-hubs-arise-to-serve-a-just-in-case-supply-chain.html