Monday, February 24, 2014

When China loses, Mexico wins

A supply chain network depicts the links between multiple organizations that work together through the exchange of information and materials to provide value to the end customer.


The bigger the product portfolio of a company, the more complex its supply network becomes. Furthermore, a number of other business challenges make management of a supply network difficult. They are:
  • ·    Volatile markets and changing customer demands
  • ·    Increasing logistics costs (transportation, warehousing) compared to revenues
  • ·    Different strategies for demand fulfilment (eg: Push, Pull)
  • ·    Increased customer satisfaction level requirements
  • ·    Changing distribution strategies

However, considering that supply chains now need to be more market-responsive than ever, companies must optimize their supply networks in order to serve their customers efficiently. An optimized supply chain works with the best possible economics.
As part of supply network optimization, the following things need to be planned:
  • ·         Selection of manufacturing site
  • ·         Selection of distribution center site
  • ·         Sourcing strategy
  • ·         Customer service territory of DCs
  • ·         Inventory management
  • ·         Optimal routing of materials
  • ·         Transportation and logistics

‘Near-shoring’ and ‘Reshoring’ – implications of supply network optimization
As part of optimizing their supply networks, many American companies, who had once offshored all their manufacturing to eastern countries like China, Philippines etc, are now bringing their operations closer to home, a phenomenon known as Nearshoring. Due to increasing transportation costs from the eastern countries to North America, and also because of the rising wages in these countries, the cost advantage of having operations there that once existed is gradually declining. Mexico and Panama seem to be the new favorite locations for companies to set up their offshore operations. Apart from the obvious advantages of geographic, temporal, cultural and linguistic proximity, the greater control and reduced risk are driving companies to move their operations from the far east closer to home. Not just this, near-shoring offers the advantage of reduced lead times for products and keeping the products closer to end customers. Canadian aircraft and train manufacturer Bombardier is investing millions of dollars in operations in Mexico. Following suit are automobile giants Chrysler, General Motors and Ford which are in the process of or have already set up huge operations in Mexico.


Companies such as Whirlpool and General Electric did their math and have brought some of their manufacturing units back to the United States itself, considering the rising costs overseas and the risk and lack of control involved. This process is call Reshoring, and is taking away thousands of manufacturing jobs back from the eastern countries to the Americas.  
Having said this, the one question that I am wondering about is the impact of these moves on global supply chains. Was the hullabaloo about ‘Global Sourcing’ and globalization just a passing fad?
The answer may not be an outright yes, but definitely casts some doubt on the fundamentals of globalization.   


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