Spend Matters Jason Busch recently spotlighted an Industry Week cover article on his pet topic of supply risk. (Truth be told, I planned to post on this too but was tied up with my Top 5 Supply Strategies series.)

I won’t rehash the points of the article. (But I do encourage you to read it here.) Nor will I critique Jason’s assessment of the supply risk issue. He does a mighty good job. (Although an underlying sky-is-falling sensationalism often sneaks into his posts on the subject. Hey it sells newspapers! Or pixels…or something like that.)

Instead, I want to point out the curious final section of the Industry Week article, which appeared under the sub-heading “Going Local.” Now I know I received a series of comments from Supply Excellence readers when I last conjectured that the U.S. could be the next low-cost country. But only half as many as when I suggested that near-shoring may be back in vogue.

According to the article, “Avoiding possibly logistical snafus – as well as the two weeks or more it can take to obtain supplies shipped from overseas – is one reason some manufacturers in the aerospace, high-tech, automotive, and healthcare industries pay a premium to source critical parts locally.” The article points to a small custom electronics contract manufacturer as an example of a U.S. company that has bucked the trend to go offshore in favor of domestic sources that can provide rapid delivery and supply line assurance.

Although there are better examples of U.S. manufacturing facilities sourcing on shore (Toyota and Honda come to mind), the decision of Industry Week to feature a small defense electronics manufacturer that prides itself on quick turnarounds gets right to my point in stirring the “Buy American” (or at least near-shore) pot: Strategic sourcing should be less about finding the lowest cost supplier and more about aligning your sourcing and supply allocation decisions with the needs of your business.

The contract manufacturer featured in the Industry Week article found that inconsistent delivery and long lead times from offshore suppliers did not support corporate objectives of gaining competitive advantage through rapid and custom assembly that met the stringent quality and regulatory requirements of aerospace and defense customers. The company’s president said the responsiveness afforded by his U.S.-based supply strategy more than offset higher supply costs. In fact, he added that, with transportation and handling costs were factored in, the total cost of the his company’s U.S.-based supply strategy was on par with or only a slight premium above what he could have accomplished with offshore supply.

Don’t misunderstand me. I am not promoting a blind nationalistic Buy American campaign. On the contrary, I am a staunch free market objectivist and a huge proponent of global sourcing. I have witnessed first hand the dramatic cost benefits supply management organizations have achieved by sourcing from such emerging market hotbeds as China and Central and Eastern Europe.

However, I am issuing warning about the irrational exuberance Corporate America has displayed for low-cost country sourcing. Too often I have seen companies set arbitrary goals to transition a large percentage of total spending to suppliers in low-cost regions. More often than not, these targets are set with little or no regard for actual supply or business requirements. I know of several instances where such goals have been driven by C-level executives who learned of low-cost country sourcing from a magazine article or a discussion with a peer on the 12^th hole at East Lake.

Engaging blindly in any supply strategy – whether buying from China or adopting technology – is a dangerous proposition. There are countless stories where companies lured by the low-cost country siren song have seen the material-cost savings of offshore supply evaporate due to the unforeseen “hidden” costs of transportation, handling, and tariffs, changes in regulatory policy, or quality or performance issues with product or delivery. Even worse, sending supply to low-cost regions just to achieve near-term savings can often be opposed to corporate objectives.

In fact, just last week, I had this debate with the new CPO of a U.S.-based chemical manufacturer who told me of his plan to transition a large portion of his company’s raw material spending to China. The company has grown considerably in recent years through a series of mergers and acquisitions and was in the process of divesting its mainline chemicals business and reinventing itself as a specialty chemical supplier. The CPO anticipates that moving supply to China will help him put some quick cost-savings points on the scoreboard. And I believe him. But, considering the company’s attempt to reinvent itself as a specialty (read: custom) chemical producer, I questioned whether this sourcing tactic will provide the level of flexibility and responsiveness required to meet the demands of this new dynamic business model.

The bottom line: Too often, low-cost country sourcing strategies are a case of the tail wagging the dog. In today’s global and dynamic economy, supply management executives need to adopt a “right-shoring” approach that defines sourcing strategies based on the objectives of the business first — and on total supply costs (including material and landed costs) second. The decision where to locate supply should be determined based on how well the supplier and its location support these first two objectives.

Email Forward & Bookmarks

Close this WindowBookmark and Share This Page

Save to Browser Favorites

Ask backflip blinklist BlogBookmark Bloglines BlogMarks Blogsvine BUMPzee! CiteULike co.mments Connotea del.icio.us

DotNetKicks Digg diigo dropjack.com dzone Facebook Fark Faves Feed Me Links Friendsite folkd.com Furl

Google Hugg Jeqq Kaboodle linkaGoGo LinksMarker Ma.gnolia Mister Wong Mixx MySpace MyWeb Netvouz

Newsvine PlugIM popcurrent Propeller Reddit Rojo Segnalo Shoutwire Simpy sk*rt Slashdot Sphere

Sphinn Spurl.net Squidoo StumbleUpon Technorati ThisNext Webride Windows Live Yahoo!

Email This to a Friend

Copy HTML: 

If you like this then please subscribe to the RSS Feed.

Powered by Bookmarkify™

More »