CIPS Americas News


Global Supply Chain or Manufacturing Matrix?

CIPS 5 August 2019

As the saying goes, the only certainty in global sourcing right now is uncertainty. The outcome of the U.S. and China trade conflict? Uncertain. How the U.K. will exit the E.U.? Uncertain. Prospects for the global economy? Uncertain.

Sourcing from far-off countries raises the level of uncertainty even more. It adds the risk of supply chain disruptions or disclosures of unseen unethical behavior. The relatively simple math that led companies to source from China and a few other low-cost countries a decade ago has been replaced by complicated calculations involving risk assessments, the growth of new markets, new technologies and corporate social responsibility, among other factors.

As an example of the new math, The New York Times reports that Samsung has moved a significant amount of its smartphone manufacturing from China to Vietnam, and Apple is considering a move there as well.

As the saying goes, the only certainty in global sourcing right now is uncertainty. The outcome of the U.S. and China trade conflict? Uncertain. How the U.K. will exit the E.U.? Uncertain. Prospects for the global economy? Uncertain.

Sourcing from far-off countries raises the level of uncertainty even more. It adds the risk of supply chain disruptions or disclosures of unseen unethical behavior. The relatively simple math that led companies to source from China and a few other low-cost countries a decade ago has been replaced by complicated calculations involving risk assessments, the growth of new markets, new technologies and corporate social responsibility, among other factors.

As an example of the new math, The New York Times reports that Samsung has moved a significant amount of its smartphone manufacturing from China to Vietnam, and Apple is considering a move there as well.

Global Supply Chain or Manufacturing Matrix?

Cost still drives sourcing decisions, and the cost differentials among many countries have narrowed significantly. A Boston Consulting Group study indexes the manufacturing costs in the United States as 100, and against that, China scores in the 93-95 range. By comparison, Mexico is at 86 and Indonesia at 82. Labor costs are generally the largest part of those metrics, but energy and currency fluctuations also influence the scores.

As countries develop, they tend to lose their low-cost advantage, so we do see a natural migration such as the one that Samsung has made, and Apple may be making from one country to another. They may not be on the charts yet because their total manufacturing output is so low, but African countries are definitely on the radar of smart CPOs who are in a position to move operations without huge capital investments or significant issues in training a workforce. It would not be surprising to see clothing manufacturers moving to Africa, as the fashion industry is one that has for some time chased low-cost labor across the globe.

Consumers are also driving change in sourcing strategies as they look more often for products made in America. A report by the Reshoring Initiative for 2018 says that a record 1,389 U.S. companies had announced during the year that they were returning 145,000 manufacturing jobs to America. According to the Initiative, companies have announced a total of 757,000 jobs brought back from offshore since 2010. Investments in robotics is one of the keys to that shift. Robots can work 24 hours a day. They don’t get tired, and they don’t create a retirement liability. For instance, Stanley Black and Decker is building a highly automated, $90 million plant in Texas to manufacture its Craftsman-branded tools – returning up to 500 jobs to the U.S. The company also says it intends to use a number of other innovations to boost the productivity of the plant and keep it competitive.

Supply managers are also watching where the demand is and trying to meet that with factories that have smaller footprints and shorter supply chains to serve markets in developing countries and other places where demand is growing. Technologies such as 3-D printing play very well into those strategies, especially for low-volume components. There are obviously great savings if you can manufacture parts on site precisely on demand. Furthermore, when it comes time to retool for a specifications change or different part, you simply click on a new file and restart production. And building where you sell has the potential of lowering transportation costs for goods sold as well as supplies purchased. Shortening supply chains is also reducing risks of disruptions, so companies are moving out of areas prone to natural or man-made disasters or countries that don’t protect workers or the environment. Vietnam is a good example of a country that is trying to step up from a low-cost source for low-tech products to a producer of high-technology, high-value products such as smartphones. From their point of view, it makes sense to protect their economy as it grows and starts to lose its low-cost labor advantage. From a manufacturer’s point of view, a growing middle class could turn Vietnam into a place for more potential sales as well as sourcing.  

For all these reasons, BCG reiterates in its report, that “rather than concentrating production in a handful of ‘low-cost’ developing economies to serve world markets, companies should adopt a more flexible, regional approach to their global manufacturing footprints and supply chains.” In other words, we may be moving away from linear supply chains toward “manufacturing matrixes,” where components are still traveling all over the world, but shorter distances and in more directions to manufacturing facilities and markets with high demand. We may not be there yet, but it’s the direction we appear to be headed.

By Bill Michels, VP Operations, CIPS Americas

Reference: Boston Consulting Group BCG Report: How Shifting Costs Are Altering the Math of Global Manufacturing

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