DC Velocity - June 2012

basictraining
BY ART VAN BODEGRAVEN AND
KENNETH B. ACKERMAN

The penitent’s road map to reshoring

WELL, THE CHICKENS ARE CONTINUING TO COME HOME TO roost. Or maybe in this 21st century of globalized supply chains, the Peking Ducks are coming home. (OK, we know it’s “Beijing” today, but the menu at our favorite takeaway joint still says “Peking.”)

Many of the pioneers who boldly sent both product and component manufacturing off to China have moved onward and upward, pocketed handsome bonuses, and are apparently immune from prosecution. But the cost-slashing offshoring that has been a given for CFOs for decades now has been exposed as a risky bet, with more downsides than anyone imagined at the outset.

It’s not just China; it’s the search for the low-cost labor source, wherever it might be, that has created some pretty shaky—and no longer slam-dunk lowest-cost—supply chains.

UNINTENDED CONSEQUENCES
When it comes to the unintended consequences of offshoring, the
bad news comes in several flavors, all unappealing.
Here are a few of the possibilities:
up, gasoline went up—a lot. Then they went
down—a little. Then up. This will continue for a
long time with the overall trend being signifi-
cantly up (unless everybody converts to natural
gas, and soon). The offshoring command deci-
sion is getting shaky in this scenario.

▪ One is the effect on inventories, which continue to be under pressure for reduction. Simply having a physically longer supply chain means more inventory to cover the replenishment cycle. Or generates significant risk in service performance, if one tries to hold stock to prior levels. Or both, if the equation isn’t got quite right.

Add to that the safety stock needed to accommodate lowered reliability and increased variability in delivery performance. More of the same impacts. Put slow steaming into the mix, and you increase the upward pressure on inventories. Throw in the seasonal effects of monsoon/typhoon periods in Asia. It’s enough to make one start talking with a clergyman, or with oneself.

Did we mention the consequences of work stoppages at arrival ports? Or challenges in finding transport capacity to move stocks from point of arrival to distribution destinations? Both require on-hand inventory stocks to make disruptions invisible to customers— or both can drive brand-killing customer delivery failures.

▪ Then, there is the elephant in the room of transportation costs. In the early days, it didn’t matter much. Depending on where manufacturing had been previously located, offshored product typically incurred the additional cost of ocean transport, then over-the-road miles greater than when domestically produced. West-to-east container transport was significantly more expensive than the reverse. But fuel was cheap.