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October 10, 2017

A trend back toward more regionalized economies?

We now live in a truly global economy. Companies make and ship products all over the world and must manage very complex supply chain networks of plants and distribution centers to serve their customers. Globalization has created its share of opportunities and challenges for manufacturers. It has pressured U.S. manufacturing companies to innovate, get lean, and become smarter and faster at what they do to compete with countries that operate with lower costs.

Coupled with the rapid evolution of data analytics and technology, this has enabled truly global supply chain strategies. The intensification of globalization is now being reexamined. Manufacturers that were caught up in the outsourcing/ offshoring craze are reconsidering this method for a variety of reasons:

Reason #1: cultural and political winds are shifting
The votes are in: there is clearly a trend toward protectionism. This sentiment extends to border protections, global trade agreements and immigration policies. Big companies are taking note – Walmart, for example, committed to source more products from the United States than from offshore. GE is re-evaluating its supply chain. “GE is also trading a global footprint designed for maximum efficiencies of scale for a greater presence in local markets.”

Other consumer trends support a move toward a more regionalized economy, such as the renewed focus on sustainability, reduced carbon emissions, fresher foods and locally-produced items. So what does this trend mean for supply chains? Companies that have historically been more focused on importing will be negatively affected, providing more incentive for establishing domestic manufacturing.

Reason #2: cost curves have changed
Companies will always pay close attention to “total delivered cost,” which includes the cost to source materials and components, the cost to make (direct labor and overhead) and the freight cost to ship – typically, the largest cost drivers. It was the big differential in labor costs between the United States and Asia that created the wave of outsourced manufacturing to begin with.

The consulting firm Alix Partners reported that, in 2005, Chinese-produced parts arrived at U.S. destination ports an average of 22 percent cheaper than comparable products manufactured domestically. Today, according to Boston Consulting Group, the gap has shrunk to approximately one percent. The rising cost of Chinese labor is a big reason for that gap closing. However, an equally important factor is transportation. The higher the cost of transportation, the more significant the freight “penalty” to ship over greater distances.

Reason #3: Rapid advances in technology
The world today is in the midst of an Industrial Revolution. According to a 2017 MHI report developed in collaboration with Deloitte Consulting, robotics and automation were ranked as the most likely technologies to disrupt the global supply chains. Other technologies in the top five included  predictive analytics, the Internet of Things (IOT), driverless vehicles and drones, as well as sensors and automatic identification.

Rapid advances in technology will continue to drive innovations with a direct focus on labor productivity improvements. Companies will be able to do more with less, free from the constraints of tight labor markets, while new technologies will further disrupt operating practices as we know them, creating opportunities to seek competitive advantage.

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Rich Thompson

International Director, Supply Chain & Logistics Solutions

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