Articles by "Nearshoring"
Showing posts with label Nearshoring. Show all posts

on Friday, June 28, 2019 0

The Importance of Diversifying a Multinational Large Supply Base Today


Optimizing one’s supply base to function beyond national borders is an intriguing safeguard to one’s multinational supply chain. With months of geopolitical tension in Asia centered on the issues of global markets and foreign trade policies, the turmoil has challenged buyers to strategically consider this ideal. The resulting tariffs and regulations have placed critical roadblocks for businesses that function across China and the United States. As managers try to keep their supply chain operating as smoothly as possible, executives and key stakeholders are expanding the width of their supply chain operations to overcome these possible disruptions to their procurement and strategic sourcing efforts.

For example, multinational technology company Apple recently suggested transitioning some of their production away from China. For a vast majority of its manufacturing production, Apple has leveraged its supply base in both China and Taiwan. Apple is looking at Southeast Asia as an alternative in the face of the China-United States trade dilemma in that region. Currently, in China, Apple leverages key manufacturers such as Foxconn for their extensive iPhone production with Luxshare-ICT and Geortek for AirPods production. In Taiwan, Apple also leverages Compal Electronics, Pegatron, Quanta Computer, and Wistron for their production of iPhones, MacBooks, and AirPods. Altogether, Apples engaged with these suppliers to evaluate possible options outside of the China market. Besides their crucial assembler suppliers, Apple vendors for intermediate goods, e.g. printed circuit board (PCB), are closely observing for any decision to be made. Because any shifts in production can ultimately take months to years, long-term decisions may require swift actions by all of these suppliers to capitalize on the opportunity and ensure a smooth transition to prevent hiccups in Apple’s possible implementation outside of China.

Similarly, multinational conglomerate Alphabet, Google’s parent company, is transitioning the production of their technology goods, such as their Nest thermostats and server hardware, away from the United State and China. In their stead, Taiwan and Malaysia have begun implementation of these production processes. A similar movement occurred earlier with Alphabet shifting the production of their motherboards away from China and toward Taiwan. This effort came directly from the associated 25 percent tariff imposed on Chinese motherboard hardware. It cannot be overstated that Taiwanese and Southeast Asian manufacturing companies are eager to capitalize on the divisive geopolitics, and the gradual shift in production by Alphabet is a statement about the feasibility of diversifying their supply chain.

In another case, videography technology manufacturer GoPro transitioned their Chinese production to Mexico to combat future tariffs that could hamper their supply chain. GoPro’s decision came as a means to safeguard their long-term growth by expanding outside of Asia for an entirely different continent. As a result, the company will have to face new challenges and a distinctly different geopolitical space. Nonetheless, there come substantial positives to this decision. For Mexico, metal and plastics fabrication are advanced and time-tested manufacturing spaces that have been meted by strong, economic markets for the automotive and electronics industries.

In summary, we are witnessing companies question the viability of their multinational supply chains being tied too strongly with China. China’s position as a dependable source for low-cost manufacturing and production has led companies to put all their eggs in one basket. The economic disruption by the China-United States trade war caused major problems in cost-driven strategies and outsourcing initiatives for companies. As a result, many businesses find themselves struggling to get their materials and components outside of China in an affordable manner.

Ultimately, the key is to diversify supply chains. This investment will not be affordable in most cases. However, by investing and expanding their capacity elsewhere against supply-chain disruptions, companies may find the initiative worth the price to pay.

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on Thursday, June 06, 2019 0

Imposing tariffs is not an uncommon practice, and it doesn’t always carry a negative effect.  When they are applied strategically to economic sectors that may be vulnerable or unable to compete head-to-head in regional markets given certain conditions, they can prove beneficial. For instance, China is the largest producer of steel and the industry is heavily subsidized by their government. As a result, Chinese steel tends to be rather cheap. Mexico, too, produces steel, but does so at a much lower output. Mexican manufacturers – in the automotive, aerospace, etc. industries - are heavy consumers of steel parts and products, so the Mexican government imposes tariffs on imported Chinese steel in order to equate its costs with those of Mexican-produced steel. This is intended to protect Mexico’s steel producers and enable them to compete fairly. In theory, Chinese and Mexican steel can now be compared and consumed based on quality or other specs besides just cost. In this scenario, a tariff makes sense.

But imposing "blanket" tariffs without a commercial rationale behind it is a terrible idea. If you don’t believe that, you should look at what happened to the Dow Jones last week when the now-infamous 5% tariff was announced (not imposed). Blanket, unstructured, and non-purposeful tariffs often drive speculation into panic - justified panic.

We see this everyday. Part of our work is to help North American businesses improve their supply chains, which in many instances entails supporting transitions within their manufacturing process from China to Mexico (https://www.sourceoneinc.com/consulting-tools/sourcing-and-procurement-services/low-cost-country-and-nearshoring/), a trend that started many years ago, way before the current administration imposed tariffs on China and, you guessed it, cost was a major driver for businesses considering the switch. They looked at Mexico for two major reasons. The first was proximity which created logistical advantages, and the other was the cost benefit associated with lower labor rates and a North American Free Trade Agreement that provided for a tariff-free transit of goods.

Consider this situation: in less than 36 months, massive tariffs on Chinese goods were imposed which increased costs to American business and forced them to look elsewhere, namely Mexico and Eastern Europe. Suffice it to say our practice was booming.  Next, NAFTA was dissolved and replaced with the US-Mexico-Canada Agreement which amongst other provisions (and the fact that “Free” is no longer part of the name) ensures that labor conditions are fairly balanced across all three countries – a stipulation that will likely increase labor costs in Mexico. Then, a new blanket tariff is announced on Mexican goods, meaning companies importing products from Mexico will need to absorb the increased costs. So, those US businesses that were driven out of China and into Mexico are now forced to pay more and faced with two options. They can contend with either eroding margins or increasing prices. At worst, eroding margins means companies are less profitable and more prone to financial distress. At best, they’ll be less likely to hire new talent; while increasing prices may mean reduced revenues due to a diluted consumer base.

Shifting manufacturing to the United States may not be a viable option for many either. Even if a manufacturing sector is mature enough to effectively absorb production, costs would likely be even higher than in Mexico. After all, US labor rates are as much as eight times higher than in Mexico, and remember those tariffs on Chinese parts increasing costs already? So that means someone will pay.

Many pundits say it’s the consumer, but it’s really everyone! US Businesses will pay more as they absorb higher costs and lower profits, consumers will pay more as prices go up, the US economy will slow down as consumer trust is diminished, Mexico will pay as local manufacturers will decrease their exporting activity, and the chain goes on and on. I’m not saying all these things will happen concurrently, but perfect storms do occur and as permutations and combinations of these factors pile up, everyone will feel a direct or indirect impact, whether we like it or not. This is how you fuel speculation. When the question, “How hard will this impact me?” meets the statement, “I’m not sure what to do now,” anxiety is born.  Wall Street doesn’t like when companies are anxious and, needless to say, neither should you. Ultimately, a market that feels insecure WILL underperform, so simply announcing that a tariff is coming will have a tangible, wide-reaching effect, let along actually imposing it. Remember, perception is reality.

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on Tuesday, November 06, 2018 0


Around the globe, the ongoing trade war between the United States and China has business leaders asking the same pair of questions, "How will tariffs affect us and what can we do about it?"

If your organization is just now asking these questions for the first time, then it's very, very late to the game. So late, in fact, that it probably already knows the answer. The cost of doing business and producing goods has increased. By now, consumers are starting to observe these price increases themselves. Organizations who can't or won't take action are now observing the consequences of a  disappointed consumer base. They're losing market share and - before too long - they could lose their business altogether. Worse still, organizations with flagging market share have only just begun to see the results of new legislation.

That doesn't mean they should give up hope. Admitting defeat is as foolish as waiting around for the situation to correct itself. Organizations and industry commentators alike can afford to learn this lesson. Rather than devising response plans, far too many are using this situation as an excuse to air grievances. In politically polarized times, they've got countless excuses for their lack of preparedness.

Are their gripes unfounded? No, but they're certainly unproductive. As tempting as it is to join the crowd in shooting the messenger, it's time for truly excellent Supply Chain Managers to set themselves apart by sending a message of their own. They know that failure to take action will mean lost market share. Taking action, on the other hand, presents a world of unknown possibility.

Supply Chain Management is all about agility, innovation, and quick thinking. The escalating series of tariffs provides ample opportunity for forward-thinking organizations to display all three. As they adapt to new circumstances they can write a new narrative for their organization. Rather than simply stating, "here are my specifications" they can begin to think bigger and ask, "how can I improve upon these specifications and establish a culture of adaptation and evolution?"

Business leaders have known for some time that the costs of doing in business in China were beginning to outweigh the benefits. That's why the last decade has seen more and more organizations nearshore their operations to Mexico and other locations. Though the nearshoring trend has steadily gained steam, many organizations have neglected to take part because the issues associated with Chinese supply chain operations had not yet affected them.

With patent infringements, quality control concerns, and inflated transit times, issues have piled up. For the short-sighted, however, they've long looked like someone else's problem. Now, with Trump's tariffs in play, the perils of doing establishing supply chains across the globe are inescapable. They present both a burden and an opportunity for all global organizations.

The nearshoring process is perhaps more attractive - more imperative even - than it's ever been. Writing for Forbes, Andria Cheng reports that apparel companies are particularly eager to relocate. She writes that a majority of global apparel sourcing professionals "strongly believe" they'll nearshore operations by 2025. Cheng quotes from numerous sources, but one sentiment is common among them. Conversations around relocation began long before President Trump took office. Tariffs, these executives suggest, have only accelerated them. While they represent an unexpected 'last straw,' business leaders were certainly anticipating a 'last straw' of some sort.

Nearly half of Americans oppose the new tariffs making headlines every day. More than 140 associations have joined the fight against them. One small group, however, must feel some measure of gratitude. Anyone who has struggled in vain to build the business case for a nearshoring initiative has found a new trump card. 

Surely every Procurement professional longs for a more predictable, stable global market. The events of the last year, however, should remind even the most unflappably optimistic professionals that stability is never a guarantee. Frankly, it's more reminder than anyone should have needed.

If your organization has found itself blindsided by new regulations, it's time to create systems to ensure you aren't blindsided again. You may have missed years worth of writing on the wall, but it's not too late to take action. Your organizations should look to enter new markets with the same enthusiasm that citizens carry into voting booths on Election Day.

It'll take time, and it'll occasionally look fruitless, but the right strategic action will guide your organization into a stronger, more stable future. However surprising the world around us grows, you'll enjoy the comfort of an optimized and adaptable approach to Supply Chain Management.
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on Friday, August 10, 2018 0
Tasked with performing an essential, multi-functional role, today's Procurement professionals have their hands full. Procurement's responsibilities are further complicated by inconsistent demand, crowded markets for talent and technology, and lingering misconceptions about the function's value.

As Procurement teams have evolved, traditional support models have grown less effective in serving the function's goals and objectives. While traditional Business Process Outsourcing still has its uses, best-in-class Procurement teams require a more flexible and robust offering.

The Procurement Help Desk from Source One is precisely this sort of offering. When organizations choose the Procurement Help Desk, they gain access to the spend management leader's full suite of resources. This includes a team of dedicated subject matter experts, a deep repository of market intelligence, and Source One's own proprietary Procurement technologies. Better still, clients enjoy this arsenal of Procurement support for about the price of a single hire.

Source One's spend management team recently put this support model to the test in an engagement with a North American medical device manufacturer. What started as a nearshoring project ultimately matured into a multi-year series of initiatives touching dozens of spend categories and tens of thousands in spend across three continents.

Through the Procurement Help Desk model, the medical device manufacturer not only realized considerable cost reduction in key commodity categories, but also successfully established more sustainable, efficient, and cost-effective operations. Armed with the knowledge gained throughout the engagement, the organization is now prepared to make more informed, strategic supply management decisions well into the future.

Check out the timeline below to learn more about this engagement and gain a better sense of how the Procurement Help Desk supports organizations.

To learn more about this successful spend management initiative and Source One's Procurement Help Desk model, check out Enabling the Business with On-Demand Supply Chain Support. This whitepaper outlines the benefits of the Procurement Help Desk and provides a case study its versatility and effectiveness.

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on Tuesday, June 27, 2017 0
Global manufacturing has seen many changes recently in terms of the introduction of new technology, shifting industry demands and associated production levels, as well as the preferred production locations. The latter point is what I would like to focus on in this article from a US manufacturer’s prospective. There have been many conflicting schools of thought about where the truly “low cost” production regions reside. Traditionally, Asian countries (since the 1980’s) have dominated the conversation from a low cost manufacturing standpoint. However recently there has been a lot of buzz from companies operating and distributing products in the US regarding the idea of Nearshoring. Nearshoring, from the US’ prospective, is an alternative to outsourcing to low cost countries which are located extremely far away from the US  geographically speaking. Nearshoring entails moving production, assembly and other business functions and processes to our close neighbors in Mexico. This relatively new movement has solved quite a few challenges that come along with dealing with companies who operate in opposite time-zones as that of the US.

There are many financial reasons that have led to this shift of US companies moving operations from Asian and other low cost countries to Mexico:

·         With the maturation of the Chinese manufacturing industry specifically (along with other Asian countries) and the associated implementation of labor hour restrictions, training and safety requirements and other working condition regulations they have seen an accompanying demand for a higher wage for skilled labor. Since around the year 2000 and on the Chinese labor rate has steadily increased while on the contrary the Mexican labor rate remained relatively stagnant during the same time period. In 2013, for the first time, the average Mexican labor rate fell below that of China’s.

·         The Yuan/Peso exchange rate has created another financial advantage where the Peso has continued to gradually weaken against the Yuan over the past 5-6 years making it even more affordable to produce in Mexico.

·         The shipping costs from Mexico to the US are much lower as compared to cross-continent shipments. Shipping goods across oceans costs much more in fuel, labor, and other resources to get to the end destination whether by sea or air. The cost difference is further perpetuated by the establishment of NAFTA which eliminates tariffs and duties on shipments crossing the US/MX/CA borders.

·         Energy costs, and the associated overhead of production, are steadily increasing in China while, again, Mexico remains relatively flat. In fact, the cost per MMBTU has been increasing for the past 10-15 years in China.

There are many other advantages of moving production and operations to Mexico from far away countries that are not solely financially driven, as detailed below:

·         Reduced lead times which allows for lean inventory, better planning and therefore a decreased risk of product shortages.

·         It is easier to communicate with Mexico considering our time zones are all within 3 hours of each other. In China, their day begins when our days in the US end and the opportunity for face to face or even phone call conversations are extremely rare.

·         Intellectual property is heavily protected by Mexican regulatory bodies and they enable authorities to actually enforce IP laws. When you look at China and other less developed countries, the protection of IP is a huge problem considering the lack of infrastructure, prevalence of corruption, and the general inability of Chinese authorities and agencies to enforce IP laws.

·         Mexico has strict child labor laws and enforces a 48 work week. Though China and other low cost countries are generally improving in this regard, Mexico still has superior working conditions and laws in place to protect the workers.

Overall, as companies evaluate the opportunity to move operations and production facilities to different countries, there are many factors that need to be considered and weighed before making a decision. As globalization in Supply Chain/Procurement continues to grow, and countries’ production advantages continue to change, it is important to stay informed with current events and shifting cost factors. Just because something was true today doesn’t mean it will be true the next. With changing political climates, technology, and other economic factors it is hard to say where the next popular manufacturing destination will be for many US companies.
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on Monday, June 19, 2017 0
On this day, 25 years ago, just as Source One was beginning to launch in Pennsylvania, simultaneously, Batman Returns officially debuted in theaters across America, bringing together some of 1990's Hollywood’s biggest names: Michael Keaton (of earlier Batman fame), Danny DeVito (a legendary in the TV series, Taxi), and Michelle Pfeiffer (later renowned for her work in Criminal Minds.) As the 6th highest grossing film of 1992, Batman Returns acts both as a cultural landmark in a time of grudge music and coffee shops, and as a characterization of Source One’s primary principles in Project Management and Strategic Sourcing.

To begin, one must first understand the basic premise of the film: Batman returns to the screen to fight a new arch nemesis, the Penguin, while at the same time collaborating with and fighting off a new flame, Selina Kyle, also known as Catwoman. Contrary to intuition, however, Batman is not the true star when it comes to highlighting Source One’s Project Management and Strategic Sourcing principles – it is the Penguin’s failures who prove these points.

While project management for Source One clients means utilizing strategic sourcing to develop strategic partnerships and relationships with suppliers, along with determining a strategic plan for utilizing innovative technologies to ascertain the company’s end goal, for the Penguin, project management means forging false strategic partnerships, manipulating relationships with suppliers, and misusing innovative technology to achieve his mission.

As a result of the Penguin refusing to abide by basic Source One project management and strategic sourcing principles, the Penguin is the source of his own, gradual downfall. For instance, after forging a false strategic partnership with a petty criminal named Schrek through blackmail, this partnership hurts the Penguin’s villainous projects, as Schrek is the reason for Catwoman’s inception, one of the protagonists who eventually turns on the Penguin and assists Batman.

Similarly, the Penguin’s ruin continues through his manipulated relationship with suppliers – after deciding to kill all of Gotham’s first-born sons, the Penguin turns to outside suppliers to provide him with henchmen and weapons to accomplish this project. Where the Penguin miscalculated, however, was the strength of his suppliers: the strength of his henchmen and their weapons were not wieldy enough to overcome Batman and Catwoman; had the Penguin developed legitimate relationships with his suppliers, the quality of his products and team might have been stronger.

Finally, however, the Penguin’s ultimate untimely end occurs through the Penguin’s misuse of innovative technology. After the defeat of his henchmen and their weapons, the Penguin turned to his final backup plan: using outsourced mercenaries to direct a path of missiles to destroy Gotham City. However, Batman’s strategic planning and utilization of innovative technology proved greater – using the Batmobile, Batman rerouted the Penguin’s missiles to destroy the Penguin’s lair, effectively ending the Penguin’s villainous career once and for all.

Ultimately, as the Penguin’s failures in Batman Returns highlight, it is paramount that successful companies – villainous or not – follow guidelines like those advocated for by Source One, in order to achieve the utmost success. Perhaps if the Penguin had utilized Source One’s expertise in project management and strategic sourcing to develop strategic partnerships, relationships with suppliers, and a strategic plan for utilizing innovative technologies over turning to false relationships, manipulation, and misuse of technology, things would have turned out differently for the Penguin – if only it weren’t 25 years too late for the Penguin to find out!
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on Friday, November 11, 2016 0
I recently had the opportunity to meet with the Ambassador of Mexico to the United States, Mr. Carlos Sada, in what was a very private and candid meeting near Source One’s office in Chicago. As the only representative of the procurement function and the only consultant in the room, I found the discussion extremely engaging and surprisingly timely to my company’s nearshoring undertakings.


Aside from the privilege that it was to sit and chat with such a prominent individual, the meeting was full of interesting content, especially when the discussion revolved around the industrial and economic development in Mexico and its significance to American businesses. You can learn more about his visit here: https://embamex2.sre.gob.mx/eua/index.php/en/recent/1298-ambassador-carlos-sada-pays-work-visit-to-chicago-illinois

Ambassador Sada pointed out that “numbers don’t lie” and that the US-Mexico relationship encompasses one of the most dynamic and economically significant regions in the world, which is primarily fueled by close ties between businesses - from soft commodity trading to the more recently trending automotive and aerospace industries that not only create hundreds of thousands of jobs in the region but that have become the foundation for many other industries to flourish.  

As part of Source One’s Nearshoring offering, we’ve many times reiterated that exploring Mexico as a hub of competitive labor, emerging supply base, and business prospecting is no longer a matter of “if” but of “when” for US companies; and my conversation with the Ambassador reiterated our belief. Through Source One’s network of partners we’ve helped develop synergies between local governments, academic programs and businesses to orchestrate a sustainable environment that fosters opportunity for American and international companies who seek to manufacture better quality products at competitive costs to position themselves not just in the North American market but worldwide.

Ambassador Sada’s perspective is both optimistic and cautious. He sees untapped talent and flourishing opportunity for businesses to initiate or expand operations in Mexico that could sustain long term growth for companies on both sides of the border. At the same time, he stressed that collaboration is key to finding competitive business partners and optimizing current relationships. He also indicated that the political climate surrounding the democratic process in the US will continue to play a role post-election but that private businesses will continue to be a main driver for success, and so it is critical for companies on both sides to diligently approach prospects.

And I agree, it is not uncommon for Source One’s customers to ask us to define the risk factors in pursuing nearshoring efforts. Many companies are concerned about the true costs of labor, the quality of the products, and stability of the local governments to provide a safe business environment, and when the international trade conditions are challenged, an additional variable is added to the equation of “perception”. Reality however, is sometimes much different, and we’ve been successful in proving to our clients that finding suitable suppliers who can produce innovative and quality products is not only viable, but highly probable. Therefore, it is vital for organizations to work together and manage risk adequately; by pursuing diligent strategic sourcing efforts, risks can be identified and mitigated - and successful business relationships that add value to both economies are created.

You can learn more about our nearshoring effort in our website: http://www.sourceoneinc.com/consulting-tools/sourcing-and-procurement-services/low-cost-country-and-nearshoring/
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