“Rightshoring”: Customer centric manufacturing in volatile times
By Narendra Mulani -- Logistics Management, 11/1/2008
In a down economy, controlling manufacturing costs is particularly important. But working feverishly to court and keep customers is even more essential. Sooner or later, the economy will come back. But if cost cutting has been too aggressive or mis-focused, alienated or disenfranchised customers may not follow.
Unfortunately, measuring and controlling manufacturing costs is often simpler than consistently meeting customer demand. This is particularly true for companies that focused on a farshore manufacturing strategy. They’re the ones most at risk as crude oil prices fluctuate wildly, labor costs rise in developing countries, and the U.S. dollar plummets in value compared to major Asian currencies.
But does all this mean that offshoring’s reign is coming to an end? Not necessarily. Nearshore or farshore, the critical differentiator is still formulating flexible, customer-centric manufacturing strategies that fully reflect a product’s current “total landed cost.” That means being able to calculate all costs incurred:
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Within each country of manufacture: raw materials, storage, labor, quality, overhead, obsolescence, packaging, risk of disruption, and exchange rates.
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In transit from country of manufacture to country of sale: fuel, insurance, port charges, handling, security, banking, potential demurrage (detention), duties, and handling agency charges.
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Within the country of sale: local handling, transportation, taxes, safety stock, productivity implications, maintenance, and environmental impact.
Of course there’s a second part of the total landed cost equation: what you do with the information. This is where “total landed cost arbitrage” comes in. Think of this as the process of assessing the cost differential between the total landed cost of manufacturing a product domestically and the total landed cost of manufacturing a product offshore (while taking exchange rates into account).
Once this differential is determined, actual manufacturing decisions can be made by comparing manufacturing costs to the costs of not meeting customer demand due to a lack of stock. This customer-centric bottom line is the “stock-out cost (SOC)”—the impact of lost sales, lost repeat purchases and loss of brand value for each product and location.
Shaping a balanced, flexible strategy
With each product or country’s real total landed cost identified, offshoring’s advantages or disadvantages become clearer. Under no circumstances will offshoring disappear as a result, but the strategy must be evaluated as part of a wider context that includes:
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Nearshoring: Across North America, nearshoring has become more popular since the signing of NAFTA and CAFTA (Central American Free Trade Agreement). With wages in most Central American member countries at one third the level of U.S. wages, sourcing from these countries could offer a significant cost and proximity advantage.
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Splitshoring: Keeping manufacturing processes that are not too labor intensive onshore is another strategy to consider. For example, the final assembly of foreign-made mobile phone batteries, circuits, cameras, and outer casings could be completed closer to the customer, thereby shortening the time needed to respond to market changes and simplifying customization to meet changing consumer demands.
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Peak load manufacturing: Manufacturing operations could be divided so that some of a company’s products and components are manufactured domestically, with others produced overseas. For example, local manufacturing capabilities might be used to accommodate surges in demand while offshore venues are deployed for longer or more stable production runs.
Accompanied by several industry examples, the graphic on page 23 presents a model for considering alternative manufacturing strategies. This approach balances the total landed cost differential against demand variability and stock-out costs. For instance, increasing labor intensiveness pushes the strategy toward the right quadrants, while increasing technology and innovation intensiveness pushes the strategy toward the top quadrants.
Lastly, a manufacturing strategy that meets consumer product and price demand must be supported with sound information for decision making. Toward this end, econometric models can be created to help companies continually evaluate the impact of “what if” scenarios, such as:
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Crude oil prices rising, stabilizing or even dropping.
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The value of the U.S. dollar continuing or ceasing to fluctuate.
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Labor costs in foreign countries rising further or faster or, conversely, falling.
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Foreign competitors setting up new bases that allow them to respond more readily to consumer demand.
Insights gained from analyzing the impact of these scenarios can help most companies reshape their manufacturing strategies as macroeconomic factors change. Supply chain masters know that this final point (rapidly incorporating innovations to control costs and maximize customer satisfaction and retention) is critical to the attainment of high performance. Thinking specifically about farshore, nearshore, or splitshore is less relevant than continuously maximizing agility and innovation.
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