Don't Stretch Your Global Supply Chain Past the Breaking Point

Don't Stretch Your Global Supply Chain Past the Breaking Point

Determining the best place for production and sourcing is very much a shore thing.

The classic definition of an optimist has been somebody who sees a glass as being half-full rather than half-empty, but based on the results of two recent studies, an optimist today might be somebody who is grateful that he has a glass at all. Current research indicates that neither offshoring nor reshoring seem to be working very well for U.S. manufacturers.

The belief that the reshoring of production back to the United States from low-cost countries has led to an industrial resurgence is not supported by economic data, says Robert Atkinson, president of the Information Technology and Innovation Foundation (ITIF). U.S. manufacturing value-added in 2013, he notes, was 3.2% lower than 2007 levels, and the number of manufacturing facilities today is 15,000 fewer than the beginning of the recession.

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"Most of the claims for a structural rebirth of U.S. manufacturing are unfortunately based on myths and anecdotes," Atkinson says, adding that any assessment of the industry should be based on "rigorous analysis and review of the official data."

In ITIF's recent report, "The Myth of America's Manufacturing Renaissance," Atkinson (along with co-author Adams Nager) dispels the idea that China's rising labor costs are leveling the playing field, driving production work back to the United States and other North American countries. The facts, though, indicate that even after substantial pay increases in recent years, Chinese wages are still a mere 12% of average U.S. wages in 2015.

However, a separate study conducted by the University of Tennessee, Knoxville's Global Supply Chain Institute points out that relocating manufacturing and product sourcing to low-cost countries isn't getting the job done anymore, either.

"Countless factors can harm performance when supply chains are stretched across the globe," notes UT's Ted Stank, one of the authors of the Global Supply Chains report. "The most successful companies evaluate the local variables before jumping into a global supply chain and design a dynamic network less vulnerable to the pitfalls of modern 
globalization."

Stank recommends that manufacturers use an EPIC framework, a tool devised by UT researchers and the ESSEC Business School in Paris. EPIC stands for Economy, Politics, Infrastructure and Competence, and is used to evaluate the overall supply chain worthiness of a country based on all four criteria, and then assigns a letter grade to each country. Although China does relatively well, earning a B grade, most of the other low-cost Asian countries earn fair-to-middling scores (C- for Bangladesh; D+ for Myanmar; B for Thailand; C+ for Vietnam). Though sub-Saharan African countries are often cited as future low-cost production centers, the UT report indicates that's a bad idea. Other than South Africa (B-), no other country in that region earned better than a C-.

According to the UT study, global supply chains could someday evolve into a series of multilocal pods, with regional sourcing and production supplying an area's needs. In reaching that point, U.S. manufacturers need to do a better job at calculating total cost of ownership on a supply chain basis, taking all of the following into consideration:
• Transportation costs
• Cost of additional inventory
• Cost of quality and obsolescence
• Risk costs
• Cost of schedule non-compliance
• Payment terms
• Cost of administration
• Cost of responsiveness.

 

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