Supply Chain and Logistics: The Next Low-Cost Production Center

Nobody would claim that manufacturing workers in China are living the high life, but even a relatively modest increase in Chinese wage costs is causing some global manufacturers to rethink their supplier strategies in favor of even lower-cost Asian economies. In a recent survey of logistics trends, 78% of third-party logistics providers (3PLs) -- those companies who manage the sourcing and logistics activities for many multinational manufacturers -- say they've seen clients shift some production, assembly and export consolidation work from China to such countries as Thailand, Vietnam, Indonesia and Sri Lanka.

For manufacturers and 3PLs alike, a real opportunity exists now in Africa, a continent that includes 11 of the world's fastest-growing economies, according to the International Monetary Fund. While poverty, unrest and incidence of diseases still occur in some areas, Africa is also home to the world's fastest-growing and youngest population, as well as strong international investment, particularly from China, which is reportedly investing $100 billion in Africa and the Middle East.

See Also: Lean Supply Chain Logistics Best Practices

Logistics infrastructure, however, particularly in terms of roads and ports, is one of the chief hindrances to growth in Africa, much as it was in Asia in previous decades. Moving goods through customs can be a slow and tedious process, exacerbated by corruption all along the supply chain. In Nigeria, for instance, more than $5 billion in import duties are lost every year due to smuggling.

The challenge, then, for manufacturers looking to expand into Africa -- whether as a low-cost production center or as a potential market -- is to adopt a strategic approach to global trade management. The rise in the use of free or preferential trade agreements in recent years (a nearly fivefold increase over the past 20 years) necessitates a greater understanding of global trade management trends and solutions.

"With continued growth not only in local markets but across borders, organizations need to remain committed to building their [supply chain] skills in order to remain relevant and ensure a continued success in the new normal, global marketplace," says Zack Deming, a global logistics and transportation consultant with Korn/Ferry International. Along with that, he says, is a need for increased transparency between manufacturers and the 3PLs who often serve as their eyes and ears in foreign economies.

As manufacturers expand their global operations, they are increasingly relying on third-party logistics expertise. However, "there is an over-emphasis on short-term goals at the expense of long-term, partner-focused relationships," points out Dan Albright, vice president and North American supply chain leader at Capgemini Consulting. "This is hindering their ability to attain a more highly functioning and cost-effective supply chain, as well as a solid foundation for mature, strategic 3PL relationships."
 

The answer, he suggests, is for manufacturers to "think collaboratively and build long-term relationships with their 3PLs."