Sourcing's Home Run

Sourcing's Home Run

An alteration in trade throughout North and South America over the past few years suggests a growing trend toward “near-sourcing” that will affect supply chains on a global scale. Also known throughout the industry as near-shoring, reverse globalization or supply chain compression, near-sourcing is the act of companies migrating production to bordering countries in an effort to minimize costs, reduce production times and maintain more consistent time-to-market visibility and control.

Savvy supply chain professionals are taking notice of this emerging trend and the increasing manufacturing opportunities in Central and South America, as well as the fiscal enticement of doing so.

Historically, inexpensive fuel, lenient trade agreements and cheap labor fueled globalization and allowed companies to seek cost-effective production throughout the world. With fuel costs expected to remain high indefinitely and with drastically rising labor costs, companies are recalculating the benefits of global outsourcing and looking for manufacturing partners closer to home. Those combined variables are putting cost pressure on the manufacturing of goods in China for distribution to the U.S., and thus lending additional credence toward the development of more manufacturing centers throughout Central and South America.

A recent survey conducted by global business advisory firm AlixPartners states 63 percent of senior manufacturing-orientated executives selected Mexico as the most attractive country for near-sourcing, and though security risks are a clear concern among respondents, relatively few have actually experienced supply chain disruption in Mexico.

What’s more, overall sentiment appears moderately optimistic about the future of the country’s security problems, with 50 percent expecting at least modest improvement in safety and security issues, indicating that while safety and security in Mexico must be taken very seriously, many companies believe these risks can be lessened effectively.

In addition, 42 percent of those respondents indicate they are currently near-sourcing or will be within the next three years with the top reasons being lower freight costs, lower inventory (in-transit) costs and improved speed-to-market. Other reasons included “time-zone advantages” (easier management coordination, etc.) and improved “cultural alignment” with North American managers.

Another indicator of the changing manufacturing paradigm in China is rising labor costs. From 2005 to 2010, wages increased at about 20 percent annually, far outpacing the rate of growth in U.S. pay. In a recent report published by global business consultants at Boston Consulting Group, the authors highlight that China’s manufacturing cost advantage is shrinking fast. The report predicts that by 2015, higher U.S. productivity, a weaker dollar, rising Chinese labor costs and other factors will virtually eliminate the cost difference between U.S.- and Chinese-made products — and that China should no longer be treated as the default option.

Their consensus is that Mexico has the potential to become the big winner when it comes to supplying North America in the near future. Its strategic location of bordering the U.S. condenses shipping times from 21 days to a day or two when compared to China, and imported goods enter duty-free per the North American Free Trade Agreement.

Those factors, teamed with more affordable production labor when compared to China, make Mexico-based production facilities very attractive. We see the near-sourcing trend becoming even more prevalent in the years ahead.

In closing, we anticipate some manufacturers instituting hybrid strategies within the foreseeable future. Time will tell exactly when and, more importantly, where global manufacturing hubs take place, but as everyone is challenged to do more with less in this increasingly competitive marketplace, it will be interesting to see how the forwarding community adapts to align with this near-sourcing trend.

Bohn Crain is founder and CEO of Radiant Logistics, a non-asset-based third-party transportation and logistics provider in Bellevue, Wash. Contact him at 425-943-4599.