Is Near-Sourcing Near At Hand?
A recent article in World Trade Magazine, an Executive Overview on Near-Sourcing, has the doctor wondering if this is finally the year where people realize that going crazy on low-cost country sourcing is not always the smart way to go.
If the low-cost country is half-way around the world, as opposed to just a country or two away, then you're going to greatly increase lead time and if we're talking a rapidly developing economy, you're going to greatly increase risk as well. That's why the doctor has been preaching home-cost country sourcing, where you find a way to source in the local region in a globally competitive way. In other words, the doctor believes that near-sourcing, if you can achieve it, is the way to go.
The article, which defines near-sourcing as any kind of sourcing strategy that shrinks distance a measurable degree, notes that low-cost country sourcing with an extended overseas supply chain introduced a lot of risk factors into sourcing. It also noted that a recent AMR report that found that although 90% of companies surveyed confirmed they were outsourcing aspects of production, 56% admitted that the total landed cost relative to prior sourcing efforts had actually increased.
Let's repeat that: 56% of companies that jumped on the low-cost country sourcing bandwagon found that their total-landed costs actually increased! That's why the doctor continually promotes total cost of ownership modeling and value-based strategic sourcing enabled by true decision optimization. Otherwise, you might find that what you thought sounded like a good decision was actually a very, very bad one. As the article notes, without proper modeling, you might get hit by one or more of the following hidden costs:
- unplanned air / expedited freight
- the 'fatal cost' of poor quality
just ask Aris Isotoner (oh wait, you can't!) or Mattel - the 'third shift' effect
(lost revenue due to counterfeiting from the vendor that works two shifts for its customers and one for itself) - the cost of distance
(outsourcing to 'under-performers' typically doubles inventory holding costs) - rising fuel costs
And, when all is said and done, if you didn't thoroughly investigate the new "low-cost" country sourcing opportunity, and do proper modeling, you too might find that your costs actually increased.
This is a bit overbroad...for example if your product is "dense" enough in terms of dollars per pound that you can afford air freight, Shanghai is only few hours further away than Guadalajara. I don't see the language barrier to be any diffferent between the countries. Management level people speak English in both places.
But I can see why low cost seasonal goods need to be nearby. So do desktop (but not laptop) computers, because the dollar to kilo ratio is too low to be able to fly desktops.
Also, to a great degree the article compares a bad sourcing job in a remote country to a good domestic or nearby sourcing job. If people are getting bad quality or their design is being copied, that's a bad sourcing job. Simple measures such as restricting sourcing to foreign invested companies in developing countries will reduce that possibility.
It is shocking that landed costs went up so often. Somebody has a bad landed cost/risk analysis program.
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Well, whether or not it is overboard all depends on who you ask. The US politicians would probably say I'm not going far enough!
Aso to your comment that "somebody has a bad landed cost/risk analysis program", I think you meant to say "there are still too many somebodies that don't have or aren't using any cost / risk analysis programs at all".
Total cost modeling and strategic sourcing decision optimization should be a mandatory part of every process. Yet less than a fifth of companies have tried it, and probably less than a tenth of companies use it regularly.
Now, as I've said before, I'm not saying that an optimization program can always make a better decision, but an optimization program can allow you to determine the true costs of each decision, and evaluate the impact of each risk in a what if scenario. And if you're not doing this, how do you know you're making a good decision? (The answer, of course, is "you don't" because "you're not" because I've never seen a scenario of real world complexity where a good, true, sourcing decision optimization platform couldn't come up with a better answer for the costs and constraints given to it. Sometimes the cost differential or risk differential isn't worth changing from an award decision you're comfortable with to one you're not, but at least you know how much money you're sacrificing or risk you're taking on with that comfort decision.
And that's the w0rd.
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