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The rise in the price of oil is leading many industry commentators to talk of the undermining of Asia's competitiveness as a global manufacturing hub and the return of a large share of outsourced manufacturing production closer to major consumption markets. Commentators are talking in terms of regional manufacturing models over global ones, with production for markets such as the US, for instance, moving back from locations such as China to places like Mexico and other parts of Central and South America, or even back to parts of the US itself.
This idea, sometimes referred to as "near-shoring", has been mooted before, most recently following the Chinese-made product recalls in the US. The recalls exposed security and quality issues in China-linked supply chains, and questions were raised over whether outsourcing-manufacturing production to Asia meant a myopic focus on cost reduction at the expense of quality and security in supply chains. There is little doubt that oil prices are eroding margins in many US and European businesses that engage Asia for their production, and these businesses need to be creative in the management of costs, which may well include relocation of production closer to main consumption markets.
For Asia, if this trend proves to be significant going forward, it will certainly be offset to a degree by the regions own growing consumer market, which factories located here are increasingly serving. Longer term, the hike in the price of oil should result in an acceleration of the trend of development of more advanced supply chain models, such as dynamic supply networks that give brand owners or 4PL-type operations access to thousands of suppliers in dozens of countries from which they can custom-build supply chains based on specific orders or contracts.
These kind of supply networks, made possible by advances in IT, better infrastructure and service links between different economies, and the increasing opening up of countries to foreign trade, represent more holistic supply chain models, the success of which isn't predicated on the cost of transportation. They give the flexibility and agility required to deal with the increased level of risk inherent in the increasingly complex nature of an inter-dependant world and are supply chains that create value in areas beyond simply accessing lower labor costs.
While challenging to create, and often requiring deep adjustment in the approach of companies to markets and supply chain management, these kinds of network supply systems already operate successfully in many forms. The rise in the price of oil, together with other major issues such as the need to create more sustainable businesses with supply chain models that build sustainability, and the increased risk of supply chain disruption in a more complex world, make them the most logical supply chain solution for the successful businesses of the future.
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