Supply chain disruptions have brought a lot of talk of nearshoring and offshoring, and these are compelling propositions for many reasons. Shipping rates on transpacific routes increased six-fold or more in the last two years and show signs of remaining volatile. Wages have risen in China and other Southeast Asian countries favored by U.S. retailers and original equipment manufacturers. Add in tight transportation capacity overall, wild swings in consumer demand, a war in Ukraine and a pandemic that continues to close downwhole geographical regions, and a change in strategy seems inevitable.
But the painful reality is that companies aren’t going to be able to simply switch to manufacturing or sourcing from entirely domestic or nearby locations. If there isn’t the capacity nearby, it takes a lot of capital expenditure to build or help generate it. It’s also not quick to implement. Then, some things just have to be sourced from particular places, especially in the case of raw materials such as lithium or cobalt.
Hence the rise of terms such as multi-sourcing, continuing to make some products offshore as before, but selectively increasing capacity in locations that are nearer. Mexico presents attractive alternatives, with cheaper labor closer to the U.S. market. Companies can also revisit which port hubs they use to import goods or parts from Asia, possibly opting for smaller (and less congested) gateways closer to their distribution networks and eventual point of consumption.
Furthermore, production footprint modeling is gaining popularity. That’s where a company maps out the locations of the facilities where products are manufactured, along with capacities required to make it happen.
But production footprint decisions need to take into account the complete end-to-end supply chain, not just one or two levels. And the weighting given to transportation costs, especially inbound transportation costs, needs to pay heed to the changing global supply chain landscape.
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