Wednesday, February 19, 2014

Next-shoring Now

imageSupply chains manage variability. Variability naturally exists in all processes. Specific to supply chains, you could quote variability in demand, supply, lead-times to replenish, and so on. So the corporate supply chains singular objective is to manage this variability profitably. If you can do it better than the next guy, you win! That is competitive advantage for you. Where do you see this most in action? Look around and you will see this principle in action in how global supply chains are emerging.

First there was off-shoring, the primary focus being cost. Then companies like Zara built their business models around being responsive to customer demand invented near-shoring. Now McKinsey says there is next-shoring and provides a blue-print for the companies to follow. But what is behind all this? The same old desire to reduce cots and increase the ability to quickly respond to emerging customer demand and preferences.

The quest for a balance between the cost of business and the desire to be responsive to the changing customer preferences will continue. The “optimal cost/service spot” on the globe will keep on moving as the economies around the world keep on emerging and become more developed. As economies develop, their inherent (labor and material) cost advantages disappear with rising wages/prices and increased local demand for goods and services. Add to that the ever-present volatility of energy prices, and the equation for supply chains to solve becomes even more complex.

Immediately after the WWII, Japan became the favorite destination for companies in America to procure cheap manufactured goods. As the Japanese economy grew and their standard of living caught up with the developed nations, they lost their cost advantage. As Japan still retained leadership in innovation and research, China emerged as the world’s manufacturing hub for everything utilitarian. But the trajectory of Chinese growth maps well to Japanese: Starting with utilitarian merchandise, now they supply everything from the cheap plastic Halloween decorations to super computers. Of course, the supply chains emerged in response and became extremely long and global in physical reach.

Growing awareness to risks for such long supply chains, eroding cost advantages, increasing energy costs, and a renewed focus on customer is now forcing the companies to redesign their supply chains to be shorter, nimble, secure and more agile.

To the above mix, add the new technologies like advanced robotics, 3d printing, and autonomous vehicles and a new landscape for manufacturing and distribution starts to emerge. In this brave new world, labor cost advantages disappear, designing and manufacturing truly personalized products becomes a commonplace reality, and distribution costs are substantially reduced! This is what McKinsey calls next-shoring and provides the guidelines for the corporate leaders.

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© Vivek Sehgal, 2014, All Rights Reserved.

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