Global Sourcing Trends:
What Goes Around, Comes Around

Rising fuel prices are helping to transform North America’s supply chains. In today’s economic
environment, optimizing supply chain performance often means developing shorter supply
chains and a counterintuitive approach to conventional supply chain practices.

Jim Davidson

Trends. Some last. Some fade. Then there are those that reverse. Business is cyclical in nature. What goes around, comes around.

Ask me to comment on global sourcing trends and I’ll tell you we’re headed back where we started. After years of ambitiously extending and strengthening supply chains between North America and Asia, there is now some kind of movement back to America. That’s right. After spending countless hours (days, weeks and even months) and millions of dollars negotiating deals with China and India, the traffic is beginning to turn around. The reason? Need I say it – the escalating cost of transportation due to the increasing price of fuel. Is there enough movement to consider it a trend? In my opinion, yes.

Given the high price of fuel, I can’t say I am surprised to find some North American companies are re-sourcing their manufacturing back to the Americas. In recent months fuel surcharges of 50% have been added to the cost of transporting a container from Asia to North America. Still a bargain when you consider that fuel surcharges for transporting goods from Europe to America are posted at 100% on average.

By re-sourcing back to America companies can seize new opportunities for establishing competitive advantage. Competitive forces drove outsourcing to Asia and now competitive forces are reversing the flow. Mexico is certainly getting more manufacturing contracts as outsourced business is returning to this continent. Making the move back is relatively easy and quick given the established workforce and insignificant language and cultural barriers. It is too early to judge how long this re-sourcing activity will last or how far-reaching it will get. But if the cost of fuel stays high then I predict more and more manufacturers will be sourcing suppliers in Mexico or even in Canada or the United States where a growing, unskilled labour force comprised primarily of new immigrants is driving domestic labour costs down.

So yet again the pendulum of cause and effect exercises tremendous influence on our industry. Truly, there is nothing more constant than change. What remains critical is the ability to identify where business is headed and to respond quickly and decisively to significant trends. If you don’t, your competition will.

Trends clearly indicate that nothing lasts forever. Companies constantly have to re-evaluate their business environment and embrace the changes that occur. Who do you depend on to help steer the course?
In today’s volatile business environment trend spotting is an invaluable skill. Know that the best 3PLs are continually surveying the business landscape, looking at the whole picture of global activities, scouting the trends and assessing cause and effect. The best 3PLs will have you considering responses to forces you may not have detected on your own, or chose to ignore if left to your own devices. Needless to say, there is a lot to be gained from their expertise and guidance. A competent 3PL can be one of your company’s most profitable alliances. Chose wisely. Your future will depend on it.

One thing your 3PL will assure you is that short supply chains are less costly and easier to manage than long supply chains. (They are also more environmentally friendly, but more about that in my next LQ commentary.) The movement towards outsourcing in Asia has taught us that if a company continues to lengthen their supply chain in pursuit of lower manufacturing costs or labour costs then they had better be paying close attention to the impact of variable costs on their supply chain. As we’ve seen, the advantage of lower labour costs can quickly be cancelled out by dramatically escalating transportation costs. As one cost component battles another, strategic decisions have to be made based on the net result. The message becomes clear. Those companies re-sourcing offshore need to better manage their supply chain costs because the supply chain is becoming a much larger and more significant component of their overall costs.

Escalating fuel costs greatly impact continental supply chains as well. The greatest challenge lies in compensating for return trips made by empty trucks. Suppliers address this dilemma by raising rates for the full load to compensate for the empty miles. In recent years warehouse facilities have diminished in favour of longer supply chains that increase both overall total miles and costly empty miles. Industry studies have told us it’s the best way to operate, supporting the automatic bias that says less warehousing is better. After ten years of sharing the belief that less warehousing reduces overall transportation costs while providing for better service, I’m changing my thinking. I happen to believe that higher fuel costs are going to lead to a trend towards more warehousing. Here’s why.

To rationalize a turnaround to more warehousing, one needs to look at the bigger picture. You need to see the whole landscape and how it will continue to be coloured by a very real threat to profitability: the high price of fuel. combined with the pressure to operate in a more environmentally friendly way, fuel costs will continue to assault the bottom line. But with threat comes opportunity.

One legitimate way to counteract these challenges is to optimize supply chains by moving slower and cheaper rather than at full speed ahead. Increased use of intermodal transportation means less dependence on road transport, less sensitivity to fuel prices and lower transportation costs. intermodal can cut transportation costs significantly. Granted, it may take longer, but warehousing can bridge the time gap. With more warehousing closer to the end user, inventory can be held until it’s needed and transported over much shorter routes. You build additional inventory into the supply chain, allow for slower methods of transportation and save costs in the long run.

Seems a simple enough solution but difficult to implement when the industry is still operating under yesterday’s thinking. Is your bias still towards minimizing warehousing? Or do you agree with my assessment? As a seasoned professional accustomed to supply chain optimization through creative problem solving, I believe we’re on the verge of having it all happen as I see it. As the CEO of a progressive, highly competitive 3PL I’m here to challenge the bias and ask you to do the same.