Daily Archives: July 31, 2008

Is Your Supply Chain Reversible?

The last few years have been very challenging for supply chains with the rapid rate of globalization, but I believe that the greatest challenges are yet to come. Specifically, I believe that the challenges of Centralized Purchasing, Low Cost Country Sourcing, and Risk and Disaster Management will look like child’s play compared to the supply chain challenges that you will face in the next five years.

When you consider the fact that the price of oil has skyrocketed over the past year, that skyrocketing demands in India and China have not only doubled and tripled the price of many raw materials but significantly restricted their supply as well, that the Euro has risen substantially while the US Dollar has fallen substantially, and that global food supplies are restricted and at a fifty year — if not a hundred year — low (thanks, in part, to the bio-fuel blunder), it should be fairly obvious that unprepared supply chains are in for a bit of a shock.

However, this is just the beginning of the changes that lie ahead. And companies that aren’t accurately predicting, and planning for, what comes next are going to be in for a bigger shock. Especially since the shift is already beginning. So far this shift has three main elements:

  • Global Shifting of Manufacturing Bases
    With respect to the European market, the US is now a Low Cost Country for Sourcing of sophisticated manufactured goods like construction or scientific research equipment.
  • Global Redistribution of Food Supply Chains
    With transportation costs skyrocketing, food distributors and supermarket chains are scrambling to source as close to the same marketplace as possible. For North America, this will mean more sourcing from South America than Africa or Asia whenever possible, as foreign producers are now no longer the lowest price.
  • Shifting Market Dynamics towards the Developing World
    In the next two decades, India is predicted to advance from the world’s 12th largest consumer market to the 5th while it’s middle class increases at least tenfold. In the same time, China will grow to the world’s third largest consumer market. Globally, the size of the middle class is expected to almost triple by 2030 — and where you buy your raw materials and components and products today is where you will need to sell them tomorrow.

In my view, this all points to one inescapable conclusion – that if you want to survive, your supply chain must be reversible. Raw materials, components, and products must be able to flow both ways and your supply chain needs to be capable of turning on a dime if supply becomes unavailable in one part of the world due to a natural disaster or inhospitable political or economic climate. An optimized inbound supply chain from China is useless if it now costs you more to bring a product to market than you can sell it for, and even more so if you can’t ship product that the emerging middle class in Asia wants from the US back to China, because that’s where a significant portion of your global revenues will be coming from in ten to twenty years, assuming you want to remain a global player.

So if you haven’t asked yourself this question yet, I think it’s time you should. And before you say I’m a crackpot, remember, I was among the first to not only predict that low cost country sourcing was going away and that best cost country sourcing was still not going to be good enough when I said the key to success was home cost country sourcing — and now that the US is a low cost country source for (Western) Europe, those manufacturers ready to take advantage of this situation are going to lead the turnaround in US manufacturing.