Daily Archives: January 15, 2010

Nearshoring? Not on this planet. At least not yet.

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

One of the predictions (or purported trends) we heard a lot about in the last few years is “nearshoring”. Google has 78,000 references to the term. Supposedly, trans-Pacific supply chains are so unreliable and complicated that US businesses are leaving their Chinese suppliers and moving to closer areas such as Mexico. If that were happening, I expect we would be seeing Mexican imports to the US being an increasing percentage of Chinese imports. Here’s the data. See for yourself. There was a surge in early 2008 but it went away. The data source is the U.S. International Trade Commission.

Dollar

value of US imports from Mexico as a percent of imports from China
2007 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
68 67 62 64 72 71 59 57 59 59 57 n/a

Here’s why I think many predictors are going astray:

First, they don’t differentiate between goods that usually travel by air and goods that travel by ocean. If your goods travel by air, an 8000 mile supply chain is only 12 hours longer than a 2000 mile supply chain. I agree that trying to have a long flexible supply chain is only possible if air freight is economically feasible. The economics work for laptop computers but not for clothing.

Second, the predictors overlook the main reason companies buy from a given country … that’s where the best suppliers are. You shouldn’t just say “I’m moving from country X to country Y” unless country Y has equal or better suppliers. (“Best” here means best against criteria that include landed cost.)

Economics Professor Michael Porter wrote a book called The Competitive Advantage of Nations. It has a great chapter on how countries become centers of excellence in building things. He says it requires four conditions:

  1. High degree of domestic competition
  2. Related and supporting industries
  3. Demanding customers
  4. Adequate factor conditions

Too many predictors focus on condition four, factor conditions. That includes labor, overhead and material costs, infrastructure efficiency and overall business environment. The other three conditions are also necessary. If factor conditions were the only criterion, Japan never would have become excellent in building cars.

I’m not saying that nearshoring will never happen. It will happen first in purchasing products that can’t be shipped by air and require supply flexibility. For any product, today’s best countries will not be best forever. Some external shocks to the system can speed up the process. If China allows the yuan to float, costs for the Chinese content of China’s exports will go up with respect to the US dollar. If energy costs soar or emissions from aircraft or ships are tightly controlled, the “best” countries could change. Both of these changes are likely to happen sometime.

The typical purchasing company cannot solve these problems. You can’t generate a nearby supply base for the parts needed to manufacture your supplier’s products if it doesn’t exist already. Because of that, “insourcing” may often be a better solution than nearshoring. If starting to manufacture something you are now buying isn’t practical, the company best positioned to solve the problem is your current supplier. I suggest you start probing your Chinese supply base about what they would do if the yuan increases in value. Farsighted Chinese companies are already looking in Africa and Latin America for both sourcing and manufacturing.

Dick Locke, Global Procurement Group.

Where’s Our Leonardo da Vinci?

Leonardo da Vinci, the brilliant Italian scientist, mathematician, engineer, architect, inventor, painter, botanist, musician, writer, and the archetype of the Renaissance man, defined an entire movement almost single-handedly and inspired countless scholars to new and dizzying heights. He probably understood the connection between art and science better than any man alive during the last millennium and even conceptualized inventions (such as the helicopter and the tank) that could not be realized for almost 500 years. He was a leader and a visionary and someone who could serve as a focal point for an intellectual revolution.

Now, it’s true that the 20th century produced its fair share of great minds — Einstein, Feynman, Hawking, and Penrose who helped redefine the very universe we live in, to name a few — but most were fairly specialized, and these minds in particular focussed heavily on the fundamental sciences. In the arts we had the likes of Pollock, Warhol, and Lynch and in philosophy we had the likes of Wittgenstein, Russell, Rand, and McLuhan, but, like their physicist counterparts, they never crossed the divide. The only people who attempted to really bridged the divide were the science fiction writers like Asimov, Clarke, Adams, and Gibson. But even the greats never really crossed the line into the “world” of business which would, of course, at least as far as a scholar is concerned, sully true academic pursuits.

When you meander over into the world of business, in which most of us live in today’s mostly privatized world (where the market capitalization of six private corporations exceed 5 Trillion, which is an amount greater than the current GDP of every country in the world except the US, and the top corporation, Race World International, has a market cap that is three times the annual GDP of the US), and you look at the great business minds like Drucker, Kroc, Porter, and Ford, you see little connection to the sciences, except for Ford, who was an engineer.

We’re supposed to have reached a point where the world is flat but executing global trade, travelling internationally, and crossing the cultural divide seems to be harder than it has ever been. Technology is supposed to be simplifying the supply chain but the sheer proliferation of e-Sourcing — spend analysis, RFX, e-Auction, decision optimization, contract management; e-Procurement — P2P, EIPP, e-Document Management, e-Invoicing and e-Billing; logistics — transportation optimization, LTL marketplaces, and 3PL management; warehousing — inventory optimization, warehouse (layout) optimization, demand planning and forecasting; supply chain finance — discount management, receivables trading, and factoring; visibility — EDI/XML, RFID, and tracking; manufacturing — production planning, lifecycle management, performance management, and collaboration; compliance — regulatory, environmental, and carbon management; and other supply chain technologies is challenging even the most technologically proficient of us to keep up. And the new and improved “paradigms” the consulting firms unleash upon us every decade usually end up in the trash by the next one.

Furthermore, while the modern supply chain is, in some ways, more efficient than it’s ever been — at least at the handful of industry leaders, in many ways, it’s in shambles. We need a visionary who understands the art and science of the modern supply chain and the trillions of dollars in global trade it supports every year. Someone who understands the technology it requires and the science behind it. Someone who sees the architecture on which the supply chain is based and how to engineer a better chain based on that architecture. Someone who is comfortable with the underlying mathematics of modern supply chain models and how to use this knowledge to optimize the supply chain. Someone who hears the melodic, almost musical, patterns of a smooth flowing supply chain. Someone who knows the long history of the global supply chain which actually dates back to pre-history (and the realm of the archaeologist) … centuries before the spice trade in the 16th century and at least as far back as the 9th century during the time of the Vikings who traded with the Franks, Baltic, and Byzantine empire and pioneered trade routes down the Volga and Dnepr and to Northern India and China and essentially traded with the entire known world at the time. And someone with the vision to take the best that the art, science, and business schools (of thought) have to offer and take us firmly into the twenty-first century. Because, when you think about it, we’re still operating like it’s the 20th century, and it’s 2010.

It’s unfortunate that da Vinci lived 500 years ago, because if you take a long, close look at the world we’re supposed to be powering, it quickly becomes clear that we could sure use someone like him today.

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