Category Archives: Outsourcing

There is a Price of Relocating to “Friendly Countries”, but There Are also Corresponding Cost Reductions

This originally posted on January 3 (2024), but is being reprinted in case you missed it due to the rising importance of near/home shoring!

A recent article in El Pais on the price of relocating factories to ‘friendly countries’ noted that according to the European Central Bank (ECB), 42% of the large companies in the Old Continent that it has recently surveyed have resolved to produce in allied countries as a means of reducing risks. However, this relocation carries economic consequences, and international institutions — such as the IMF and the ECB — warn of its impact on growth and soaring prices.

The article is right. Some prices will go up as countries move out of countries in, or likely to engage in conflict, both of the physical (war) and the economic (closed borders, significant tariff increases, rolling lockdowns, etc.) variety, and move to more “friendly” countries. (As far as SI is concerned, it shouldn’t just be “friendly” countries, it should be “friendly countries close to home”. At least companies are realizing that China and/or the lowest cost country is not always the answer when that answer comes with risks that, when they materialize, could lead to skyrocketing costs and losses that dwarf five years of “savings”.

Furthermore, even though 60% of those contacted said that changes in the location of production and/or cross-border sourcing of supplies had push up their average prices over the past five years, this hasn’t been true across the board, it doesn’t have to be true, and some of those could still see savings as they optimize their new processes, methodologies, and supply chain network. (Changes don’t reach full efficiency overnight, and sometimes it is two or three years before you can optimize a supply chain network due to existing contracts, infrastructure, etc.)

Why are costs (initially) going up for many companies?

  • wages: many of the “friendly” countries are more economically mature, or advantaged, with a higher standard of living buffered up by higher wages / better social systems
  • utility charges: in “friendly” countries that are using newer, cleaner, sources of energy or limiting energy production from burning (coal, oil, natural gas) have energy costs that are often higher as the initial infrastructure investment has not been amortized, water costs could be higher if more processing inbound or outbound is required, and so on
  • production overhead: chances are that the factories are newer, required a large investment that isn’t anywhere close to being paid off yet by the owner, and you’re paying a portion of the large interest payment to the investors/banks as part of the overhead

However, it’s important to note that:

  • productivity: will go up when you move to a locale where the workforce is more educated and skilled and is better able to employ automation and modern practices, and thus gets more efficient over time, countering the initial wage increase
  • energy costs: will reduce over time as a solar farm or wind farm can produce renewable energy for decades, with the initial investment often being paid back within one third to one quarter of that time; as a result, energy prices should remain flat(ter) over time than in the locales where they are still burning dwindling fossil fuels (which rise every year in cost) and have not yet invested in renewables
  • overhead: will decrease once the investments are paid back (and the interest payments are gone), which means it can stay flat as other production related costs rise (compared to older plants which will eventually reach a point where the revitalization investment becomes significant on a regular basis)

In addition to:

  • logistics costs: will reduce when you choose a friendly country closer to your target markets (since most freight is ocean freight on fossil fuel burning cargo ships)
  • disruption costs: will reduce as less risk translates into less (costly) disruptions over time

So while costs may go up a bit at first, at least relatively speaking, they will go down over time, especially as network and process optimizations are introduced and obtained from experience with the new network, suppliers, and technologies.

There are Perks and Pitfalls of Friend-Shoring — But The Answer is Near-shoring!

On Tuesday, when we told you the tariff tax is coming and there’s nothing you can do about it, we told you the long-term solution is near-shoring, and while others will tell you that the short-term answer is friend-shoring, we want to make it clear that it is NOT.

As a result of recent logistics disruptions, geopolitics, and global disasters, and all of the supply disruptions that have resulted, a lot of global companies are starting to pull back on global outsourcing and extended supply chains, at least where they seem to have options.

Apparently a number of these organizations are considering Friendshoring, as per yet another article on the subject, with a recent example being the perks and pitfalls of friendshoring in EP&T.

According to this article this strategic shift is buzzing among industry leaders and policymakers. Why, I’m not sure.

The article has the following benefits right:

  • enhanced security and trust as partners tend to trust each other and keep each other safe
  • improved compliance and standards as friends generally work to serve the same markets and are more aware of the standards and regulatory requirements that need to be met for all to benefit

And has the following challenge mostly right:

  • increased costs as most “friends” are in first world countries with higher labour costs, higher utility and operating costs, stricter environmental regulations, etc. etc. etc. so costs are generally a bit higher up front (at first)

But here’s what the article overlooks:

  • better quality since these friends usually operate at higher standards with better tech which typically translates into
  • more reliability and longevity which generally translates into
  • reduced returns and warranty costs as customers will generally discard or move on from the product before it breaks
  • higher sales prices as customers will pay more for quality

And here’s what the article really overlooks.

It’s NOT friendshoring, it’s nearshoring!

Preferably somewhere you can get to on land, or from a nearby port. For North America, that means we should primarily be outsourcing from Central America (since we can get our stuff on trucks if ocean freighter availability is low) and, if we can’t get it there, from South America — since we can get it from a ship that sails up and down the coast (and doesn’t have to pass through a canal that has limited capacity due to drought or is unsafe due to terrorist presence). NOT from China, unless it is a raw material we can’t get elsewhere.

The nearer the source, and the less countries and distance the materials or products have to pass through, the less chance for disruption.

Moreover, it’s NOT the friends you have, it’s the friends you need, which may not be one in the same.

For example, a company in the UK might be your “friend”, but the UK is expensive, crossing the Atlantic is expensive and risky at certain times of the year, and you might be able to invest in a supplier in Mexico to get the same product! Moreover, if you invest in a company to help them grow, they are much more likely to stay your friend than a company who is only your friend because they think you are locked in to them.

Plus, if you choose, and invest in, up and coming / new suppliers, you can help them with their processes, new technology selections and plant upgrades, and even sub-tier supplier and material selection. This can be more helpful to you than an established supplier locked into their ways and last-generation technology and production lines they paid too much for.

Some of your “friends” will be the right “friends”, some won’t. Analyze them all and make sure they fit all of your requirements: near, quality, reliability, and potential for future value creation. (Not just future cost reduction after you help them get efficient, but potential sales price increase, value added services, and other factors that might increase the overall profit equation. After all, Procurement is about increasing business value, not just about securing supply and controlling costs.)

Stay close to home, and even home-shore when you can, and you will see fewer disruptions, which should be your goal as supply disruption has been the biggest risk for at least the last 15 years.

Why Do Outsourcing and AI Go So Wrong?

In a recent post on how We Need to Hasten Onshoring and Nearshoring, Jon The Revelator was inspired to ask the following question:

even though outsourcing and AI have merit when properly implemented, why do things go so wrong?

This was after noting, in another post, that we have suffered year-by-year, decade-by-decade disappointment when 80% (and even higher) of initiatives fail to achieve the expected outcome.

Because in both cases [and this assumes the case where the organization is implementing real, classic, traditional AI for a tried-and-true use case and not modern Gen(erative) A(rtificial) I(diocy)], things have gone wrong, and sometimes terribly wrong, on a regular basis.

So, the doctor answered.

Fundamentally, there are two reasons that things consistently go wrong.

The first reason is the same reason things go so wrong when you put an accountant in charge of a major aerospace company or a lawyer in charge of a major hobby gaming company (when the first has zero understanding of aerospace engineering and the second of what games are and what fans want from them).

Like the accountant and the lawyer, they don’t understand their organizational and stakeholder/user needs!

The second major reason is that they don’t understand what these “solutions” actually do and how to properly qualify, select, and implement them. And, most importantly, what to realistically expect from them … and when.

A GPO is not a GPO is not a GPO — these Group Purchasing Organizations specialize by industry and region; and in making an impact by category and usage. They are not everything for everyone.

AI is not AI is not AI (unless it’s all Gen-AI, then it’s all bullcr@p). Until Gen-AI, the doctor was promoting ALL Advanced Sourcing Tech, including properly designed, implemented, and tested AI, because the right AI was as close to a miracle as you’ll get. (And the wrong AI will bankrupt you.) Now, any AI post 2020 is suspect to the nth degree.

Simply stated, the failures are because they all think they can press the big red easy button and throw it over the wall. But you can’t manage what you don’t understand! And until the world remembers this, these failures will continue to happen on a consistent basis.

And, as organizations continue to press that Gen-AI powered “easy” button while outsourcing more and more of their critical operations, expect to see a resurgence of the big supply chain disasters, like the ones we saw in the 90s and the 00s (including the ones which wiped out Billion $ companies). Hard to believe that only nine years ago the doctor was worried about companies relying on outdated ERPs ending up in the supply chain disaster record books, given how many of the disasters were the result of a big-bang ERP implementation. However, the risks associated with Gen-AI makes ERP risks look like training wheel risks!

As a result, it’s more critical that you select the right provider and / or the right solution if you want a decent chance of success. (The worst part of all this is that while there have been spectacular failures, most of the failures were not the result of selecting a bad provider or a bad solution, but the result of selecting the wrong provider or the wrong solution for you. (Remember, provider sales people are not incentivized to qualify clients for appropriateness, they are incentivized to sell. It’s your job to qualify them for you. In other words, even though there are bad providers and bad solutions out there, they are considerably fewer than there were in the days when Silicon Snake Oil was all the rage.) In the majority of failures, primarily those that weren’t spectacular failures, the providers were good providers with good people, but when the solution they offer is a square peg for your smaller round hole, what should be expected?

We Need to Hasten Onshoring and Nearshoring — the Drivers Will Pound Those Who Don’t Into the Ground! Part 2

In Part 1 we noted how it was great to see a recent article on Supply Chain Dive on 6 reasons why global supply chains are shifting because the unending list of disruptions, cost pressures, and geopolitical tensions are only going to get worse.

As per the article, six major factors were influencing the decision — landed costs, tariffs and subsidies, geopolitical risk, existing supply networks, agility, and ESG goals — but these are, frankly, only half of the reasons that you should be shifting back. (And again, read the article for a detailed explanation of each factor, it is extremely well written and Part 1 only described the factors at a high level.) Today, with that article as a preamble, we are going to dive deeper into why the global outsourcing craze (thatthe doctor has been rallying against and complaining about for over 15 years, since he saw the business case begin to crumble in the late 2000s) was, and is, fundamentally wrong.

Collaboration

Yes, this would is overused, misused, and abused, but if you truly want to work with your supplier, it’s much easier to work with a nearby supplier than a far-flung supplier.

First of all, they are on a similar timezone, so at least half of a normal workday should overlap. No more 7 pm / 7am meetings in the best case (or 7 am / 3 pm / 11 pm meetings in the worst cases when you also have to dial in a partner organization in a multi-tier assembly operation).

Secondly, if you need to go on site, even if air traffic is grounded (terrorist risk, volcanic eruption, dangerous solar flares, etc.), you can get in a vehicle and drive to an on-shore site and many near-shore sites. And even in the North America / South America situation, while we still don’t have a complete Pan-American highway (as we still have the Darien Gap), we do have complete connectivity in North America and in South America, and if trade were to increase, it would make a ferry service from Panama to Colombia financially viable, and trucks could be ferried from Port Panama City to Santa Marta (and cars as well, although there is already a weekly service from Colón to Cartagena that could be expanded to operate more frequently). This means that you could get goods from any country county in South America into the US mostly by land in 2-3 weeks, or get to a supplier site by land in the same time. However, suitable partner selection could get you, or your goods, anywhere mostly by land in less than a week! (So, during normal times, imagine how fast and easy air travel will be — without racking up huge, unnecessary, overseas travel miles.)

Cultural Understanding

Most countries have a better understanding of their neighbours (unless it’s a communist/dictatorship with completely closed borders) than they do of countries half a world away, which usually makes collaborative working relationships naturally easier.

Complexity Reduction

The further away the good, the more complex the sourcing. There’s enough complexity to deal with in modern business. Why increase it? Especially since there is NO Big Red Easy Button (and Gen-AI definitely WILL NOT deliver one)!

Back to Basics

And, finally, when you onshore home-source or near-source, you’re getting back to basics. If you look at the history of trade, which was always long, risky, and costly, you traded for what you did not have locally, not what you had.

Convincing you that off-shoring was a good business decision that would save you money was one of the biggest cons, if not the biggest con, that the Big X and Mid-Sized Consultancies ever pulled off, since, in the long term, the only organizations that will make any money in the end are them*.

These Big X and Mid-Sized Consultancies charged you a lot of money to help you off-shore (which involved identifying suppliers, managing global supply networks, redesigning processes, updating inventory management, dealing with more defects and quality issues, etc.), which took you years to recoup before you started making money … which you have to give them again so they can help you re-shore, which requires identifying new suppliers (because even if your systems have data from pre-offshoring times, chances are those suppliers are out of business), redesign your supply networks (as you need different carriers, new warehouses, new partners, and new regulations to adhere to), updating inventory management, and temporarily dealing with defects and quality issues as the new suppliers evolve to support you. After all, any staff who knew how to deal with near-shoring (as well as handle trade in a time where there were few recriprocal agreements, tariffs were everywhere, logistics was a nightmare, etc. … i.e. pre 2000s, retired during / post COVID when they decided they had enough as a result of your “temporary” furloughs, forced office returns, and/or headcount rationalization in favour of new “AI” systems that don’t work.  (Hopefully this time, once you’ve recouped your investment re-shoring, you stay re-shored and instead use these organizations for the greatest value they can provide — see our piece on When Should You Use Big X?]

If you had just stuck to the basics, and instead of going half a world away for a quick win, invested in process, product (design for cost/reuse/etc.), manufacturing, inventory, and logistics optimization, chances are you’d be far ahead now while the rest of the world scrambles to catch up. (Although, we admit, it would have taken you a lot longer to get the same profit margins as that requires higher degrees of automation and quality in a high labour cost environment, and that takes time.)

* The worst part?  Most of them probably didn’t think and project far enough ahead to realize what they were actually doing, as it took decades for an over-reliance on outsourcing to bite us in the backside.
Also, today’s soundtrack: Bullet with Butterly Wings

We Need to Hasten Onshoring and Nearshoring — the Drivers Will Pound Those Who Don’t Into the Ground! Part 1

It was great to see a recent article on Supply Chain Dive on 6 reasons why global supply chains are shifting because the unending list of disruptions, cost pressures, and geopolitical tensions are only going to get worse.

According to the article, the following factors are influencing the decisions — and the doctor encourages you to read the article as he’s not going in depth into anything already written, especially when it was written very well, but instead wants to emphasize why the global outsourcing craze (that he has been rallying against and complaining about for over 15 years, since he saw the business case begin to crumble in the late 2000s) was, and is, fundamentally wrong (and emphasize even more factors you may not be considering yet).

Landed Costs

Items have become more expensive as supply constraints on certain raw materials and food stuffs have significantly increased prices across the board, tariffs and taxes from protectionist policies have heightened prices further, and then the skyrocketing logistics costs during the pandemic and now due to canal crises (Red Sea, Panama, etc.) and the lengthened shipping routes around the Capes (Horn and Agulhas) they are introducing make farshore sourcing very expensive.

Nearshoring from Mexico or Central America can take two weeks off of delivery time and reduce landed cost by up to 20% from the average. On the flip-side, sourcing from China with “trade war” tariffs (that Trump is threatening to increase) can increase landed cost by 20% (as section 301 tariffs targeting China added a 25% duty on hundreds of products).

Tariffs And Subsidies

These trade penalties and incentives are flying fast and furious both in populist-run democracies/republics/parliamentarian systems with Our-Country-First policies and communist/dictatorship countries with protectionist policies or tit-for-tat trade-war tariff and incentive policies. This makes “neutral” countries the best choices for outsourcing. See the article for a great breakdown of import value trends as a result of these changes in tariffs and incentives.

Geopolitical risk

The trade-wars were just the start. Now we have the Russia-Ukraine War, the Israeli-Palestine conflict, the war in Sudan, increasing tensions between China and Taiwan, and so on. All of these have, and will, disrupt global sourcing. The global political trade risk in multiple countries is now significantly high.

Existing Supply Networks

Even though, for North America, China came at the cost of Mexico, the trade networks still exist, and are easy to ramp up again. Similarly, multinationals already have hubs in multiple countries they sell (a lot) in and re-orienting around those hubs is easier than finding new hubs half a world away. Moreover, reducing routes increases FTL/utilization of key routes, and allows for logistics optimization.

Agility

Extended supply chains mean extended ocean shipping times, congestion at ports and warehouses, increasing labour disruptions (which is the biggest supply chain threat right now), can create lead times that stretch into months when we want to operate in a near JIT (just in time) manner, and get restocks in days (or weeks at most). Nearshoring can often allow that. Offshoring (unless it’s very small components you only need a small number of that can fit in a cargo plane and where the cost is so high you can afford the high air transit prices) can not!

ESG Goals

Shipping takes fuel. LOTS of fuel. LOTS of dirty petroleum-based fuel. Hard to make your ESG targets when ocean shipping is one of the dirtiest industries on the planet when there are still container ships on the ocean that, in one year, emit the same amount of cancer and asthma-causing chemicals as 50 MILLION cars. (Link) Remember that 6 of the worst polluting container ships can pollute more than ALL of passenger vehicles in the US in a year. (And don’t tell me that electric cars will fix all that when the production of a single battery pack, which often requires burning dirty coal or oil, for an electric car can produce up to 16 metric tons of CO2 [Link] and charging that battery from a dirty coal power plant can result in the indirect burning of 950g of CO2 per kWH, meaning you could be producing 78kg of CO2 every time you fully charge your battery pack for a Tesla 3. This means that, in the worst case scenario where the battery and frame production was as dirty as possible, you would have to drive 1,000,000 kms for that clean car to become carbon neutral!)

And while these are most of the major reasons to consider nearshoring and onshoring (but not “friend”-shoring, but that’s a different article), there are others. And we will discuss them in Part 2.