Category Archives: Global Trade

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.

The Tariff Tax Is Coming – And There Ain’t Much You Can Do About It!

Since you have been ignoring the home-shoring/near-shoring that a few of us experts tried to warn you about almost a decade before the first of the predictable tragedies happened (with articles appearing in the late 2000s on the dangers of outsourcing and the advantages of near-shoring — here are 3 SI articles from 2009, 2011, and 2013), you will now have to pay the tariff tax.

(Note that we are now on the fourth predictable tragedy. The first was the COVID pandemic, which the WHO and WEF were warning us about for a good decade [even though they didn’t know what the pandemic would be, they knew a pandemic was inevitable]. The second was geo-political conflicts and sanctions that cut off entire markets. The third was the double whammy of Panamanian droughts and Houthis in the Red Sea, cutting off the fast shipping lanes and forcing a return to routes around the Capes. Now we have tariffs, a predictable result of home-first economic policies that always return in times of tense geo-political climates … and especially in countries run by leaders who believe they have autocratic power, even if they aren’t supposed to.)

So now you will get hit by tariffs. No ands, ifs, or buts about it. And there is nothing you can do to prevent it. Why?

  1. Tariffs are going to be applied across the board. Thus, changing locations isn’t going to prevent them, just minimize them.
  2. In most countries, tariffs on products don’t change weekly. But sales can based on the perceived economic situation, so stocking up on inventory can increase inventory costs beyond expectations as well as logistics costs if you have to expedite shipping.
  3. Locations with cheaper tariffs without supporting supply chain networks will actually cost more, especially if the average competency of the workforce is lower than other locations.
  4. Proclamations are not actualizations. Actual tariffs could be more or less. You could switch from a location expected to see tariff increases to one that sees even more tariff increases.

If you want to protect from tariffs, which are likely only going to get worse as time goes on, there is only one option — re-shore as close as you can! You want to be as close to home as you can to not only protect against tariffs, but to minimize other costs and risks. Logistics risks, and costs, are less. Re-supply times are less. Risk response is faster. And new development and innovation is easier.

So even though costs will increase in the short-term — as you build/upgrade/refine factories and production lines, retrain workforces, build new supply lines, design new distribution chains, and so on. Especially when you re-shore to a location with higher energy or workforce costs. However, over time, the workforce will become more skilled and productive, automation will improve, and supply and distribution lines will optimize. Costs will go down, and they will be more stable than costs half a world away you have no control over.

The key is figuring out what you should re-shore and what you shouldn’t. You should only re-shore what you can do cost-competitively unless you are certain you would lose access to supply otherwise. While the end goal should be that you only outsource for what you can’t get near, or at, home, the reality is that you have to stay in business, and that means staying competitive. So, at least in the short-term, you have to pick-and-choose. So how do you do that?

What-if cost modelling, optimization, and predictive analytics. You need to accurately model the costs associated with pulling acquisition and production back over time. First production batch, 6 months, 1 year, 2 years, etc. Plot the costs over time and if the trend indicates the costs will match the outsourcing/offshoring costs within a few years, you go for it. These costs will require predicting all the component costs with predictive trend analytics, building detailed cost models, and optimizing them against all the different options. A lot of modelling, calculation, and what-if. But if you have the right advanced sourcing platform it can be done. (Although you will need to reach out to platform and modelling experts to figure out how.)

In the interim, for those of you panicking in the USA, just remember that some of the proposed tariffs is just posturing to force American allies to give into other US demands (more defence/border spending, less tariffs for US products). Others are promises to take revenge on countries that didn’t play nice or line certain pockets the last time the administration was in charge, unless those countries do exactly what is asked this time around. Thus, you don’t know exactly what will happen, all you know is that, since not everyone will meet the demands, more tariffs are coming. (And even if the worst don’t come now, who knows what the administration in four years will bring. Tariffs are coming!) That means you can’t select alternative locations ahead of time, or predict when to pre-buy. Moreover, you can only hold so much inventory, and can only get so much here so fast, so pre-buying wouldn’t help much anyway, if it helped at all.

The only sure fire way to minimize tariffs over time is to start re-shoring what you can relatively cost-effectively, as that will protect you no matter what, and even though it will take time, it will payoff in the long run. (And again, to be blunt, you should have started this fifteen years ago when Sourcing Innovation first started echoing the warnings of the inevitable disruptions that were going to come from too much off-shoring if a significant event happened, and now that we have had multiple — COVID, “special military operations” and sanctions, logistics challenges in Panama and the Red Sea, and now anti-trade policies in many countries — it’s time to act before even more disruptive events happen).

Another BRIC in the wall!

We don’t need no education!
We don’t need no thought control.

And we don’t need no American Dollar.
We don’t need no OPEC zone.
No cold war dogma in the classroom.
No arbitrary acetone!

As a result of “first-world” “western” policies, “populist” politics, arbitrary “sanctions” (which are then bypassed through intermediaries), arbitrarily choosing of sides, forced “democracies” (even though the ring-leader isn’t a democracy), etc., many countries are getting fed up of the “West” and petitioning to join the BRICS. What started as a union of Brazil, Russia, India, and China in 2006 (and then expanded to South Africa in 2010), this year saw Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates join the ranks after being invited to join on January 1. (This followed reports last year that over 40 countries have expressed interest in BRICS, and almost half of that number have bid for membership.)

As of now, the BRICS countries represent roughly 45% of the world’s population and 28% of the world’s economy. (That’s more than the US portion of roughly 25% or the EU portion of roughly 19%, and way more than the UK’s portion of about 2%.) Within a few years, the BRICS will likely gobble up a considerable portion of the 26% not in the EU, and could soon represent close to 50% of the world’s GDP and 80% of the world’s population).

A seismic shift is coming and the BRICS, especially if they adopt a central currency, will soon set the global economic standard (despite the denials of the US and EU). Are you ready? (Answer: you’re not, but you should start preparing your global supply chains now so you are when the time comes.)

I don’t need no arms around me
And I don’t need no drugs to calm me.
I have seen the writing on the wall.
Don’t think I need anything at all.
No! Don’t think I’ll need anything at all.
All in all it was all just the new BRICS in the wall.
All in all you were all just the new BRICS in the wall.

Need to Trade More Confidently? Maybe You Need Trademo to Monitor Your Supply Chain!

As you should be well aware by now (as we recently gave you a 10-part series on supply chain risk), supply chains are fraught with risks — that you need to manage, and that, in many cases you can only manage with visibility. In particular, multi-tier visibility down to the source raw material. You also need insight into key areas of regulatory compliance around H(T)S codes for trade (and ECCN for defense trade), sanctions and denied parties, and (known) forced/slave labour violations by any supplier in your multi-tier supply chain.

One application that can give you multi-tier visibility, detailed insight into key areas of compliance, supplier discovery, and even trade intelligence is Trademo. Centered around a global supply chain knowledge graph on over 5M buyer and supplier entities with over 100M relationships built upon public trade (import/export) data from over 140 countries, Trademo can provide unique multi-tier visibility and insight into your supply chain, and the supply chains of your competitors which can help you find potential suppliers who could also serve you and even identify other supplier locations that could be more relevant for you.

There are three main parts of the Trademo platform.

  1. Global Supply Chain Intelligence
  2. Supply Chain Visibility & Resilience
  3. Global Trade Compliance

We’ll discuss these in reverse order, as that is the typical order in which organizations generally seek out, implement, and use these solutions.

Trademo‘s Global Trade Compliance module supports an organization with

  • HS Tariff Search, Validation and Classification across 140+ countries
  • ECCN Search
  • Sanctions Screening across over 640 global sanctions list
  • (Import/Export) Controls (and Embargo) Search
  • Product Master
  • Landed Cost Calculator

HS (Code) Search is by country, trade direction (import or export), and partial code or product keyword. (HS codes could be classified either by referring to the built-in tariff tree structure or using the AI model to classify the HS Codes.) it brings up all the matching codes based on the product key word (or partial HS code), as well as the computed match relevance. You can then select the code of interest and see the associated tariffs and duties, controls, and any associated rulings.

ECCN search is similar to HS (Code) Search and is by country and ecn/ml number or keyword and brings up the relevant subcategories that you can dive into and get relevant details.

Sanctions screening can be ad-hoc, bulk, or advance. Adhoc allows a sourcing / supply chain professional to enter a person, company, or vessel name and screen against any set of sanction lists of interest (one, some, or all). Bulk allows the same, but against a list of uploaded persons, companies, and/or vessels. Advance screening is similar to adhoc, but allows the user to limit to countries, specific locations, and even set thresholds for partial match retrievals. The user can also setup blacklists, so that any attempt to associate a product in the master with a supplier that is blacklisted fails, any search on it returns its status, and any export includes the blacklist status. The user can also setup watchlists (for daily monitoring) and any time a new sanction, control, etc. is detected for the person, company, or vessel, an alert is created in the tool and sent to the user through e-mail.

Sanctions screening are against rules that define collections of sanction lists that are relevant to the user and the types of screenings they usually do. For example, if the organization only sources from and/or two 20 countries, they may not care about any sanctions or embargoes against the remaining countries for which sanctions and embargoes are encoded in the system. In the Trademo system, rules are sorted into list groups (global sanctions, PEP, OFAC, health & human service, banking & investments, enforcement, and maritime) and then sub-groups by source (country, entity, etc.). The buyer can select what interests them, a threshold for matching, define a rule name, and then easy peasy search just those lists going forward.

When a sanction is found, extremely detailed information is returned and generally includes the entity name, the list, the country, the authority, all known entity (operating) aliases, effective date, expiry date (if a limited embargo, for example), company address / vessel birth and identifiers / personage citizenship or address, etc. A user can also bring up the full citation and download everything in PDF if they desire.

Controls bring up, for an import country or ISO Code and/or export country and ISO Code and/or country of origin and ISO Code and/or a HS Code, all related controls and embargoes along with their type (such as import permit or export permit), the controlling authority, and the scope of the control. As with a sanction or HS code, the user can click into a control of interest and see the complete details and download the source (as a PDF) if they so desire.

The Product Master allows the organization to manage their product database down to a SKU level, along with all countries of import, export, and associated HS codes. This makes it easy for the platform to automatically monitor for relevant changes to HS/ECCN codes, duty rates, controls, embargoes, etc. and notify the user when these changes occur.

The Landed Cost Calculator is very useful for sourcing professionals as it allows them, for a lot, to enter some basic information and source unit and carrier costs and get a complete total landed cost based upon the HS / ECCN code and all import and export tariffs.

The user needs to simply enter:

  1. Country (of import, export, and origin), duties of interest (default, preferential, or both), and HS CODE
  2. Mode of transport, incoterm, currency, value (and, optionally, unit of measurement & total quantity)
  3. Freight, insurance, and any other known (sur)charges

The platform will then calculate the total landed cost that will include all the duties and tariffs on the lot, the known merchandise processing fees, the known vessel fees, the known port fees, and other known fees and give the user a total landed cost (where the user can see a 200K buy become a 250K or 300K or more buy and truly understand the cost of global sourcing). the user can also compare the landed cost across different sourcing markets.

Moving on to Trademo‘s Supply Chain Visibility & Resilience solution, it is essentially a supply chain mapping solution that allows an organization to see all of their 1 to n suppliers (3 by default, but more if they want) and filter into suppliers by tier, country, HS code, and associated trade lanes. They can create product groups by brand or region and just see the associated supply chains for those brands and regions as well. The default view shows them the supplier name, domicile country, HS codes supplied downstream, trade lanes used, tier 1 connection, and total shipment value. From this complete list, the user can select a subset of suppliers by country, HS code, and/or trade lane and see a graphical representation of their supply chain, augmented with trade value. It’s simple, but quickly informative and very useful to discovering just who is in your supply chain, as well as who is in a certain region / on a certain trade lane that was just impacted by a natural disaster or border shutdown and you need to react.

Finally, there is the foundational Global Supply Chain Intelligence intelligence offering (Trademo Intel) that is based on their core supply chain knowledge graph and all of the public trade data it incorporates. The entry point to Trademo Intel is the shipment search screen which allows the user to search across all bills of lading in all categories and retrieve all associated shipments, which can then be filtered by shipper details, consignee details, ports, cargo, and freight details, and see a summary, for the selected timeframe, of total shipments, total weight, and total value. They can then drill into (top) importers, exporters, and more detailed analytics. If the amount of data is overwhelming, they can limit to specific product categories, HS codes, shippers, or consignees before starting the search.

It’s a great tool for exploring your competitors’ supply chains, which, when limited to certain product (categories), allows you to discover potential suppliers you might not have known about otherwise. Furthermore, you can see the volumes they are capable of supplying globally and the trade lanes they are already navigating. While most risk solutions will give you credit, cyber, compliance, and/or sustainability risk, they don’t give you deep insights into products supplied, locations supplied from, lanes the supplier is using (which indicates which global regulations they comply with), and so on. When you click into an entity, you can see all of their trading partners, total shipments to/from each, HS Codes supplied, and associated shipments. They can then drill into any and all shipments of interest and see complete details. The analytics are super helpful in identifying the top HS codes, HS sections, modes of transport, and routes used by the entity.

It also allows an organization to keep tabs on global trade from a certain region and whether it is increasing or decreasing, which could signal tidal shifts that could affect future cargo availability, rates, and risks if there is over saturation or under saturation of a trade region predicted.

If you need global trade support around HS codes, sanctions or embargoes; supply chain visibility; and supplier discovery (and deep trade insight in this discovery), Trademo is a solution that should definitely be in your RFP short list. It’s easy to use, powerful, and already validated by a number of Global 3000 companies. Check it out and TRADE MOre confindently!