Time is Money: How Offshoring Increases Supply Chain Risk

Any amount of friction that slows down the speed of a supply chain, whether domestic or global, has a cost; and the cost rises exponentially as the degree of friction rises.  The opportunity cost of lost sales, the necessity of financing higher levels of inventory to protect against transportation delays, and the personnel time and effort used to secure alternate sources are only three of the many additional costs associated with supply chain disruptions.  And when you offshore to overseas countries, the number of risk factors that impede timely delivery multiply.

Do you think an uncontested election on the other side of the globe would have any bearing on the cost or availability of a T-shirt?   In January 2014, the Bangladesh National Party (BNP) boycotted national elections that brought Sheikh Hasina to power.  The BNP had hoped that Hasina would step aside before the election and accept neutral oversight of the polling process.  She refused and ran unopposed.  In January 2015, on the one year anniversary of the election, the head of the BNP, Khaleda Zia, was planning to lead demonstrations to protest the election that brought Hasina to power.  To prevent the demonstrations from taking place, the government placed Zia under virtual house arrest in her party’s offices.  In response, Zia called for the BNP faithful to blockade roads, rails and rivers, slowing down or halting apparel shipments from Bangladesh to the U.S. and other countries.  In 2014, Bangladesh exported $4.8 billion of apparel to the U.S., ranking third behind China ($29.8 billion) and Vietnam ($9.3 billion).  The blockade and resulting supply disruptions sent shock waves through the Bangladeshi economy, as apparel manufacturing accounts for approximately 12% of the country’s GDP.

The week after the triple disaster of the Japanese earthquake, tsunami and nuclear meltdown in 2011, the price of certain computer chips used for smartphones, digital cameras and other devices spiked over 30%.  Some Japanese auto plants were forced to halt production due to damage from the natural disaster and the resulting shortage of certain key parts, delaying the delivery of some car models to U.S. dealerships.

And these types of supply chain disruptions don’t happen only in overseas countries.  The International Longshore & Warehouse Union (ILWU) represents labor in 29 west coast ports.  Their 6-year labor contract with the Pacific Maritime Association, which represents the west coast carriers and terminals, was set to expire on July 1, 2014.  Talks dragged on for months beyond the expiration of the contract, leading to work slowdowns in the winter of 2014 that created massive backlogs of imports on container ships off the west coast.  The strike was eventually settled after federal government intervention, but the backlog of goods bound for factories and stores in the U.S. took months to dissipate, leaving importers scrambling for alternate sources.

Given the negative impact that such risk factors have on speed to market, many U.S. firms are taking a hard look at their extended supply chains and opting to source at home.  In 2009, U.S. Block Windows, a manufacturer based in Pensacola, Fl, decided to reshore production of acrylic blocks.  Formerly, the company would ship acrylic resin to China where it would be molded into blocks for various sizes of residential doors and windows, then shipped back to Pensacola.  “With the manufacturing in China, you had to forecast out lead time that with transportation could mean 12 to 14 weeks to delivery,” said Roger Murphy, the company’s president. “So you were always carrying more inventory than you needed and you also were at risk for being out of something if demand spiked.”[1]  Six successful years later in 2015, Murphy admitted that he made the decision to reshore less out of patriotism than to protect his bottom line.  Given that he reshored at a time when low cost China imports were flooding the U.S., how did reshoring help his bottom line?  By increasing his speed to market, he was able to fulfill orders in four production days.  The shopworn cliché is truer today than ever before – time is money.

HanesBrands announced in January 2015 that it was expanding its hosiery plant in Clarksville, Arkansas, adding 120 jobs.  The plant is one of the largest factories of its kind in the world.  Hanes plans to reshore the finishing and packaging of some of its hosiery products.  In a press release, Hanes Senior Vice President of Global Operations, Javier Chacon explained, “It is not easy for a U.S. plant to compete with offshore competitors, but the capabilities of our plant workforce and management team in Clarksville to continuously adapt, automate and improve efficiency is a testament to the resiliency of this facility since it opened in 1988.”  The company also noted that some of the key competitive reasons for expanding in Clarksville include the plant’s size, the high quality of the hosiery produced there, lower energy costs, and proximity to the U.S. market.  In other words, why slow yourself down by manufacturing socks in Arkansas, shipping them overseas for finishing and packaging, then shipping them back to the U.S.?  It takes far too much time; and that’s before supply chain risk is factored in.

The Reshoring Initiative’s “Total Cost of Ownership Estimator,” mentioned in our previous chapter as a tool for recognizing the benefits of the FEWER principle, also shines a light on the hidden costs of slower, extended supply chains.   Even the Commerce Department has recognized the importance of the total cost of ownership approach to measuring the speed and effectiveness of supply chain partners.  Their March 2015 report titled “Supply Chain Innovation: Strengthening America’s Small Manufacturers” notes that when a manufacturer uses a total cost of ownership approach to sourcing – instead of simply buying from the supplier with the lowest per piece cost – the additional costs of added shipping time, risk of inventory being damaged during transport, and interruptions of the supply chain become more readily apparent.

After decades of offshoring as a default sourcing position, more U.S. manufacturers are recognizing that a sourcing strategy that may have worked ten years ago is simply too slow today.  In the fall of 2014, L.E.K. Consulting interviewed a number of senior U.S. sourcing executives in a variety of manufacturing industries and one of the key themes they heard time and again is that strong demand from the end buyer, be it a consumer or a B2B purchasing manager, is driving companies to manufacture in closer proximity to their ultimate customer.  Key benefits included “greater responsiveness, better positioning in the markets being served and more accurate demand forecasts,” as well as more rapid innovation and end-market customization.[2]  Note the link between the compression of supply chains and the ability to go FASTER and make FEWER.  Supply chain proximity to the ultimate customer enables greater responsiveness and more rapid innovation (FASTER), as well as end-market customization (FEWER).

[1] Johnson, Ron, “Reshoring brings jobs back to U.S., including Pensacola,” Pensacola News Journal, January 17, 2015.

[2] Connerty, Michael and Wingard, Carol, “American Manufacturing: Not a New Dawn But a Welcome Advance,” Industry Week, December 17, 2014.

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