"Our interaction with clients indicates the pendulum is starting to swing away from moving factories to Asia in favor of Mexico and other parts of Latin America and even the US," says Greg Aimi, one of the firm's research directors. "The savings aren't always as great as procurement managers think they're going to be."
The biggest problem with off-shoring to the other side of the globe, he explains, is the extreme variability it introduces to the supply chain. There are more logistics considerations involved and a lot of room for misunderstanding. It's also difficult to predict exactly how long it will take products to reach US distribution centers, and regardless of predictions, the transit time is long. "When you take something that was a 300-mile chain and make it a 12,000-mile chain, there are a lot more potential fail points," the researcher comments.
To handle the long and uncertain lead time, Aimi tells GlobeSt.com, retailers have to build in a buffer in the inventory to make sure their shelves are adequately stocked. The result too often is excess product that never sells. The long lead time also means the retailer can't respond quickly to market change, he adds. While use of air rather than sea freight can eliminate the time problem, it is prohibitively expensive for most businesses.
"More companies are looking at demand for product first, then setting up their supply chain to deal with that on a timely basis. By having the factories closer to home, they can better assure they have a product that will sell and sell at higher margins because it comes at right time," says Aimi.
According to Aimi, near-shoring is less critical for durable goods because demand for those products is predictable and model turnover is limited. Fashion items, on the other hand, are particularly subject to consumer whims. He points to Dell Computer Corp.'s decision to build a 750,000-sf factory in Winston-Salem, NC as another kind of situation where near-shoring is critical.
"Their online sales program is based on building computers to the individual customer's requirements," he says. "There are a thousand different possible configurations. The only way to get the computers assembled and out to the customer in a timely manner is to do it near the distribution center."
The downside to near-shoring is higher manufacturing cost, but Aimi says the expense is balanced by lower inventory and delivery costs, greater quality control, higher sales and better customer satisfaction. He estimates between 10% and 20% of manufacturers that previously moved their plants to Asia have subsequently reconsidered, but he expects the number to grow rapidly over the next five to 10 years.
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