The current supply chain crisis is driving a vigorous and on-going debate amongst Global Supply Chain Management practitioners and the organizations in which they operate. To survive the current supply chain crisis and those in the future, this article advocates strongly for localizing your supply chain.
We can frame the current state discussion in supply chain circles around just a single question.
Should your organization make any more strategic decisions to offshore or invest our time, effort and energy in localization?
To provide context and the reasons for localization, we can illustrate from our clients’ innovation activities. With a recent Innovation & Growth Systems Cohort, the global client team was presented a narrative on the current supply chain crisis. This narrative became the final cohort application case story. The case assignment for the teams was to work together to figure out how to untie the short-term crisis in the global supply chain.
The group’s focal point was explicitly the ports of Los Angeles and Long Beach, California. The cohort quickly sorted out the challenges. With global team members from North America, the United Kingdom, Ireland, and Scotland, they effectively identified key problems to solve for the short-term in Los Angeles and Long Beach.
How do you unload 200+ ships with over 200,000+ containers, each that will hold up to 12,000 boxes?
Some of the challenges were easy to understand. Application of simple approaches would make a big dent, and fast. There are a total of nine ports along the west coast. So, let’s distribute the backlog to other ports. Let’s reroute the ships and move cargo to other ports along the west coast. We should then use other 24/7 ports like Texas, Louisiana, and Florida. Let’s use the National Guard if we need to. Let’s run all facilities 24/7 everywhere for an extended period.
The cohort also identified one of the most pressing problems—the problem of local regulation.
One amazing example are the multiple laws and restrictions against how high you can stack cargo containers in LA County and surrounding areas. Fines and penalties are significant if you stack containers over two high in the overflow freight lots off the harbor.
The number of drivers and carrier trailers is also restricting the flow of cargo. So, let’s get more drivers to move the containers. Let’s offer the truck drivers a financial premium to sacrifice time from their families to get goods to market.
It is simple. It’s just not easy to do.
The client cohort did an excellent job applying their innovation & growth mindset tools to a global problem. Even though the cohort members are not domain experts in the supply chain, they were able to identify how you could revise complex systems; then put in place measures that would reduce the backlog—all in just 90 days.
However, the cohort’s scope of work did not uncover a simple and easily scalable long-term solution. It was challenging to identify what if any, short-term measure and action could easily scale to become a long-term solution. There are a several macro and micro reasons as to why this is.
Fixing the global supply chain crisis is not a short-term problem.
Fixing the supply chain crisis is not a ninety-day, six-month, or one-year activity. It is, in fact, a long-term twenty-year problem. Redesigning the global supply chain will take a generation to improve. The supply chain will not be righted in a meaningful way until your children or perhaps even your grandchildren are in the workforce.
The global supply chain crisis is something most governments, publicly traded, and privately held organizations have all contributed to.
Time travel with us for a quick minute to better paint the picture as to why this is. Some past reading resonates in helping to understand historical supply chain cycles better.
In their book, The Fourth Turning, published in 1997, the authors Howe and Strauss, discuss historical cycles. In looking back almost 500 years, the authors explain why most history repeats itself every 100 years in 20-25 year cycles that are called turnings. To better understand the supply chain challenges we face today, all you have to do is go back just one turning, or 20-25 year cycle of supply chain and operations.
Let’s set our way back machine. It’s 1996-2001; you are working as a development engineer or a buyer in a procurement team in your local region. At that time, most likely, somewhere between 80-90% of your suppliers are within a 3-5 hour traveling distance from your manufacturing plant.
As we progressed into the early 2000’s “low-cost manufacturing regions” became all the rage. Acquisition cost, or cost to buy, became the only significant variable important to a sourcing decision.
Over time, procurement and supply chain practitioners created more advanced and high fidelity analysis methods effectively named, Total Cost of Ownership (TCO). Designing these math models to better understand sourcing decisions and their overall impact on the organization.
The TCO models were an advancement and more holistic analysis of the costs involved. Incorporating freight, shipping costs, value added taxes, capital investment, and transportation to provide a more direct comparison of a true “landed cost” comparing offshoring to a localized supply chain.
During that period, supply chain practitioners spent time in corporate board rooms, sometimes presenting multiple Total Cost of Ownership analyses as part of a sourcing strategy. If you participated in those sessions, the dynamics in those meetings frequently went like this.
If a local supplier could not meet the desired buy price, a procurement team conducted a sourcing activity to find the lowest-cost provider. Many of those low-cost providers were early-stage companies usually located in the Asia Pacific region. Almost every time, the Total Cost of Ownership analysis indicates a slight to moderate savings of offshoring compared to localization.
In most cases, when the sourced materials come from overseas at a lower acquisition cost (buy price), and once freight, logistics costs, and lead time increases, are factored in, it’s the same (or slightly less) cost to offshore compared against building locally. As a supply chain team, you recommend to your senior executive leadership to avoid all the switching costs. Let’s work with our current suppliers to strengthen our relationship.
If we partner with our local suppliers we can drive total costs down and we improve the overall value delivery of the supply chain.
The sourcing team recommends keeping the source locally. Yet facing corporate dictate to save cost, and quarterly balance sheet pressures, organizations illogically force the sourcing decision offshore. Math models identify all the switching costs when you go offshore. Supply chain and operations teams all recognize that the organization will go through tremendous internal team energy in the switch.
Unfortunately, being heavily influences by what other organizations are doing in your industry, your organization’s Board of Directors is looking to save money and improve the balance sheet. Since your competitors are offshoring, your organization will need to follow suit. If we do not offshore, our organization will not survive. The supply chain and operations teams reluctantly pulls the tigger and moves forward on the offshore plan. What unfolds next is untold amounts of 12-16 hours flights for your operations team to offshore locations building up what already existed locally.
It’s a gripping narrative, but everything changes when the offshore solution arrives.
You receive the materials from your offshore source. Then reality sets in for the organization. You experience untold amounts of quality issues. The organization then moves down the path of numerous, challenging and time-consuming reworks—all to have the same quality solution you already had locally. When comparing the total time and dollars invested after source selection, the offshore decision most times falls flat, usually costing more in time, energy, and money in the long run.
The sad and most disappointing part is that any sourcing decision to move offshore takes much of the technical expertise and skills to make things along with it.
Machining technology, injection molding, sheet metal, casting, circuit card manufacture, IC chip fabrication, you name it, all the technical expertise travels overseas too. This knowledge and tech transfer may not be problematic in the short term, but once you throw in a multi-year global public health pandemic in the mix, the situation becomes untenable.
No matter where you are in the world, in most cases, it was never lean nor sustainable for your organization to offshore.
There were three very common talk tracks in the supply chain at that time; “We will be optimizing to create a lean supply chain with this approach.” “We will have a more sustainable supply chain.” “Offshoring will help our balance sheet, and support our organization as a player in the global marketplace.”
With hindsight to look back on, was it really in any organization’s long-term interests to go along with these offshore strategies?
For real time evidence of this, just look at a lot of your local new car dealership. Speak with your local vehicle dealership sales person. Let them share with you the why, what and how, of their lack of inventory of new vehicles. Vehicles are not being delivered because of offshore sourcing of critical to function components and in may cases, a single integrated circuit chipset. Dealer markups are now above and beyond the window sticker price. It makes you really wonder about when practitioners of supply chain management will truly learn the lessons from past history and actively change the approach.
If you think the current supply chain crisis sounds ominous, it truly is.
If we are brutally honest, we must look at those historical cycles, learn from them, forecast the future, and revert to five common truths to better manage your supply chain.
- Understand your supply chain.
- Understand the critical items in your supply chain at the micro component level.
- Localize all you can in your supply chain.
- Inventory buffer for critical components.
- Scenario plan for what the next 20 years will have in store.
So why should you localize?
If you localize, it is truly lean. If you localize, it is sustainable. If you localize, you help build better economic prosperity for your organization and your local region of the world. Localizing is lean at its core. Reduction in lead-time is lean. Reduction in time is sustainable.
Localizing reduces all the complexities in getting materials from one point to another. Localization ensures that you can build up your organization in the local community. Localization also provides sustainable employment for your organization and for your suppliers as well.
Most importantly, localization will ultimately satisfy your organization’s customer base. Localization gives your customers what they need in the most effective timeframe possible.
This is a global call to action to all supply chain practitioners, in every region of the world – Start your localization journey now!
Build a resilient and localized supply chain, independent of as many offshore sources as possible.
Stand up now to get your organization ready to survive the next 20 years!
Looking to learn more about how to make localization real for your organization?
Consider attending our upcoming digital workshop on Business Continuity and Supply Chain Resiliency. If you would like to learn more about simple, effective, and detailed approaches that will support your organization and get better visibility in its supply chain reach out to learn more.
In the program, we discuss insights, offer tools, and practice real-world case application skills to make your supply chain more resilient and effective in today’s environment. This will most importantly, future proof your supply chain.
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