Today’s Supply Chain Landscape
Attracted to cheap labor and low production costs, American companies began moving operations from the US to China in the 1990’s. Today, China’s developing economy provides attractive end market opportunities, but with increasingly unpredictable regulatory crackdowns, supply chain disruptions and rising costs, companies are rethinking this strategy. An increasing number of our clients are asking for help considering a “nearshoring” approach to their operations, with the goal of reducing lead times and uncertainty. So how should companies conduct an assessment?
Align on Evaluation Criteria
Begin by articulating the desired outcomes of nearshoring. Understanding the motivation to move will help inform the requirements to consider when evaluating possible locations. Consider goals and tradeoffs, including:
- Is the goal to reduce costs?
- Reduce delivery times?
- Reduce geopolitical risks or regulatory burdens?
For example, labor costs might be higher in one country, but the infrastructure may offer improvement over the current location. Is it acceptable that costs increase to reduce those risks? Socialize the initial list with other executives to understand their perspectives and achieve their buy-in to begin the investigation. These initial discussions will help capture requirements and insights to the eventual evaluation process.
Prioritize the Decision Criteria
Understand the trends, not just point-in-time metrics. Labor and freight costs may look markedly different pre- and post-COVID, so consider both when trying to predict the future. Beyond the financials, understand the regulatory environment, political stability, and work force demographics. Consider the type of educated workforce required, worker expectations, and the competitive landscape for that labor force. Consider supply chain risks regarding over-the-road options or seaport alternatives, consider climate and natural disaster risks.
Gather Objective Data
Work to gather objective third party data, understanding that conflicting data exists, and will require cross-referencing multiple sources. In-country experts may help provide some data and insights, but understand their input may be biased and should be validated using other sources.
Narrow the Selection
Conduct a cursory review of potential alternative locations based on the move rationale, and limit the choice to 3-4 locations. There are too many variables to conduct an effective analysis without limiting the choices early in the process. Start with country-level decisions, then move to region/city. Transportation providers and suppliers will quickly lose interest in quoting an array of options, so focus the selection as quickly as possible.
Consider the Supplier Impacts
When considering a move, ensure the supply base is moving as well to attain full risk mitigation. Depending on the move rationale, it may do little good to move operations out of China if suppliers, or the suppliers’ suppliers, remain in China. Gather quotes from alternate suppliers for the top moving products with the 80-20 rule, understanding further negotiations will occur after the decision is made to move, and make conservative cost assumptions for the lower spend or less critical products not quoted.
Predicting the Future
Next, conduct a sensitivity analysis to assist with scenario planning. Sensitivity models help drive important “what-if” discussions with leadership and help identify the big needle-movers. When modeling financial impacts, understand labor and transportation costs, tariffs and duties, government / FTZ incentives, real estate and new raw material costs.
Other Supply Chain Impacts to Consider
Moving operations may impact planned lead times, and therefore may affect operational capacity and facility sizing. Determine the cut-over approach and communication and contingency strategies.
- How could local governments or employees respond once the decision is shared?
- Should buffer inventory be built before sharing news outside of the executive team?
- Will new equipment be purchased to run in parallel, or could the operations “lift and shift”?
Developing a high-level work plan will provide management with an idea of the steps and timelines required to manage the transition to help with the decision. Considering a move from one country to another may seem like a daunting task. The decision is multi-faceted; it impacts financial investments, returns, and risk management. We offer the above insights as a part of our methodical approach to addressing these very important decisions. Contact us for help in building custom solutions for your situation. We’re your Partner to Grow.
“The man who moves a mountain begins by carrying away small stones.” —Confucius
About Pete Beckwith
Pete is a partner with Fisher, and he leads its Supply Chain Solutions Practice. He began his career at Andersen Consulting and later joined Arthur Andersen’s Business Consulting Practice, where he led Supply Chain solutions for Central Ohio. After Andersen, Pete was the Director of Business Integration and IT Strategy at Cardinal Health, a Fortune 20 company in the global healthcare distribution industry. He later served multiple executive roles at Cardinal Health, including as VP within Merger Integration and Operational Excellence, until he joined Fisher in 2015.
Pete has successfully delivered large domestic and international supply chain projects. His areas of expertise include supply chain management, business integration, Lean Six Sigma, and continuous improvement.
You can reach Pete at firstname.lastname@example.org.