Right Shoring - Part 2

Yesterday we talked about why you might want to shrink your supply chain. Here are some ways to do just that.

Again from LM:

Menu of Right-Shoring Options and Opportunities

There is now an unprecedentedly high need to balance supply speed (service quality) against cost-effectiveness. In this multi-polar world—characterized by more risk, more exacting customer demands, and more economic hardships—what can companies do to "keep their balance?"

As noted earlier, one direction is right-shoring; or acknowledging that far-shore operations remain an essential part of your company's global strategy, but that far-shore decisions must be aligned (and potentially combined) with other options to form a single right-shoring strategy.

Those other options include:

Operational hedging:
This involves managing risks with adjustments to manufacturing, sourcing, and selling locations—creating flexibility in the supply chain and market-facing activities. For existing and new products, such flexibility can help mitigate the impact that large and long-term changes in dollar rates have on revenues and profits.

With existing products, manufacturing facilities can be located near the customer and in low-cost countries, with total landed cost calculations used to decide the percentage of total demand addressed at each manufacturing location. New products pose a different challenge. With the quality of innovation a strong point in the U.S., launching new and better products at a fast pace should be an ongoing focus for U.S. operations.

Early in a new product's life cycle, it is difficult to estimate demand, so the inherent service disadvantages associated with off-shore manufacturing make this a risky proposition. A more practical approach may be to manufacture certain new products locally at first and then shift production to low-cost countries as demand stabilizes.

Near-shoring:
Across North America, near-shoring has become more popular since the signing of NAFTA and CAFTA. With wages in most Central American member countries at one-third the level of U.S. wages, sourcing from CAFTA countries could offer a particularly significant cost and proximity advantage.

Split-shoring:
Keeping manufacturing processes that are not too labor intensive on-shore is another strategy to consider. For example, the final assembly of foreign-made mobile phone batteries, circuits, cameras, and outer casings could be completed closer to the customer, thereby shortening the time needed to respond to market changes and simplifying customization to meet changing consumer demands.

Peak-load manufacturing:
Manufacturing operations could be divided so that some of a company's products and components are manufactured domestically, with others produced overseas. For example, local manufacturing capabilities might be used to accommodate surges in demand while off-shore venues are deployed for longer or more stable production runs.

Figure 2 describes how these various strategies might be assessed to create a single approach that weighs total landed cost differential against demand variability and stock-out costs.

Right Shoring is Key to High Performance

A right-shoring strategy—one that cost-effectively meets consumer demands for the right price and the right quality—must be supported with sound information for decision making. This highlights the need for econometric models that can help a company continually evaluate the impact of changing scenarios, such as changes in crude oil prices, shifts in the value of the U.S. dollar, or the influx of European and Asian competitors onto U.S. soil.

All of these scenarios are more or less inevitable. It is the degree of change that is nearly impossible to predict; and this is why right-shoring—the ability to understand and adjust manufacturing and distribution options—is so valuable. In today's economy, companies must be able to rapidly reshape their business approaches as macro-economic factors change.