An indication that a new supply chain approach is gaining traction is when people start debating what it means. Such is the case currently with “near-sourcing.” The consultants are seeking to define it—while supply chain practitioners, unworried about the name, have begun implementing a changing set of practices to adjust to different priorities.

“It’s any kind of sourcing strategy that shrinks distance a measurable degree, especially your source of supply and the market you serve,” is the concept used by Steve Hochman, Director of AMR Research’s Value Chain Strategies Group.

Few would suggest that near-sourcing constitutes a step change in supply chain strategy. But, in the corporate suites where executives are charged with integrating operations with strategy, there is renewed interest in bringing key nodes of the supply chain closer to home.

Near-sourcing constitutes a fusion of the extended supply chain business model and earlier forms of more localized enterprises. Think of it as a kind of ‘mid-way’ point, optimizing such functions as labor, materials and fully landed costs with risk management, speed to market and distribution flexibility.  

“When companies went from vertical integration to outsourcing,” explains Hochman, “there was a lot of short-term pressure, on the one hand to cut costs and the other to satisfy Board demands to shift production off-shore. That caused a lot of people to not think very analytically. Now they have started to re-trench, to balance a ‘China strategy’ with an ‘American strategy.’”

If the specifics of near-sourcing still constitute a moving target, the essential element is facility location, with the key criteria being proximity to critical down-stream parts of the value chain. Whether production or distribution, the intent is to minimize the various risk factors associated with an extended overseas supply chain. In the case of fashion-driven soft goods with a limited window of prime sales opportunity, for example, production is being shifted out of Asia and into Central America (for the sake of speed to market). In the case of electronics and fast moving consumer items, domestic U.S. distribution centers are being re-positioned to regional locations within striking distance of retail channels. 

The Central America Free Trade Agreement (CAFTA), signed three years ago, marked the moment of take-off. Designed to eliminate tariffs and trade barriers with the six nations of Central America (along with the Dominican Republic), it prompted an influx of sourcing facilities for the U.S. market that has led pro-business developers to brand the region ‘the new Asia.’ And, real visionaries are calling Latin America ‘the new India.’

Lured by the ease of working in the same time zone a mere three or four hours’ flight away from headquarters in the U.S., such companies as Dell, IBM, Procter & Gamble, and Western Union on the service side and Sara Lee/Hanes, VF Corp., and Russell Athletic on the manufacturing side began moving business into the region.

Mexico, too, is getting serious reconsiderations as a sourcing site. With more than 300 flights daily to and from the U.S., a language barrier that is easily overcome, government support, and labor costs, which might not be cheap as China but undercut the U.S. (engineers, for example, can be hired at a third of the cost), technology site-selectors are seeing the advantages of locating in the country instead of Asia.

Distribution centers

The domestic U.S. side of the near-shoring equation is taking shape in the emergence of large-scale logistics hubs in the heartland designed to service ocean freight straight from the port. A landmark in this evolution occurred in 2001, when JCPenney opened a 1.1 million square-foot retail distribution center in Alliance, Texas—the 15,000-acre Perot development northwest of DFW Airport, designed to consolidate shipments via intermodal and truck directly from off-loading at West Coast ports half a continent away. Multiple other DCs, many bigger than 600,000 square-feet and charged with the same mission, now dot the landscape. Outside Kansas City, a comparable project with much the same mission and more than seven million square feet of vertical space—Logistics Park Kansas City—is being developed by The Allen Group in collaboration with BNSF Railway.

Another theme becoming more dominant in warehousing—campus sites offering tenants optimal flexibility to implement agile supply chains—is also responsive to the imperatives of near-sourcing.

“We orient  our contract logistics strategy around campus markets in key distribution centers where customers can go into multiple primary distribution centers across U.S. and be able to serve them nation-wide without having to take down a whole building,” explains Bob Spieth, President, Contract Logistics at Ozburn-Hessey Logistics. OH Logistics has flexible distribution centers, suitable for international as well as domestic service, with multiple buildings in the 500,000 square-foot range suitable for several customers, in more than a dozen locations.

Spieth cites an OH Logistics customer who fits the near-sourcing model. “We had a customer in the health care area that was shifting a piece of manufacturing from domestic to overseas. They wanted to move warehousing from further inland to Los Angeles. Again, the key was the ability to respond quickly. “We can shift capacity typically in six to nine months,” explains Spieth, who says there is often empty space kept vacant across the network for just such contingencies.

Another example, this one provided by AMR’s Hochman, involves a fast-growing memory maker. “They started with a centralized distribution model to look for local economies. Subsequently, they partnered with a 3PL (ModusLink) and asked a ‘near-sourcing’ question: ‘where should we be from the perspective of distribution?’ They found that it made a lot of sense to move away from a centralized structure to a larger number of DCs in more diverse locations.”

As paradigms and business models become more stratified and complicated, with both off-shoring and near-shoring sometimes figuring in the same supply chain, DCs are being asked to also become more responsive. “It’s not at all a commodity business,” says Spieth vigorously. “What we compete on is our campus network, the flexibility we offer customers, our technology and engineering, and the ability to set up the customer well and drive down costs.”

Changing agendas

We are in the opening phase of near-sourcing. AMR’s Hochman is quick to note “there’s not a huge ground swell of people moving out of China.” No surprise, that with Chinese contract manufacturers offering competitive expertise with labor costs 15 to 20 times cheaper, “it’s still a huge opportunity.”

But Hochman cites a recent AMR report that suggests that the honeymoon is over: although some 90% of the 200 companies surveyed confirmed they were outsourcing aspects of production (much of it off-shore), 56% admitted that the cost of total landed cost relative to prior sourcing had actually increased. He cites the culprits in the ‘hidden costs’:

•     Unplanned air freight (benchmark data suggests overseas sourcing can double a company’s logistics expenses);

•    The ‘fatal cost’ of poor quality (quality problems at both the production and customer level);

•     China’s ‘third shift’ (the crisis of counterfeiting, as the overseas vendor works two shifts for its customer and then one shift for itself);

•    The cost of distance (outsourcing ‘underperformers’ typically experience twice the inventory holding costs of in-sourced peers).

The conclusion he draws from this data: “network design decisions can quickly overwhelm even the sharpest supply chain expert.”

The ‘red alert’ button went off regarding risk with the West Coast longshoremen’s strike several years back, which closed down the ‘inventory lite’ distribution channels with unexpected consequence. In the light of this experience, shippers vowed “never again.” Along with more balanced year-round shipping schedules came a commitment to keeping sufficient buffer stock within comfortable reach of critical markets. 

The rise in fuel costs (one can now hear once inconceivable references to $150 barrels of oil in the future) constitutes another wave of cautionary wake-up. Prudent supply chain strategists at the highest levels of organizations are considering the long-term consequences of more expensive fuel on current logistics processes—and often becoming worried at the implications. wt