In order to continue providing up-to-the moment authoritative coverage of the global supply chain, World Trade has partnered with the well respected consulting firm Grant Thornton to survey sourcing trends within leading U.S. manufacturing companies.

In the following excerpt on sourcing practices and trends, Grant Thornton reports that a substantial number of the three-quarters of major U.S. companies currently sourcing internationally have made changes or are planning to make changes to alter supply chains to source closer to home. These changes are being driven by considerations other than price, such as supply chain resiliency and responsiveness, suggesting the many more—and more complex—variables entering into supply chain decisions.  

Most source internationally

The vast majority of survey respondents are sourcing internationally. More than three in four companies (77%) report spending at least some of their 2008 supply chain budgets on international sourcing, essentially the same percentage as in 2007 (76%). Among those sourcing internationally, China is the most frequent supplier country (22%), followed by other Asian countries (16%), Western Europe (14%), Canada (12%) and Mexico (9%). 

A growing proportion of supply chain budgets spent abroad

According to survey findings, more than four in 10 respondents (44%) spend between 1 and 25 percent of their supply chain budget on international sourcing, down slightly from 47 percent in 2007. Nearly two in 10 survey respondents (19%) spend between 51 and 100 percent of their supply chain budgets internationally. This represents an increase from 2007, when 15 percent spent between 51 and 100 percent of their supply chain budgets internationally. The percentage of respondents who do not source internationally (23%) is nearly the same as last year (24%). 

Offshoring: The good and bad

The vast majority of respondents (79%) report that they benefit from lower costs, calling this the primary benefit of international sourcing. Other reasons include increased production capacity (24%); improved logistics for accessing international markets (22%); access to technology or equipment (18%); access to intellectual property and ideas (11%); and improved quality (11%). 

The issues respondents cite as problematic are varied. Although more than six in 10 respondents (61%) indicate the prevailing problem with international sourcing is late product delivery, other frequently cited concerns are poor quality products (43%); customs delays (38%); and products not built to specifications (28%). Nearly one-quarter (24%) complain of higher overall costs. More than one in 10 (11%) note problems with the loss of intellectual property.

Is it profitable? Mixed feelings

Most respondents report that the return on investment (ROI) from offshoring has been positive. More than half (54%) indicate that international sourcing has increased their ROI. At the same time, nearly four in 10 (38%) say that there has been no impact on ROI due to international sourcing. An additional 9 percent say that international sourcing has worsened their ROI.

Considered together, the finding is striking: Nearly half of respondents (47%) see offshoring as neutral or detrimental to their ROI. 

Plans for the future: Moving sourcing closer to home?

While the largest percentage of survey respondents that source internationally relies on China (22%), this trend may be changing. In the coming year, many respondents are considering or actively planning to bring their operations closer to home, relocating sourcing to Mexico, Canada and, in some instances, the U.S. Nearly three in 10 respondents (28%) report that they brought sourcing closer to the U.S. during the past 12 months. More than four in 10 (45%) say they plan to bring sourcing closer to home during the next 12 months. 



Given these trends, how should companies be managing their supply chains?  What’s the right way to make good decisions?

First off, follow the money!

“It’s absolutely essential to examine your supply base and make sure it will still be there six months and a year from now,” explains Don Bailey, Grant Thornton Advisory Services principal and regional practice leader. “You want to have as much financial information as possible about your supply base, both domestically and internationally, and you need to be prepared to react to any signs of financial distress.”

According to Bailey, monitoring supplier health means staying in communication with your key vendors to address business issues and ensure you stay in tune with any supply chain risks. By opening the lines of communication, your organization and its vendors can work more effectively during these difficult times. Discuss creative solutions to minimize supply chain costs, while maintaining high-quality service.

Don’t wait until you hear about supplier problems, because by then it may be too late to line up a viable replacement, cautions Bailey. Ensure you have more than one supplier for any product that is critical to your operations. If no alternative sources exist, ask yourself these questions:

•    Are you prepared to offer programs and incentives to maintain the flow of products and services from key suppliers?

•    Should you consider vertically integrating or making an acquisition to ensure your ongoing supply?



You also need to be monitoring changes in markets and economic conditions to gauge how your supply chain aligns with them.

Last summer, high fuel and transportation costs were driving many supply decisions. Today, with the substantial drop in demand for products—40 percent from a year ago—overhead costs are a growing concern. Many companies are consolidating operations, closing factories and laying off employees. 

“There is a recognition among supply chain leaders that the market is constantly changing,” says Steve Lyman, Grant Thornton Advisory Services partner. “Companies need to be ready to react to a range of shifting conditions.” For example, when the economy recovers, which it inevitably will, companies will need to position themselves to react quickly to that demand.

“The more nimble the supply chain, the quicker you can react to changes in customer demand—or changes in the supply market. Companies certainly do not want to lose opportunities for sales because of long transit times. The potential advantages of locating manufacturing facilities close to distribution centers, such as shorter, more reliable delivery times and lower shipping costs, are certainly worth factoring in to your decision,” comments Lyman.

Cost itself is composed of multiple variables, which you ignore at your peril.

In making the decision whether to move offshore, bring operations home or maintain the status quo, you need to consider factors beyond labor costs. Moreover, these factors can change frequently.

“You want a supplier who can provide what you need at a high quality, when you need it. Factor in not only cost of goods, but also the cost of late deliveries, the cost of getting the product to distributors and customers, and intellectual property issues, as well as warranty and service costs,” says Lyman.

Making the right decisions requires a sophisticated understanding of many variables, concurs Tim Dumond, principal with Grant Thornton’s Corporate Advisory and Restructuring Services.  “Whereas it used to make sense to build an entire product in China, now decision-makers are looking at the full cost structure and where it makes sense to take advantage of different competencies,” he explains.

“For example, protection of intellectual property can be a concern in China. As a result, a number of companies are using China as a low-cost source for basic technology components and then adding the higher-value elements here in the U.S.,” Dumond notes.

The era of ‘off-the-shelf’ supply chain decision-making is over in this era of complexity.

“A one-size solution does not fit all. You need to look at each of your suppliers on a case-by-case basis and determine what makes sense for your company. At the same time, you’ve got to become more flexible to respond to changes in the market. It’s a completely dynamic process that requires greater expertise and knowledge of all the factors that can affect your global supply chain,” concludes Dumond.

For some companies and under certain conditions, the best way to streamline supply chains will be to bring sourcing and manufacturing closer to home. For others, this may not be the best decision. At the end of the day, a broad range of factors related to each company’s specific situation will dictate those needs. But every company can benefit from developing a flexible, sophisticated and adaptive supply chain that is poised to take advantage of opportunities as they emerge. wt