In the immortal warning of the Jaws movie poster, ‘Just when you thought it was safe to go back into the water,’ so it is with near-sourcing.

“Last spring and summer,” recalls Charlie McGee, Vice President of International Development for Averitt, “near-sourcing was hot as firecrackers.” The competitive advantages that had been driving U.S. supply chains in a mad dash to China over the previous decade had seemingly all turned sour. Now, though, he’s seen that wave of enthusiasm begin to ebb.

The pressures to bring sourcing closer to home came to a focus when hefty ocean fuel surcharges (remember $150 a barrel oil?) were wiping out much of the savings from cheap labor. But compounding that difficulty was the rising levels of the ‘China price’ of goods themselves. With the economy flush, the government started eliminating the energy subsidies to domestic companies it had granted to spur production. There were other concessions to the pressures from global trading partners to level the playing field. Minimum wage laws were instituted (while demand pressures were putting workers in industrial regions in short supply, also pushing up pay). The melting of scrap into steel was subject to environmental oversight, adding costs. And hovering over the entire economy, like the perennial grey pollution, was inflation in basic commodities.

“Lots of people started to re-think their overall supply chains,” observed McGee. “Near-sourcing got pretty strong legs.” This was especially true with products which less labor intensive, like tooling and metals. The Americas started looking good again.

“We have seen a migration of both manufacturing and assembly of finished goods from Asian origins back to the Americas…most aggressively over the past couple of years,” agrees Bryan Lusby, Managing Director of Global Forwarding, Americas, at C.H. Robinson. “It doesn’t appear that any one sector is driving the move,” he observes. “We are seeing supply chain re-engineering from high-tech to apparel. But in general, it appears that the high cost, high duty goods are on the forefront of the activity (with NAFTA providing some relief here). 

There was a certain déjà vu quality to this migration, Mexico had seen an influx of U.S.-bound production before, in the 1990’s—which then subsequently departed for China.

“Obviously the groundwork for much of this movement to Mexico was laid with the inception of NAFTA,” says Lusby. “But many companies chose to source their manufacturing and procurement from Asia. The reasons were pretty straightforward in terms of total landed cost, as well as confidence in the supply chain dynamics…as well as the quality of goods being produced.”

What changed?

“The cost benefits of labor began to be outweighed by the ever increasing transportation rates for ocean and airfreight,” continues Lusby. “This was driven in part by better capacity planning on the carrier sides, keeping rates on an upward trend, especially when combined with the ever increasing fuel surcharges. Additionally, the numerous examples of finished goods quality issues—from lead paint in toys to tainted food products—posed real threats to U.S. suppliers and American consumers.”

Risk mitigation is another big factor that has prompted reappraisal of offshore supply chains, particularly the vulnerability associated with a distant China link. The lure of cheap production may have been the irresistible lure in the beginning, but over time it has become clear that there is vulnerability associated with a globally stretched supply chain.

As Forrester Research recently noted, “For many leading companies, the overarching theme of risk mitigation is an emphasis on back-to-basics supply chain planning.” Among those ‘back-to-basics’ is sourcing from locations where there are other strategic considerations in addition to cost. 

“Leading companies look beyond low cost labor and favorable tax breaks and complete detailed site selection assessments that include factors like the probability of disruption scenarios, geopolitical stability, transportation infrastructure, currency fluctuations, and IP protection laws.

A harsh lesson learned by many companies who embraced distant China sourcing was the unanticipated consequences of being unable to quickly respond to abrupt market changes. Fashion-driven soft goods proved particularly vulnerable to this and, correspondingly, apparel vendors have led the movement back to the Americas. They, too, had an earlier iteration near-sourcing in the 1980s and early 1990s in Central America. At that time, they were benefiting from the nearness of factories in countries like Honduras and Panama to exploit loopholes in protectionist U.S. trade policy (if the thread and fabric were U.S. made and the cutting done domestically, only the value added of stitching was taxed). NAFTA and CAFTA rendered these tactics unnecessary, but by then much of the action had shifted to Asia.

But apparel, too, is returning. This time, though, it’s to the Yucatan peninsula rather than Central America. “We see Mexico as very much the potential beneficiary of the transitions underway,” says C.H. Robinson’s Lusby. “There is little doubt that Mexico is in the driver seat, so to speak, of all the countries in the Americas.”

“It goes without saying that many of the countries in Central and South America are not without their own issues in terms of infrastructure, government support, instability risks, labor pool and carrier offerings,” cautions Lusby. “But we are certainly seeing a trend whereby many of these countries are doing everything they can to attract industry during this period.”   

“We see Mexico as an area of opportunity for C.H. Robinson and we are investing into our capabilities in Mexico and on the border,” agrees Vice President Dan Ryan. “Our customers are asking us to help them compete on a global scale, and our job remains to provide the right transportation solutions and an ROI to keep them competitive in their respective markets. Mexico is attractive on many fronts, including speed to market, control, language, and proximity to the United States. In addition, Mexico is heavily investing in infrastructure that will position them well for future port, manufacturing and logistics opportunities.”

A big factor in the resurgence of Mexico is the availability of sufficient semi-skilled labor there (in contrast to Central America, where the worker pool tends to be too thin to support extensive production). 

The arguments for near-sourcing—lower transport costs, enhanced supply chain flexibility and responsiveness, better visibility, less logistics bottlenecks—seemed compelling, as Charlie McGee noted, until the economic downturn. The financial breakpoints, which were all pointing toward near-sourcing, suddenly eased off as the price of fuel precipitously declined. Compounding this was the excess supply in ocean transport, driving down costs. “Near-sourcing is happening more slowly, more gradually,” he observes. “That’s the pace that will likely be maintained.” But the long-term trend is for the ‘re-Americanization’ of a significance share of production. “Little by little, people are realizing that there is no cost difference in buying and sourcing in Asia than in Mexico. And with Mexico, you get faster cycle time and reduced transportation costs. But the shift doesn’t happen in one fell swoop.”

Sidebar: Making a Near-Shore Strategy Worthwhile: Strategic Considerations, By Danny Halim

Although fuel prices have since decreased, U.S. companies understand that they must have a plan in place to offset such costs in the future—prompting them to take a strategic look at locations in the Americas for the manufacture of goods. There are several factors that companies must consider to make a near-shoring strategy most likely to realize faster ROI.

Near-shoring is not “all or nothing.”

Companies with an eye on global growth understand that off-shoring is an excellent way to expand overseas. However, companies also understand that fluctuating transportation costs and other events such as political instability or volatile raw material costs can increase the cost of off-shoring, making near-shoring more appealing. For most U.S. manufacturers and retailers, a hybrid near-shore and offshore strategy makes the most sense.



Strategic sourcing decisions

Key components for making successful supply chain network design and sourcing decisions include:

•    Proximity: In addition to affecting quality management efforts, proximity also impacts the lead times and costs of shipping goods from the manufacturing facility. The longer the lead-time, the larger the order quantity so as to take advantage of the shipment cost. Longer lead-times can also reduce responsiveness and increase uncertainty, which can lead to higher safety stock.

•    Infrastructure: Road quality, telecommunications support and education systems must be considered when determining a near-shore versus off-shore strategy.

•    Labor costs and skills: Labor costs in Latin America are slightly higher than those in Asia, but the proximity helps cut down on transportation and inventory costs. A location with limited skilled labor or poor infrastructure for education can stymie a company’s capacity for growth. 

•    Cultural similarity and local regulations: Different cultural norms and local regulations—such as holidays, work hours, unions and overtime—must be understood and respected when setting up facilities outside the U.S as they will impact the consistency, responsiveness and costs of your supply.

•    Government support: The ability to take advantage of tariffs, incentives and free trade zones when setting up facilities in other countries is an important consideration.



Transportation and logistics strategies

Changes in sourcing decisions require companies to closely re-evaluate both inbound and outbound logistics strategies (e.g., flow-through, cross-docking, direct-ship, carriers). Full visibility is critical, allowing companies to anticipate whether goods are arriving to the warehouse on time, whether shippers and internal logistics suppliers are complying with set service levels, and the freight cost associated with each transportation movement are tracked and audited. Inbound and outbound logistics must be integrated so costs and total spend are fully understood and asset utilizations are maximized. Once shipping and logistics strategies are settled, inventory policies can be determined.



Inventory policy management

Because the cost structure, lead time and degree of supply variability will be different in a near-shore or offshore network, companies must re-consider where their inventory is held and will need to evaluate different distribution models so they can take advantage of lead-time and remain responsive to changing market conditions. Inventory policies and network infrastructure will determine the cost and speed at which a company can satisfy customer demand.



Integrating technology with business processes

There are many things to consider when determining whether to near-shore and how this strategy should fit into a company’s strategic objectives. To ensure a successful model, companies must integrate network design with inventory and logistics strategies. In order to do so successfully, companies should partner with a supply chain technology vendor that provides not just an integrated platform to perform all three, but also the domain expertise required to guide through the process.



Danny Halim is Vice President, Industry Strategy, for JDA Software.

Sidebar: Crossing Borders: Effectively Streamlining Your Near-Sourcing Operations, By Troy Ryley

As more companies are shifting operations closer to home to adapt to the difficult economic climate, they are met with the complex and often costly processes that come with moving freight across the U.S. and Mexico border. Not only do companies need to comply with the strict regulations implemented by the Mexican government, but must take into consideration the cultural and language barriers as well. The unique challenges that come with trans-border transportation, along with the constant pressure to cut time and cost out of the supply chain, have many companies struggling to develop strategies that streamline the trans-border process in order to achieve the maximum benefits of near-sourcing their operations.

Throughout the import/export process, shippers face the difficult task of working with multiple organizations in both the U.S. and Mexican. A shipper moving cargo to Mexico must effectively communicate with up to five groups involved in the process, including: a U.S. carrier, U.S. customs broker, Mexican forwarder, Mexican crossing agent, Mexican customs broker, and a Mexican trucking company. This complex process can add days or even weeks to the transit time. Without the appropriate documentation needed by any of these “touch points,” there is a risk of long and costly delays.

Mexican import law contains stringent regulations and restrictions making it crucial that the shipper provide Mexican customs officials with the necessary information regarding packaging, labeling and quality standards. In order to import cargo to Mexico, shippers must work closely with a customs broker, as Mexican law permits only customs brokers to submit an Importation Declaration for a clearance of goods into Mexico. Additionally, Mexico also has an elaborate system of mandatory federal standards and numerous enforcement agencies that impose import restrictions and require the appropriate permits for entering the country. Throughout the import process, shippers are required to provide crucial documentation to both U.S. and Mexican customs officials, including: Commercial invoice, Bill of Lading, U.S. Shipper’s Export Declaration, Legalized Commercial Invoice, NAFTA origin and Certificate of Origin, some of which must be delivered in Spanish.

During the customs clearance process, merchandise can be unloaded and evaluated by service agents multiple times. These inspections ensure that the physical freight matches the documentation to verify proper duties and taxes are being paid. This process typically takes a matter of hours; however, that period may be longer when discrepancies are discovered. Since a U.S. carrier, U.S. customs broker, Mexican forwarder, Mexican crossing agent, and Mexican customs broker can all be handling both the cargo and necessary documentation, any breakdown in communication can be costly. 

Although documentation and security requirements are different for importing and exporting cargo in Mexico, much of the required information is the same. Leveraging a technology solution to handle transportation management can greatly streamline the process and reduce the risk of errors. Automating the transportation management allows shippers to consolidate the documentation process and connect all parties involved, allowing them access to shipment details when and where they need them. 

 Shippers can achieve even greater efficiency by outsourcing their logistics services. By working with a third-party logistics provider (3PL), shippers can leverage comprehensive trans-border supply chain solutions as well as knowledge of Mexican culture and customs procedures, thus reducing the investment into the resources needed to effectively navigate the challenges that come with cross-border transportation.

With a TMS solution in place and/or a logistics services provider handling these cross-border activities, not only can shippers streamline the documentation and communication process, but they also can enhance visibility to create a smoother, faster and more predictable supply chain. Increasing visibility allows shippers to gain more insight into choosing the right carriers to fit their needs and make adjustments based on exchange rates and shifts in equipment capacity.



Troy Ryley is Director for Transportation and Distribution, Transplace Mexico.

Sidebar: The Sourcing Dilemma: Should You Go Near or Far?, By Brad Mitchell

Near-sourcing—the idea that companies could procure products from suppliers closer to their own facilities or customers in order to drive down costs while gaining efficiencies—emerged as an attractive option for many manufacturers last year as fuel prices soared. Now, as prices have leveled and other economic challenges have emerged, many companies are left in the dark when trying to determine which sourcing strategy makes the most sense for their businesses.

The answer to the sourcing dilemma is really straightforward—one size does not fit all. The sourcing decision is not an either/or decision. The key to solving the sourcing dilemma is to understand the drivers for deciding when to source globally and when to stay closer to home.  



A Time for Near-Sourcing

When asked the main benefit of near-sourcing, many automatically assume that cost savings is the answer. While this was temporarily the case during the recent fuel crisis, in reality, some costs are typically much higher for near-sourcing than they are for global sourcing. This is in large part because labor costs in Asia are still much lower than those in Mexico and the transportation infrastructure is in place to support low-cost sourcing in Asia.

The primary benefit of near-sourcing is speed. Companies with facilities closer to their suppliers can react faster to changes in demand.

This can be especially appealing for those in the retail and consumer goods industries as well as for some industrial parts manufacturers. A key challenge in these industries is knowing what will sell and what won’t at any given time and planning inventory levels accordingly. With near-sourcing, companies don’t need to bring in large volumes of inventory; instead, they can bring in only what is needed at the time, a practice known as a “fast-turn” solution. This approach allows for re-supplying between seasons, which enables companies to address last-minute changes in customer demands, which would never be possible for products that have to travel via ocean freight from global suppliers.

Those who engage in near sourcing also benefit from an environmental perspective by reducing their carbon footprints due to less fuel consumption.



When to Look Farther

It’s important to remember, however, that while near-sourcing can be a very effective short-term strategy, it’s not necessarily a long-term trend. Globalization is a long-term trend, and global sourcing strategies give companies added flexibility in serving more global markets. With global sourcing strategies, companies can often more easily reach and provide better service to international customers. Having a diverse, global supply base also helps companies maintain business continuity with the flexibility and options to continue even in the event of natural disasters, geopolitical conflicts and other emergency situations.

Cost savings are another key benefit of global sourcing. Thanks to Asia’s low labor costs and optimized transportation support infrastructure, it’s still significantly cheaper to source from China in many cases than it is to source from Mexico, for example.  And while sourcing from Mexico brings U.S. companies closer to many of their customers, it doesn’t eliminate the challenges associated with cross-border trade. Whether they source from Asia or Mexico, companies still face cross-border issues and a tight regulatory environment for products coming into the U.S. market.

Another critical area in the sourcing debate is supplier management. Some think that near-sourcing gives companies greater operational control over their suppliers than global sourcing due to location alone. This certainly doesn’t have to be the case. There are good supplier management solutions today that allow companies to keep a close watch over and connect all of their supplier—regardless of their geographic location. If companies are having issues managing their suppliers, the problem may not be the wrong sourcing strategy. The problem may be the result of too few tools and technologies in place to have a broad, more accurate picture of their supply chains.



The Balancing Act

Every product should be optimized both in terms of how it is routed and from where it is sourced to determine which sourcing strategy is right for which product. To do this, companies much first determine what the optimal profile is for each of their products in terms of “effectiveness” or “efficiency” in the supply chain. “Effectiveness” in the supply chain is all about speed and visibility, and for products benefiting from these attributes, near-sourcing is often the answer. “Efficient” supply chains, on the other hand, are those focused on lowering costs for products that don’t need to be quickly re-stocked, and this is where global sourcing offers many advantages. An optimized supply chain matches each product to the right mix of effectiveness and efficiency.

Companies should always consider their total supply chain picture when making sourcing decisions. Instead of looking at transportation and labor costs alone, they should consider their total distribution costs, including the costs of products, insurance, freight, warehousing and all other factors involved in getting their products to their customers. What’s key is balancing the total distribution costs with the total opportunity costs. Companies shouldn’t fail to consider lost revenue from missed timing, stock-outs and missed sales. 



A World of Opportunity

The good news for companies is that no matter which sourcing strategies they use, there is a world of opportunity awaiting them. To take advantage of these opportunities, it’s critical that companies develop agile, responsive supply chains that give them the flexibility to react to market and customer needs. Without an agile supply chain, companies could find themselves “locked in” to a single type of sourcing or distribution strategy that precludes them from capturing new business.



Brad Mitchell is president of UPS Logistics and Distribution. With more than a century of experience in transportation and logistics, UPS is a leading global trade expert equipped with a broad portfolio of solutions.