Supply Excellence — Re-Sourcing: Back in Vogue

Re-Sourcing: Back in Vogue

February 21st, 2008 · by Tim Minahan · No Comments · LCCS and trade, automotive sector, supply management, supply market dynamics, supply risk

Over the past year, Supply Excellence has been tracking a growing trend for companies to rethink their sourcing strategies. For example, General Motors has made re-sourcing a cornerstone of its (ongoing) turnaround plan. And just last week a major food and beverage company told me it was rethinking supply lines for core ingredients.

Mattel’s Chairman and CEO Bob Eckert recently told the Financial Times that his company is having second thoughts about its China sourcing strategy.

While most of the interview focused on how the toymaker allayed consumer concerns after recalling 20 million hazardous toys last year, the question that caught my attention had to do with China. Eckert said his firm was contemplating shifting supply out of China.

However, the move has little to do with product quality issues from the region. In fact, Eckert wisely said quality issues were the responsibility of Mattel’s own procurement and manufacturing groups: “Countries don’t make products; people do…We’ve had manufacturing problems in other markets [besides China]. So the important thing is for companies to take responsibility for their manufacturing process.”

Instead, Eckert said Mattel’s decision to shift supply from China had more to do with rising supply and manufacturing costs in the region. (Although as noted here, last year, in an attempt to appear safer than Mattel, other toymakers stampeded to bring their manufacturing back on shore.) “The toy industry has moved several times over the past decades. At one point we manufactured heavily in the United States. The toy industry’s been in Taiwan, in Hong Kong. Now it’s in the southern provinces in China. I see the economic forces moving the industry either further inland in China or perhaps to Vietnam.”

Indeed, labor and manufacturing costs in “low-cost” regions like China and India have been rising steadily due to increased demand and rising wages. Such factors are making near-shore locations – such as Mexico for the U.S. and Eastern Europe for Western Europe – more attractive for sourcing. In fact, many Asian and European companies are now viewing the U.S. as an affordable sourcing market.

Sure, China still offers a cost advantage over these more developed regions, but the delta is shrinking. And, when weighed against transportation costs, cycle time benefits, and access to major consumer markets, these near-shore locales are becoming more appealing sources.

The message to supply managers: there is no optimal supply region. Changes in market dynamics and your company’s business strategy, will force you to constantly reevaluate and balance your supply portfolio based on costs, performance, and risks.

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