Companies Rethink Supply Chains as Global Trade Evolves

By Michelle Campbell | Dun & Bradstreet Editor

July 9, 2015

The right supply chain strategy is central to a firm’s competitive edge. As more companies expand globally, deciding where to locate production processes is becoming increasingly complex.

Offshoring was popular in the 1990s when economic conditions in developing economies created attractive wage, transportation, and energy cost differentials, as well as opportunities for regulatory arbitrage. Consequently, many US and European companies moved their production and support services to Asia, Latin America, and Central and Eastern Europe.

But several factors — including advances in information and communications technology, changing demographics, the rise of the BRIC nations, political pressures, and an evolved trade and investment relationship between developed and developing economies — have since led to more complicated supply chain strategies.

The expansion of the middle classes in emerging markets such as China, India, and Brazil meant that offshoring took production closer to new consumers and provided opportunities for firms to expand in different markets. By some accounts, this also led to the erosion of initial offshoring benefits. Higher wages, rising inflation rates, and stronger regulations created a more expensive operating environment outside home countries.

Furthermore, offshoring has become a politically contentious topic, particularly in the US, as opponents have argued that the practice takes away American jobs. The US Economic Policy Institute estimates that outsourcing to China cost 3.2 million jobs between 2001 and 2013, contributing to wage erosion and a higher trade deficit. Indeed, the most recent furor over US President Obama’s trade deal is an example of the debate surrounding US trade with and investment in emerging markets. Offshoring’s potential impact on domestic jobs is a debate that is likely to rage on for some time.

Anecdotal evidence suggests American companies are bringing jobs back home. Changes in US consumer spending patterns along with American companies’ reshoring or nearshoring (relocating production closer to the US) are primary reasons for the anticipated moderation in container traffic through the Panama Canal when it reopens next year, according to Panama Canal Authority CEO Jorge Quijano. The need to protect intellectual property is another driver of reshoring/nearshoring initiatives, notes Rita Gunther McGrath of the Columbia Business School.

Others observe that wholesale reshoring to the US, Canada, and Europe is still not occurring on a large scale. Global supply chain strategies are actually more complex and fluid, notes Morris Cohen, professor of operations, information and decisions at the Wharton School of the University of Pennsylvania. Firms may make decisions for reasons beyond low labor costs. For example, some companies (particularly those in the electronics sector) may engage in offshore operations in pursuit of superior quality, better technologies, and highly skilled labor. In fact, in the last decade some emerging economies have been building a reputation as home to workers with sought-after technical skills at competitive wages.

Further complicating the decision to reshore is that some initiatives have not yielded anticipated benefits. A case in point is General Electric’s experience of “bringing jobs back home” to Kentucky, which had mixed results. GE encountered difficulty finding workers with the requisite skills and discovered that domestic employees were not as interested in factory work. Additionally, GE encountered higher-than-expected labor and retention costs.

The decision to shift production overseas or remain at home, then, is specific to each firm and the industry in which it operates. Each company must take into account a variety of factors when considering its supply chain strategy, such as capital-intensive versus labor-intensive processes or low- versus high-tech skill requirements, as well as the competitive landscape in which it operates.

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