Recalibrating the Split between Global Supply Chains and National Supply Chains
Over the past decade, many companies have taken the plunge to extend their supply chains to China and other foreign countries. With wages there so low and with the costs of multi-modal (e.g. ocean/truck/rail) shipping being cost effective, large numbers of manufacturers and distributors have moved their production and sourcing overseas. At the same time, many companies have begun selling into these markets to increase sales and profits.
There are four variables that may trigger a recalibration of the percentage split between global and national supply chain utilization. First, there are signs that high Chinese logistics costs are expected to rise further. Some 85% of delegates at this year’s Automotive Logistics China conference, representing vehicle manufacturers, suppliers and logistics providers, say they expect the real price of logistics in China to rise over the next five years. Chinese logistics costs are already high at 18.5% of GDP, nearly double that of more developed markets.
The second variable is fuel prices. Bunker fuel has gone up 85% since the beginning of this year. With fuel costs expected to rise to $150 to $200 a barrel in the coming months and years, this will drive up the costs of ocean, air, rail and truck freight shipping, making long, global supply chains much more costly. The demand for crude oil seems insatiable. The market penetration of highly fuel efficient engines and the market utilization of alternate fuel sources appear to be moving at a snail’s pace. It will take decades before we move away diesel fuel powered trucks and trains.
The third variable is the world’s food supply. The world reserves of wheat, rice and other staples are at 35 year lows. The U.S. government gives farmers a 51 cent per gallon subsidy to divert corn from the food and feed grain supply. The United States produces roughly 6.5 billion gallons of ethanol annually, representing less than 5% of gasoline supplies. Under the new guideline, this is projected to make up more than 25% of the gasoline mix.
When farmers produce more corn, they produce less of everything else. More corn means less wheat. Less wheat means shortages and higher costs for bread and pizza. It also results in shortages of other staples such as eggs, poultry and milk. Critics argue that corn-based ethanol is also energy inefficient and consumes scarce water resources.
The push to convert food products to biofuel is likely going to slow down or come to a crushing halt. Are we going to starve the citizens of the world just so we produce more alternate fuels? Does it make sense to provide subsidies to “put the world’s dinner into the gas tank?” As we change course and use more of these food substances for human consumption, this will place more upward pressure on the cost of diesel fuel, making long supply chains even more costly.
The fourth variable is the ever declining value of the U.S. dollar. As the currency declines, it makes the cost of importing foreign goods that much more expensive. The U.S. may have to go through a couple more difficult years economically to overcome its current housing and credit crises. This may place more downward pressure on the embattled greenback making it even more costly to import goods from overseas. While some argue that the U.S. will likely soon pull out of their current malaise as a new President takes office, this is debatable. The problems associated with the housing and mortgage crisis and the level of household debt may make a recovery a long and arduous process.
There is a great attraction in establishing a global supply chain. Jim Tompkins, President & CEO of Tompkins Associates, the keynote speaker at this year’s Supply Chain & Logistics Association Canada Conference highlighted that companies with global supply chains are more profitable than companies with exclusively North American supply chains. Companies that both import from and export to overseas markets, are even more profitable than companies that do not export abroad. The global shipping and logistics movement is here to stay.
However, with overseas logistics costs and shipping costs rising so significantly, this may cause some supply chain professionals to do some rethinking and recosting exercises? As Mr. Tompkins pointed out, the typical transit time from China to North America is 23 days. Goods shipped from a North American vendor can be transported in a fraction of the time, resulting in more inventory turns and improved cash flow.
The key question is how much of an increase would it take in the landed cost of importing goods from some of your offshore suppliers before it becomes more cost effective to produce and distribute the goods in North America? You can do the math by creating a model that reflects changes in production and distribution costs based on projected cost increases (offset by any improvements in productivity) and variances in inventory turns and cash flow by virtue of manufacturing in North America. This may help you determine when and where a “Made in North America” supply chain as compared to a global supply chain works better for your company’s various product lines.
Taken together, these four elements place considerable upward pressure on the costs of long supply chains. In time, they may cause many countries and companies to look inward, to recalibrate the balance between global and national or North American sourcing, production and distribution, increasing speed to market and cash flow while reducing the distances that goods must travel and as a by-product, reducing fuel consumption and freight costs.