We call reader attention to a recently released research study from AlixPartners, that firm’s Manufacturing-Sourcing Outlook. This is the third consecutive year of publication of this report.

It warrants a read from supply chain, product management and sourcing leaders.

The report concludes that the United States has reached parity with Mexico as a preferred nearshoring location and that the U.S. is on-track to achieve cost-parity with China by 2015. There are, of course, important caveats to surround the assumptions of these conclusions.  The latter conclusion is consistent with the well cited 2011 research report by the Boston Consulting Group.  After reviewing all of them, Supply Chain Matters believes that they are reasonable and pragmatic including considerations for China’s wage inflation rates and sourcing switching costs. One of the other more important criteria are assumptions related to the cost of transportation, which AlixPartners viewed as currently favorable to outsourcing.  As we have noted in previous commentaries, international ocean container and air freight carriers are awash in excess capacity and need to recover eroding revenue streams by cutting capacity or service.

Some of the other important takeaways from this report are:

  • Decisions related to nearshoring are now very top-of-mind; the report states that 84 percent of respondents indicate that these decisions are important, up from 53 percent last year.
  • The majority of executive respondents surveyed expect to reduce total landed costs in the range of 5 to 20 percent.  An editorial sidelight, when this author led research 8 years ago related to decisions to source production in China, this same bandwidth of cost savings was cited.  Thus, thresholds of cost savings opportunities remain consistent.
  • The cost gap concerning China and the U.S. has been closed, on average by 70 percent in specific product categories that AlixPartners analyzed, which included fabricated parts, assemblies and consumer products.
  • A caution that China still maintains an advantage of scale, and will aggressively protect its existing manufacturing capabilities.  We would add the caveat that protection should be assumed in defined strategic industries within the current five year plan for China.  That includes growth industries such as high tech and consumer electronics, alternative energy, medical and healthcare products and other strategic industries.

As we have also pointed out in our recurring commentaries, supply chain teams should expect more leveraged use of robotics and factory automation across China as it responds to these current global economic shifts.

We all know that product sourcing decisions are strategic and often involve longer time horizons.  Therefore it is very appropriate for sourcing and product management teams to be broadening their horizons out to 2014 and beyond. That would include, by our view, some discussion in the Executive S&OP process.

If you are asked to support these efforts, keep in mind that sound analysis and insightful information will go a long way to insure that decisions on continued outsourcing or nearshoring are made with all the facts and with consensus assumptions. We remind sourcing and product management professionals to absolutely include the voice and insights of transportation, logistics and supply chain operations in these ongoing analysis and decisions.

The good news is that newer analytical and business intelligence technology tools making their way into mainstream use will greatly help in these efforts.

Bob Ferrari