Not long ago, offshoring of goods and services was a foolproof way to keep costs down—if you could manage it. Now, however, due to changing markets, local sourcing is experiencing an upswing. Helped by Gabriele Rizzo, futurist adviser for private and public international defense organizations, and Alexander Bird, CEO of micronutrient food manufacturer Kiss My Keto, let's look at the pros and cons of local versus global supply chains.
Benefits and Drawbacks of Local and Global Supply Chains
Since local supply chains are often smaller, local suppliers may require less of an initial investment and allow smaller orders, which results in lower stored inventory costs.
In some foreign countries, worker wages are increasing, so the gap in labor costs between local and global supply chain strategies is diminishing. For instance, according to Eurostat data released in the fall of 2018, wage growth in the eurozone reached its fastest rate for two years, accelerating in the second quarter of 2017.
There is the need to push trust as far down the supply chain as possible, as near to the raw material as you can, to try and maintain certainty of provenance, processing, assembly and delivery.
—Gabriele Rizzo, futurist adviser
Also, goods and services production is becoming more specialized and geared to local customers, and in such cases, there is often an advantage of being physically close to the buyer. These factors led global management consulting firm AlixPartners to report that 69 percent of the 106 U.S. and western European manufacturing firms that responded to their 2016 annual survey were considering moving production closer to their home bases.
But global supply chains have substantial benefits as well. Today's economy is unquestionably global and having only local operations may result in lost opportunities and stalled growth.
Also, depending on your industry—and especially if you are in manufacturing—you may face significant skills shortages in certain U.S. regions, but can readily find available labor in countries such as China and Mexico. Raw materials may also be less expensive in a foreign market, and global supply chains also allow businesses to take advantage of the innovation afforded by emerging markets.
That said, time lags, shipping delays and language and communication barriers associated with global supply chains may negatively impact a business's speed, agility and on-time delivery record.
Finally, political situations can sour quickly, so global supply chains in certain regions of the world may carry a higher risk of business disruption overall.
One Business Navigates Local and Global Supply Chain Issues
At the root of the local versus global supply chain issue is how and where a business can work with the most trusted suppliers.
"There is the need to push trust as far down the supply chain as possible, as near to the raw material as you can, to try and maintain certainty of provenance, processing, assembly and delivery," says Rizzo.
Kiss My Keto is an ideal example of the importance of trust in making geographic decisions.
“Because we are in the natural food space, having traceable ingredients from suppliers close to home is always a primary concern. When dealing with consumables, having local suppliers also allows us to visit production facilities for regular inspections," says CEO Alexander Bird.
“In cases where we source from overseas," he continues, "we often need to spend more than other customers so that we can ensure reliable patents as well as certified processes and practices."
According to Bird, an advantage of a local supply chain is the speed to market.
“When we source locally, we find that deadlines are more often adhered to and we can keep our customer commitments," he says. “On the flip side, it tends to be more expensive due to the high cost of doing business in California."
What does Bird think the future holds with respect to local versus global supply chains?
“The advent of 3D printing and technology-based work means it's no longer just a matter of where you can get the cheapest raw materials and labor," he says.
“Businesses will also want to consider the formula of skilled workers plus effective manufacturing processes," Bird continues. "This may lead to establishing global supply chains in places like the Philippines."
There's no doubt that today's supply chain management can present a complex and rewarding challenge to businesses. Owners thinking of engaging global supply chains may want to examine the opportunities and potential pitfalls associated with their unique business and circumstances, and take steps to mitigate risk.
For instance, says Bird, global suppliers can cut corners so it's advisable to have a local auditor who can oversee production and visit suppliers in person frequently and on short notice.
Regardless of your local and global supply chain mix, it's critical to retain a focus on your most important asset: people.
"Evolving your supply chain operations involves adapting a future-ready posture, or engaging, upskilling and retraining your workforce," says Rizzo.
And this is essential regardless of where that workforce is located.
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