Increasing Cost and Risks Encouraging Re-Sourcing Trends
- May 1st, 2012
- By: Loraine Lawson
For the third year in a row, technology manufacturing jobs are leaving China and other Asian and Latin American countries to return to the U.S., thanks in part due to the high costs of overseas supply chains.
The shift means that in four years, manufacturing shifted from the U.S.’s most outsourced function to the least outsourced function, Procurement Leaders reports.
The main reason for this rapid change: Delays in the supply chain caused by natural disasters, as well as the hidden cost of operating supply chains outside the U.S. And Europe, according to experts. Rising wages and fuel prices are also playing a role.
But what seems to be catching companies off-guard is the impact on their supply chains.
Panos Mourdoukoutas, professor and chair of the Department of Economics at Long Island University Post, argues in a recent Forbes column that outsourcing creates fragmentation in the supply chain.
“…Outsourcing leads to the fragmentation and disintegration of the supply chain, inviting new competitors into the industry, and undermining pricing power and profitability,” writes Mourdoukoutas. “Outsourcing of manufacturing, for instance, is feasible only if it can be separated from other supply chain activities: product development, branding, marketing, distribution, and after sales services.
“This means that as additional activities are outsourced, the supply chain turns from a single integrated process performed within the boundaries of traditional corporations to a fragmented and disintegrated process, a collection of separate and disjointed activities, performed across several independent subcontractors.”
The study was conducted by BDO USA, which polled 100 U.S. chief financial officers in the technology sector.
European manufacturers are also experiencing a similar shift, though in smaller numbers, according to Spend Matters, in part because EU companies are being more cautious about new orders and sticking to current suppliers.
A recent Knowledge@Wharton Today article noted that prices in China have risen 15-20 percent a year or higher, and China’s currency, the renminbi, has risen 4 percent a year.
Meanwhile, wages in the U.S. remain stagnant due to higher than normal unemployment. U.S. Manufacturers have also managed to increase productivity.
There are other reasons some companies are leaving China: Wharton’s says companies are tired of their designs and processes being copied by Chinese companies, while others resent unfair trade practices, reports the Fiscal Times.
But the situation is more complicated than one study can show. For instance, the Wharton article points out countries like Vietnam and Indonesia are now attracting manufacturing from other nations — including China — due to lower labor costs.
India also is back on the table as a possible draw for companies, particularly when it comes to providing services rather than manufacturing. Countries with low-tax rates, such as Ireland, with a 12.5 percent tax rate, and Israel, at 24 percent, are also attracting companies, according to the Organization for Economic Cooperation and Development.
While supply chains are listed as a main cause for lost manufacturing in some countries, more complex international supply chains are credited with bringing chip plants abroad, according to a recent Chicago Tribune article.
Experts vary on whether this “re-sourcing” trend will last or how many companies will actually return manufacturing to it’s point of origin. Regardless, keeping supply chain costs under control be key to profits, no matter where you’re located.