Strategic Considerations: Is It More Cost-Effective to Operate in Low-Cost Locations or Domestically?
Title: Navigating Future Sourcing Strategies
Years of cost-driven sourcing has relentlessly pushed manufacturing to low-cost regions like Asia. But the yoke of supply chain disruptions caused by the pandemic calls for a shift - one that balances cost with geographic diversification and resilience. This guide outlines the wise sourcing strategies for the future, as we move away from exclusive dependence on low-cost geographies, and discuss the advantages of multi-region sourcing, technology integration, robust logistics, quality supplier management, and continuous monitoring in the rapidly-evolving global landscape.
Sourcing Strategy Evolution
Let's take a trip down memory lane. When the Electronics Manufacturing Services (EMS) industry emerged over 30 years ago, a majority of final manufacturing and assembly occurred in the US, Canada, or Western Europe. Yet, intense competition, customer demands, and profit maximization propelled the shift to low-cost geographies like China, India, and other Asian countries.
This evolution was not limited to manufacturing alone. Services like IT, accounting, security, call centers, software development, and HR have also been ripe for low-cost outsourcing. The driving force behind this shift - cost. Beyond cost, there might have been other reasons, but money talks the loudest when it comes to sourcing priorities and decisions.
Advantages and Disadvantages of Low-cost Sourcing
Though low-cost sourcing has its benefits, such as reduced labor costs, lower total manufacturing costs, and landed costs, it also presents challenges. For instance, it might necessitate longer lead times, impact inventory levels, strain cash flow, and introduce gaps in resource and governance requirements.
Conversely, domestic sourcing shines in areas like labour control, timeliness of communication, ease of doing business, and intellectual property protection. The decision between sourcing from low-cost geographies versus local, domestic sources boils down to a careful evaluation of factors, such as labor costs, manufacturing costs, landed costs, lead times, supplier capabilities, inventory impacts, cash flow, and many more.
The Way Forward: Sourcing Strategies for the New Era
The global Coronavirus pandemic has revolutionized the way we view supply chains. It has dismantled Supply Chains in every industry across the globe. While the pandemic has exposed the vulnerabilities of relying heavily on low-cost geographies, it is important to avoid the false narrative that domestic sourcing is a magic bullet to eliminate supply chain disruptions. The pandemic's reach is indiscriminate - it spares no location, company, or industry.
Moving production from Asia back to the U.S. to evade the pandemic is a short-sighted solution. It is essential to recognize that domestic sourcing alone is not an effective strategy to avert supply chain disruptions. Instead, there are other considerations that demand our attention.
Strategic Considerations for On-shoring
Restoring strategic technological capabilities, such as computer chip manufacturing, or logistics optimization can make on-shoring more appropriate. By establishing on-shore capabilities, nations can maintain their technological independence and strategic advantages.
On-shoring can also enable logistics streamlining, as it eliminates unnecessary steps in the Supply Chain, like overseas shipping or dealing with middlemen. It is also worth noting that techniques like dual sourcing or parallel Supply Chains can provide additional layers of protection and ensure greater supply assurance.
Balancing the Sourcing Equation
In conclusion, avoiding the pandemic disruptions by on-shoring is not a sound reason for sourcing decisions. Instead, a balanced approach that blends outsourcing to low-cost geographies and on-shoring will create highly resilient and robust Supply Chains. Intelligent sourcing strategies will thus allow businesses to capitalize on the advantages of both strategies [1][2][5].
To be successful in this new era, businesses must be adaptable, agile, and forward-thinking. By embracing advanced technologies, strengthening supplier relationships, optimizing logistics, and continuously monitoring and adjusting sourcing strategies, businesses can weather disruptions, capture opportunities, and maintain their competitive edge.
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[1] "The Digital Procurement Revolution: AI and Logistics in Strategic Sourcing," S. Brumer, 2021.[2] "Supply Chain Resilience and Diversification: Navigating the New Normal," M. Gupta, 2020.[3] "Smart Sourcing: Mastering the New Art and Science of Strategic Sourcing," M. Anglin et al., 2020.[4] "Supply Chain Management: Strategies for Reducing Cost and Risk," S. Schilling, 2018.[5] "Digital Procurement: Transforming the Future of Procurement," EY, 2021.
- In the evolving global landscape, a balance between cost-effective low-cost geographies and geographic diversification, enhanced logistics, and robust supplier management will augment the resilience of sourcing strategies.
- To create highly resilient and adaptable supply chains, businesses should adopt a balanced approach that combines outsourcing to low-cost regions and on-shoring, capitalizing on the advantages of both strategies.
- Embracing advanced technologies, strengthening supplier relationships, optimizing logistics, and continuously monitoring and adjusting sourcing strategies will enable businesses to weather disruptions, capture opportunities, and maintain their competitive edge in the new era.
