Inventory Risk in 2010: One of Many Reasons to Rethink Your Global Supply Chain Strategy

IDC Manufacturing Insights recently released their white paper and webinar entitled “IDC Insights Predictions 2010: Manufacturing Supply Chain.” IDC is a very insightful group with timely research.

One of IDC’s predictions for 2010– “Balancing Supply and Demand across the Value Chain Will Prompt a Strategic Redesign of the Supply Network” – ought to grab the attention of US brands and manufacturers.

IDC explains that three emerging global factors are causing US- based manufacturers and brand owners to rethink the collective instinct to off-shore manufacturing and assembly.

The three factors noted:

1.)    Profitable proximity sourcing – an emerging trend whereby US-based manufacturers and brand owners are realizing a multitude of benefits in sourcing manufacturing/material vendors within the region of headquarters and/or where the majority of their customers are located.

2.)    Emergence of the “globally fair wage” – the reality that Asia, India and others are waking up to the fact that a “fair wage” is worth fighting for.

3.) Logistics vs. Labor – the reality that, even with relatively low oil prices, global logistics costs are eating into or exceeding any margins gained in sourcing to low-wage regions.

We at MOREY agree that these three trends will continue to affect the global supply chain decisions of our customers. But perhaps the biggest trend that will affect supply chain decisions in 2010 is inventory risk.

Inventory Risk…

Our industry (Electronic Manufacturing) is like all manufacturing industries. When we negotiate a contract with an OEM, the biggest sticking point is volume commitment. We want to give customers a tight tolerance on commitment. Our customer wants as wide a gap as possible. This is a common scenario. But if 2009 taught us anything, it’s that this unruly economy has made volume commitments almost irrelevant. It turns out that our customers don’t have any better of a read on how much and when anymore than the housing, retail or banking industries do. Go figure. We don’t blame our customers for this. The old adage “It is what it is” rings true in this economy now more than ever.

The net result in this scenario is increased inventory risk. And this factor alone is enough for US brands to reconsider where their materials are coming from and where their manufacturing partners are located.

2010 holds a lot of promise, but we are seeing a carry-over in volatility in the supply chain from 2009. It’s going to take some time for the laws of supply-and-demand to reach equilibrium. Why make it any more volatile than it is by putting an ocean between your product and your customers?

Beyond Inventory Risk…

But inventory risk is just one of the many disadvantages of having oceans between sources and markets. Most customers don’t like to think about quality failures, but they do happen and when they do, the recovery time is multiplied because of time and language differences. The product travel time also adds to recovery time and could potentially cost millions in customer line shutdowns. Fast and effective response to quality problems becomes increasingly difficult to manage when working with partners in far-flung geographies.

Other risks include quarterly currency fluctuations which directly affect customer profits. With the decline of the dollar, the benefit of offshore manufacturing is diminishing further. The biggest benefits companies seek from low cost countries are labor costs. In typical electronics manufacturing the total labor cost put into a component range between 7-12%.  Even cutting those costs in half would not yield savings that compensate for quality recovery and inventory risk. In addition, most suppliers also have to replicate overhead on both ends of the ocean. This overhead generally ends up eating into customer profits, as it must be built into the price or transaction costs.

I could go on…

We agree with IDC Manufacturing Insights that global supply chain trends are causing brand owners and OEMs to reevaluate their decisions or intentions to source globally. We confirm the underlying causes that IDC indicates in their research and add that inventory risk in 2010 is perhaps an even greater underlying factor. We also note that beyond inventory risk, myriad other factors add to the risk of global sourcing.

- Taymur Ahmad

Taymur Ahmad is Vice President of Operations for MOREY. He is author of “Continuous Improvement Culture,” a blog dedicated to the best practices in continuous improvement and how those practices are delivering more value, cost reductions and increased quality for the customer