Politicians, the news media, and business analysts are obsessed with the idea that American companies might be shipping jobs overseas. The buzzwords–outsourcing, offshoring, and even “nearshoring”–are repeated ad infinitum on the campaign trail and the nightly news.
Based on my experience as a successful business owner–and taking a page from our farmers–I believe we would benefit by shifting the focus of the conversation. Rather than talking about outsourcing, we should be looking, thinking, and doing business closer to home under a framework I like to call “LocalSourcing.”
LocalSourcing is just what it sounds like: it’s when a company purchases raw materials, components, and supplies from suppliers located within a 150-mile radius. It’s a smart business strategy that lowers costs, improves your ability to respond to customer needs, and creates American jobs. In other words, it’s good for your business and good for our country. LocalSourcing has numerous benefits:
Reduced Inventories: A company can significantly reduce its investment in inventories as a result of more frequent shipments from local suppliers. Building on the concepts of Lean Manufacturing, you schedule deliveries of the materials that you need–when you need them. Using LocalSourcing, my company integrated a kanban system with our suppliers to schedule deliveries three times a week. These were adjusted order-by-order, based on our demand and optimal production schedules. We were achieving 40-50 turns with our raw material inventory. This contrasts starkly with the inventory a business must carry when working with an overseas supplier. Given the multiple risk factors associated with doing business overseas (see below), a company must carry significant levels of inventory to protect against supply chain disruption. Every dollar invested in slow moving inventory is a dollar that is not working to grow your business.
Lower Logistics Costs: The logistics costs of using international suppliers–including overseas containers, inland freight, and the capital tied up with lead times ranging from 60-90 days–are significant. To meet a spike in demand, you may even need to have items sent by air, at a huge cost. LocalSourcing allows you to receive shipments on an as-needed basis, pulling items from your supplier kanbans that arrive on your factory floor in hours rather than months. Our suppliers used their own trucks and responded quickly.
Avoidance of Supply Chain Disruption Costs: The time required for overseas shipments can increase for any number of reasons, including delays in shipping caused by customs inspections, natural disasters, political risks, and even holidays. Any one of these delays can be extremely expensive, resulting in a shutdown in your production lines and a failure to ship products to your customers. Combined with long lead times, the potential supply chain risks results in the need for a dramatically increased inventory “buffer,” and the possibility of getting stuck with slow-moving or obsolete items if and when the customer demands changes.
Cost Parity: As labor costs rise overseas (particularly in China), the advantages compared with U.S. labor rates are diminished. Changes in currency valuation further reduce the benefit of lower labor costs that have driven many offshoring decisions. As U.S. manufacturers embrace Total Quality Management, Business Process Improvement, and Lean and Six Sigma processes, the total cost of production decreases, and many products manufactured locally are no longer at a cost disadvantage. LocalSourcing allow you to bring these skills into your supply chain, resulting in a globally competitive cost structure.
Financial Risks: Contracts with overseas suppliers need to factor in the possibility of currency fluctuations and increased credit risks. The company on the other end of the transaction may be a middleman–meaning you may need to worry about the financial stability of unfamiliar suppliers.
Improved and Consistent Quality: LocalSourcing allows you to work closely with nearby suppliers. You can consistently upgrade the quality, improve productivity, and lower costs (through TQM, skip-lot inspections, and other techniques) based on collaborative, quality-driven processes. This contrasts with the hit-or-miss quality one commonly encounters with overseas shipments. Many companies have the added expense of hiring independent inspectors to check every shipment in overseas factories. This includes confirming that substandard materials were not substituted.
Intellectual Property Protection: One of the significant dangers in working with Chinese suppliers is the risk of IP theft and counterfeit products, which can severely damage your brand and profitability.
As a business leader, you have the opportunity to build a strong, cost-efficient, and highly productive supplier base close to your company–and in your own business community. LocalSourcing is a good business decision that will lead to the creation of new jobs throughout your supply chain. The risks inherent in working with offshore suppliers are mitigated, and your business will be better able to respond to changes in customer demand and spikes in sales. And the ability to quickly meet your customers’ requirements will be a catalyst for business growth.
Better yet, you can give the politicians and news media a new buzzword to obsess over.
Posted July 9, 2012
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