Fact Versus Fiction for Nearshoring and Onshoring: Global Supply Chains Are Here to Stay
The death of the global supply chain is premature. Some media report that US labor costs are lower than China labor costs. Others contend that fuel costs are so high that global trade is no longer cost effective. And then we have those that only look at how shipping times from Asia to the US have become longer, creating issues from an agility perspective. While each of these perspectives is true, they are not valid augments for relinquishing global supply chains and bringing manufacturing closer to home with onshoring and nearshoring.
June 12 2013 by James A. Tompkins
Even more significant is the natural process of creative destruction, meaning economies evolve from low-cost to middle class, in which middle-class people are consumers. Consumer populations want to consume, to buy things. Thus if factories in places like China are closed, the US will be far-shoring consumer products into China as the middle class of China grows. In fact, consider from the book Global Tilt by Ram Charan:
- The world is evolving from being mostly poor to mostly middle class. By year 2022, there will be more middle-class people in the world than poor.
- By year 2030, 5 billion people, nearly two-thirds of the global population will be middle class.
- Going forward, the spending by the middle class will be significantly different than today. Asians will spend the most. By 2015, the number of middle-class people in Asia, Europe and North America will be about equal.
- By 2021, there will be more than 2 billion middle-class Asians with a third of them from China, more than four times the number of Chinese middle class as compared to today.
- Smart companies from North America and Europe will continue to expand in Asia. This is where the growth of the middle class (of the consumers of products) will be the greatest going forward.
The world is evolving and will continue to evolve. Onshore or nearshore decisions need to be made in the context of two key factors: total delivered costs and future volumes of consumption. Total delivered costs encompass all costs, not just labor, fuel and inventory. This is the final costs an item after it passes through the full end-to-end supply chain and reaches the end consumer. In terms of consumption, look to the future; don’t base decisions on present levels. As the world evolves, consumption patterns shift. Companies’ manufacturing locations need not be in tune with yesterday’s consumption numbers but today’s and tomorrow’s numbers.
We will not see the “death” of global supply chains, only the failure of companies that make the wrong decisions. There is something to consider in each of these facts. Onshoring or nearshoring can be a viable option for some product categories, but the global marketplace creates a need for global supply chains. The challenge is putting all of the facts together and determining the best locations for the company and its products.
As the founder and CEO of Tompkins International (www.tompkinsinc.com) based in Raleigh, NC, Dr. James A. Tompkins focuses on supply chain strategy, specifically the implementation of end-to-end supply chains that are demand driven. He developed the Creating Supply Chain Excellence Blog and Global Supply Chain Podcast. He also shares insights on business strategy through his “Business at a Crossroads” and “Amazon Effect” presentations. Follow Dr. Tompkins’ Twitter account @jimtompkins, and connect with him on LinkedIn.