Near or Far – your outsourcing decision will impact your Supply Chain

Posted by Barloworld Logistics on 08 Mar 2018 9:00:00 AM


As industries become more and more commoditised, there is a growing understanding that value is not necessarily intrinsic to the product sold, but in the manner in which this product is brought to market. Such commoditisation has resulted in organisations seeking opportunities to create competitive advantage through various partnerships, be it through outsourcing non-core functions to niche support organisations, or manufacturing bases in geographies that offer low costs per item produced. Globalisation has indeed created a one-world market and increasing digitisation is building an economy where the location of services is no longer as relevant as the value such create.

For the last decade or so, South Africa has seen a marked decline in the local manufacturing industry attributed, in part, to both escalating local cost and the ease at which products are sourced globally. This, in turn, has led many local Supply Chains to seek their raw materials, components and finished goods internationally, relying on robust import processes to fuel their route-to-market. This trend is what is known as off-shoring. Off-shoring by definition is the process of moving operations, and or services, overseas to capitalise on the cost benefits offered by certain geographies. The boom in Asian economies has resulted in everything from manufacturing to IT support being handed off, and while this may have a cost benefit in terms of price-per-item produced, there are many factors to consider before deciding to move off-shore.

Traditionally the primary driver of off-shoring has been the lower costs associated with production in, for example, the Far East. Off-shoring however, hides a plethora of cost that if examined in totality may render this solution, if not more costly, at least equitable to the alternatives. Relegating production to international counterparts increases the risk of shortage and low-quality costs. These costs may be burdensome to quantify up-front, but if the objective of a high-performance Supply Chain is to deliver quality products to customers when they need them – factors such as shortages and low quality can rapidly erode competitive advantage. In an economy with a volatile exchange rate, there is no guarantee that the landed cost-of-goods will remain lower than those made through local production. Added to customs and duties and other import costs – the unit price when viewed in total may indeed far exceed those of domestic manufacturing. Additional complexity is added through different time zones, cultures and languages, making off-shoring an exceedingly complex solution. That being said, capitalising on the economies-of-scale, cost-benefits and ease of global trade can offer benefits beyond the reach of smaller local producers.

An alternative to off-shoring is near-shoring, which retains the benefits of international manufacturing, but counteracts some of the challenges. Near-shoring refers to the outsourcing of processes to countries nearby – often within the same continent or even sharing a border. A growing realisation has driven this trend that there are benefits to be garnered from partnering within trading blocs such as SADEC or the EU. A practical example would be that of a fashion retailer opting to use a textile manufacturer in Lesotho as opposed to one based in China, or indeed South Africa. The benefit of near-shoring is that in the main such relationships benefit from shared-time zones, cultures and languages, as well as lower transportation costs, but are still susceptible to fluctuating exchange rates and import tariffs.

Whether sourcing from across the globe, a neighbouring country or simply a manufacturing plant down the road the end goal remains the same – right place, right cost, at the right time to the right person. This basic adage of Supply Chain holds true, and it is only through the deep understanding of the value drivers within the chain, together with weighing up the costs vs. benefit of each option that the right decision can be taken. Supply Chain modelling, risk analysis and expert advice from Supply Chain partners will pave the way, and if such is then backed up with smart freight forwarding or warehousing solutions to extract maximum value from the chosen strategy – competitive advantage will naturally follow.

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Topics: Trends and Insights, Trends