Some countries around the world have created vast manufacturing empires that combined produce over a quarter of the world’s goods. One specific country comes to mind when we think about manufacturing products, China. Take a look at the tag on your clothing, the engraving on your electronic devices, or the imprint on your dinnerware. You’re likely to see the words “made in China” staring right back at you, a monument to their manufacturing prowess etched in fabric, ceramic, and steel that encompasses the entire globe. In fact, in 2018 China alone accounted for 28% of the globe’s manufactured output. China became the manufacturing hub of the world for a variety of reasons, some of them being low cost of labor, low taxes, lack of regulations, ingenuity in business and plain and simple hard work. Recently countries and companies are beginning to reconsider their globalized manufacturing approach, and in some cases we are seeing a small resurgence of companies and governments relocalizing their supply chains.
Why Isn’t China as Attractive as Before?
An original benefit of outsourcing manufacturing to countries like China was the low cost of labor, but as economic growth continues so will the demand for higher wages. As an example, the monthly minimum wage in Shanghai is 2480 CNY compared to 690 CNY in 2007. That is a 72% jump in only 13 years. But not being able to get your product manufactured as cheaply as it was before isn’t the only reason companies and governments are looking to bring production back to their local markets, there is also a push to lessen environmental impacts, reduce delays in product distribution, and recently, an increased market interest in locally sourced products. These factors are among many that have contributed to shifting supply chains to more local regions and markets.
The Environment and its Impact on Globalized Supply Chains
The environmental impact of a global supply chain has been discussed at an increasing frequency over the past decade. While the price of producing goods in a low-labor cost market might be beneficial to the company’s bottom line, the environmental impact of globalized sourcing does not reflect well on a company’s brand. Bringing goods in from overseas generally requires more energy than domestic production and the shipping industry is responsible for more than 3% of global carbon dioxide emissions. Ocean shipment produces the least amount of carbon dioxide of any logistics method. However, an argument could be made that a localized supply chain will still reduce carbon dioxide emissions when companies focus purely on domestic logistics and negate the need for ocean shipment.
Responding to Demand and Juggling Your Supply
Today, people want what they want now and not any later. Localized supply chains give companies the ability to respond to changes in demand faster because they do not have to rely on goods and services that take time arriving from several thousand miles away.
A globalized supply chain can create additional risk when responding to customer demand. First, it increases lead time. Relying on shipping parts or goods from China to the United States may reduce costs but shipping overseas can take months. Additionally, the importation costs need to be considered as well as the potential risk of goods being held at the border or port because of incorrect documentation. Misidentified goods can also cause major delays.
These risks can be mitigated by storing needed items in local warehouses to respond to sudden changes in demand. Warehousing comes with extra costs however and there is still a potential risk that your demand outpaces the warehouse storage. When this happens, the only outcome is a delay in product shipment to customers. In a localized supply chain, warehousing needs are reduced because the supply chain length can be shortened by weeks and months allowing organizations and companies to effectively manage costs and respond to changes in demand from their customer base.
Local Demand for Local Goods
Finally, consumers are increasing their demand for local goods. You’ve probably heard the phrase “buy local” on the news, on the radio, and in your community. The push to source locally is mainly discussed when talking about food but there is also an interest in locally manufactured goods. Buying local means that the money stays in the community and supports jobs, local growth, and increases the potential buying power of local residents. It makes people feel good to say that they’re supporting their communities by buying locally sourced goods. That feeling is an incredible marketing tool that increases demand and growth, so if a supply chain is localized that adds more to a company’s brand recognition.
Like I mentioned at the beginning of this article what I’m writing here is simply one view of many. The decision to globalize or localize a supply chain is a difficult one and heavily depends on the industry. There are also many other factors that can influence one’s decision to localize a supply chain including tax implications, free trade agreements or tariffs, and the political climate of the day. The point is not to encourage everyone to localize their supply chains, instead it’s to help us remember that globalization is not always the answer.
About the Author:
Tyler Lutz is a Global Supply Analyst at Tesla. He is a professional and experienced Supply Chain Manager with a proven history of delivering results in the automotive sector, and is passionate about continually developing leadership skills and ensuring team cohesion and communication.