Offshoring loses some glamour, or how JIT became “just-in-case”

By: 
May 10, 2011

Management consulting firm Accenture has long been a supporter of company's offshore outsourcing efforts; indeed, it has helped companies to find low-cost manufacturing services. However, it appears that the consultant's tune may be changing. Accenture's recent survey and subsequent analysis revealed that 61% of the survey's 287 respondents were considering matching supply chain location with demand location by on shoring or near shoring manufacturing and supply.

There cannot be much surprise in this. The Japanese earthquake and tsunami was a "perfect" storm in more ways than one. It revealed an Achilles heel in the global supply chain, particularly with respect to the automotive industry. Add to that tragedy the unrest in the Middle East, the cool relations between the U.S. and China, and other macro-political events, and having a supplier near at hand starts to get very attractive again.

"Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers' expectations across a wide spectrum of areas, such as being able to rapidly meeting increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs," said Accenture's report.

Another recent report in the Wall Street Journal noted that Just-in-Time (JIT) inventory has been so widely adopted over the past two decades that companies are being caught short as supply chains lurch, with one result some plant slowdowns or even shutdowns. Not only natural disasters, but geo-political events have the potential to interrupt supply chains when suppliers are located a half-a-world away from the manufacturers, leaving companies unable to meet customers demands.

JIT remains a good idea. Large inventories of parts and materials sitting on shelves awaiting use cost companies a lot of money. However, recent events are forcing companies to rethink JIT, with many adopting "Just-in-Case" strategies and opening new warehouses in order to expand inventory to provide a cushion again future disasters.

Accenture notes that many companies have discovered that "managing supply operations that are separated far from where demand occurs has weakened their overall operational planning, forecasting and general flexibility, while in some cases driving up costs with the need for complex network management. In some cases, this situation has limited the companies' competitive advantage."

For example, 49% of respondents reported facing issues with cycle or delivery time, and 46% have experienced product quality concerns as a result of offshored manufacturing and supply operations. With labor a decreasing percentage of the total cost picture - "typically not more than 5% to 10% of cost of goods in Accenture's experience" - there will be fewer reasons to seek out low-cost countries (LCCs) for manufacturing.

For plastics processors in the U.S., this trend may mean a shift of brand owners' production to "near shore" places like Mexico and Central America.

Question: Are you seeing an increase in parts orders to "pad" inventories? Do you believe that your customers are moving toward a "Just-in-Case" strategy?

 

 

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