A silver lining to high oil prices - FT.com

Summary:
Arnoud de Meyer and Matthias Holweg anticipate a trend of "back-sourcing" due to rising energy and commodity costs: manufacturing will increasingly move to where the markets are, including back to the UK. Few companies that have gone global have so far achieved the full cost efficiencies they had envisaged, and this will get worse. Two common mistakes that companies make when deciding to source components from abroad are: they tend to only calculate the static costs of a supply chain, and they assume that costs will remain stable. Furthermore, global supply lines might be cost-competitive but they certainly are not carbon-competitive, which is gaining in importance. As a result, narrowly defined production costs will become less important in deciding where to locate manufacturing. This presents an opportunity for Western manufacturing, provided the skills and tacit knowledge that is needed for manufacturing are preserved. Companies may also have to learn how to efficiently operate smaller flexible units that produce the customised products for the local market. (Published: 30/07/08)

Notes:

• Increased transport costs resulting from higher energy prices and carbon taxes
  
• may create an opportunity for a revival in western manufacturing
• Most strategic decisions in companies are influenced by new "paradigms"
• path-breaking new concepts
• globalisation was certainly the paradigm of the past decade
• application of such paradigms tends to behave like a pendulum
• swinging towards one extreme, and eventually swinging back
• Is it possible that the pendulum may swing back for global manufacturing?
• premise of global sourcing and exploiting lower labour costs for manufacturing in eastern Europe and the Bric countries
  
• largely built on the cost of transport
• dropped by a third between 1960 and the turn of the millennium
• result of introduction of containers and the rise of third-party logistics providers
  
• shipping goods reliably from one end of the world to the other without owning any of the transport assets in between
• with further help from
• trade liberalisation and agreements
• stable currencies that reduced the risks in establishing global supply lines
• research shows that few companies that have gone global achieved the full cost efficiencies they had envisaged
• some even found that "offshoring" their operations was more expensive than sourcing or manufacturing locally
• subsequently returned to their home country
• cost of logistics may be a lot more important than originally estimated
• others found that product cost was indeed much lower, yet this cost reduction was traded off with much reduced quality
• e.g. recent highly publicised product recalls
• companies commit two common mistakes when deciding to source components from abroad
• tend to only calculate the "static" cost of a supply chain
• basically adds the unit cost ex-supplier factory and the transport cost together
• lower labour cost reduces the unit cost of the product
• generally offsets the higher transport cost of bringing it into the UK from China
• other costs are often not considered or underestimated
• e.g. the additional cost for buffer stocks
• supply chain becomes inherently less able to respond to swings in demand or changes in technology
• e.g. risk of obsolescence or running out of stock
  
• drastically increases, yet often is not factored into the calculation.
  
• e.g. cost of quality defects
  
• rises tremendously when a defect is discovered in a shipped batch arriving in Europe and costly air freight has to be used to refill the supply line
• e.g. co-ordination cost of working over long distances
  
• often taken for granted
• tend to assume that costs remain stable, not account for "dynamic" costs
• perception is that countries in eastern Europe, China and India have inexhaustible labour pools that one can tap into at low cost
• and that all these workers are trained to the needed level
• recent experiences
• Eastern Europe
  
• car manufacturers find that local labour pools of trained workers have been virtually exhausted
• inflation in the cost of trained labour is in double-digits as manufacturers are competing for labour
• India
• trained staff will change jobs several times per year if they see the prospect of higher salaries elsewhere
• annual turnover of 20 per cent being normal
  
• labour cost inflation rising to 25 per cent a year in some regions, such as Bangalore or Pune.
  
• China
• trained middle manager in the car sector, fluent in English and Mandarin, will earn more in Shanghai than in Wolfsburg or Birmingham
• carbon footprint gaining in importance
• global supply lines might be cost-competitive but they certainly are not carbon-competitive
• rising consumer conscience about the impact of patterns of consumption
• manufacturers with offshored operations will find it increasingly hard to justify sending products half-way around the globe if they can be made as easily close by
• recovery of competitiveness in the manufacturing sector
• long been dismissed as an obsolete part of a "service economy"
• "backshoring" trend
  
• manufacturing will increasingly come back to where the markets are
• does not mean that all of it will come back
• emerging countries are also enormous markets and local production will serve local consumption there
• but: companies will have to think increasingly in terms of networks or portfolios of plants
• narrowly defined production costs will become less important in deciding where to locate manufacturing
• developing the opportunity
• UK will need to preserve the skills and the tacit knowledge that is needed for manufacturing
• may have to learn how to efficiently operate smaller flexible units that produce the customised products for the local market