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Geopolitics Makes Domestic Sourcing More Attractive

Geopolitics Makes Domestic Sourcing More Attractive

When a company needs parts and materials, a purchasing or sourcing function will find an appropriate source, negotiate cost and terms, and administrate the transactions to complete the procurement. In recent years, a lot of that purchasing activity has gone to the Far East – China, Taiwan, Korea, Vietnam, Malaysia, etc.

The primary reason companies buy from that part of the world is, of course, cost. Labor rates in the developing world are a small fraction of what they are here in the West.

But the decision about where to source is not always cut-and-dried. In addition to the actual per-unit cost for the item, buyers must consider the "landed cost," which includes shipping and handling, customs and import duties, agent fees, etc. – in other words, all of the costs involved in getting the item into your facility and ready to use or sell.

In addition, the longer time that it takes to get the item – from when you place the order until it arrives, the lead time – has a definite impact on your costs and flexibility. When importing, you will unduly have to order in larger quantities and therefore less frequently, which means that you will carry a larger inventory and be less flexible. If demand changes – either up or down – it will take longer for you to adjust your inventory and purchases to accommodate the change. And if demand suddenly dries up, you will likely be left with a reasonable quantity of unusable (obsolete) parts or products.

All things considered, the trade-off between domestically sourced items with a higher unit cost but lower logistics costs, shorter lead time and lower risk, compared to imported items with lower unit cost, higher logistics costs, longer lead time and higher risk can be a much closer comparison. The risk factor can tip the balance in favor of domestic sources.

Beware that conditions change and the decision you made a year or two ago might not be quite as attractive today. You know what happened to transportation costs a couple years ago, when the price of oil went from the $ 40-per-barrel range to over $ 150 per barrel. Oil prices have settled back into the $ 70- $ 80 range, but could change dramatically overnight. Over the past few months, Chinese workers have been demanding, and getting, significant wage increases in the beginning of a trend that is likely to continue into the foreseeable future. International shipping can be disrupted by weather, port congestion, terrorism or the threat of terrorism that slows down inspections and processing, changing tariffs and geopolitical upsets, and many other factors. Combine these unknowns with concerns about product safety, contamination and quality, and it might drive companies to take another look at prior sourcing decisions.

Major corporations are doing just that. There is evidence that a significant number of companies has switched from Chinese and Far East sources back to US production and suppliers. This is obviously good news for the US economy and job outlook. This move is supported by the fact that US productivity has continued to improve through this tough economic period. That certainly helps manufacturers lower costs and compete more effectively with suppliers in lower labor-rate areas.

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