Saving costs should not come at a price in manufacturing

SYSPRO chief product officer, Paulo De Matos.

By Paulo De Matos, Chief Product Officer, SYSPRO

Consider for a moment what potentially goes into manufacturing a beverage. The manufacturer may source ingredients from New Zealand, sugar cane from North Queensland and bottle the final product in Indonesia. In total, the turnaround time from sourcing to delivery could have taken a year.

The challenge with longer supply chains, is that they often become inflexible when unexpected changes occur. With the global lockdowns occurring with no forewarning, the outsourcing of operations to another country was no longer viable. Often, these businesses had previously opted to offshore operations to benefit from lower costs, especially labour.

According to our recent study into business resiliency during COVID-19, 60 per cent of businesses stated that they would have to reconsider existing business models for sourcing, manufacturing and distribution if they wanted to become more agile post pandemic. Additionally, 42 per cent of businesses stated that they will near-shore or re-shore manufacturing operations in the near future. This reconfiguration of supply chains will have a positive impact on the localised supply of components and result in organisations developing dual sourcing policies for improved supply or supply certainty in times of uncertainty.

Before making a final decision around how best to reconfigure a supply chain, it is worth understanding the different types of outsourcing as well as their unique characteristics.

Offshoring

Offshoring involves the outsourcing of manufacturing to vendors in distant countries. Quick-win benefits include lower labour costs, often at the expense of quality. Other considerations are the impact of time difference for communication, the legal system, the tax system and language barriers. Companies also expose themselves to several risks as they will need to hand over their intellectual property to the offshore manufacturers, especially those manufacturers in countries that have no patent law protection.

Despite these challenges, countries like Mexico and the Philippines are creating local manufacturing hubs to attract offshore manufacturing and create local export economies to make offshoring a far more attractive option to manufacturers.

Near-Shoring

Near-shoring involves outsourcing to a nearby country. This type of outsourcing is useful for companies that want to co-ordinate with a team in a similar time zone.  One of the benefits of near-shoring is to reduce operational distribution costs and the number of days it takes for a product to move through the supply chain.  Importantly, a closer proximity allows for greater control and a higher quality product.

Once the supply chain has been shortened, manufacturers can respond much quicker to changes in demand, and increase their speed to market for newly developed products and improved products.

On-Shoring

This type of outsourcing involves the relocation of manufacturing operations to a lower cost location within the same country, taking advantage of government initiatives and incentives. The Queensland Government is one which has been proactive in this area, even prior to COVID-19.

While the perception is that this is costly and is counter to the concept of offshoring, the reality is that increased flexibility in the supply chain and just-in-time delivery, results in the long-term reduction of costs. Focus is placed on quality and greater control.

In addition, there are further cost reductions as manufacturers and their distributors no longer need to consider the additional process of unpacking, customs costs and government inspections that affect all international freight movements.

Re-shoring gains momentum

It has been known for many years that the supply chain needs to be as short as possible to maximise control and reduce costs.  As more product tampering, industrial espionage and piracy abound, the businesses with the longer supply chains are exposing themselves to more risks.

Manufacturers are always looking to reduce cost, but without a clear measurement of the actual costs associated with offshoring, near-shoring and on-shoring it will be difficult to quantify what is the cheapest option.  This measurement must also consider the hidden costs of the buffer stock filling the supply chain, costs of freight, storage and even the extra insurance, just to name a few.

While offshoring may have appeared as the obvious choice in the past to reduce costs, benefits like the protection of intellectual property, the production of quality products and improved time-to-value are starting to outweigh the former choice.

Almost every business that survived the pandemic learnt some valuable lessons, and these need to become the basis of the revised business model.  Within the new business model will be the unique issues that will determine the wellbeing of the business should another interruption like COVID-19 occur.  My advice? Prepare for another disruption.