Local sourcing – is it for everyone?
Since the 1980’s supply chains have become increasingly global and cost has been a dominant factor in this shift. In the 1970s and 80s, savvy organizations began to realize that they could make significant savings by sourcing raw materials and parts from markets such as Taiwan, Singapore, and China. In doing so, they fired the starting gun on far-shoring. Other organizations quickly cottoned-on and realized that, if they wanted to remain competitive, they needed to follow suit.
With the benefit of hindsight, it’s easy to criticize many of these businesses for following the crowd. However, cost and competition still need to be at the forefront of supply chain and procurement decision-making, or the business will suffer.
The rise of re-shoring and near-shoring
Now, many organizations are looking to reverse this transition and re-shore or near-shore their sourcing and/or manufacturing. In other words, bring it back to home shores, or those of a close neighbor.
There are several factors driving this shift, including sustainability, but chief among them is resilience. Over recent years, organizations have experienced a sequence of disruptive events, from the COVID-19 pandemic to the recent war in Ukraine. These have shaken global supply chains and exposed their weaknesses. Organizations are now on a mission to mitigate risks – and one way to do this is to bring operations closer to home.
However, before forging ahead, there are several questions that supply chain and procurement professionals should think about:
- What’s the risk? – Leaders need to assess whether the global nature of their supply chain really exposes them to undue risk. Our Sourcing for Resilience checklists for supply chain and procurement professionals provide further information on how to go about this. Leaders also need to consider how strategically important raw materials or component parts are. If they’re rare, high value, or essential to production, it’s worth sourcing them as close to need as possible.
- How can risks be mitigated? – If leaders identify risks, they need to consider how these could be mitigated. Near-shoring or re-shoring may well be an option, but it’s a good idea to explore more cost-effective alternatives too. For example, if they find that they’re too dependent on one or two suppliers, they could look at diversifying within market.
- Is near-shoring / re-shoring a viable option? If near-shoring or re-shoring emerges as the preferred option, professionals need to consider whether it’s viable. Are the necessary raw materials available? And do they have access to the skills, technologies, and infrastructure needed to work with these?
- What’s the cost? And can we still be competitive? Leaders need to be realistic about how much sourcing and/or manufacturing locally will cost, and to what extent this could impact their profitability and competitiveness. They also need to remember that buying local carries risks too. Any supplier can be impacted by a virus outbreak or a war.
Are there any other options?
Far-shoring and near-shoring are not the only sourcing strategies out there. Increasingly, supply chain and procurement professionals are developing dual sourcing strategies, where they procure some materials or parts from abroad, and some closer to home. This can be a best-of-both worlds solution and is likely to grow in popularity. However, it’s important for professionals to weigh-up the pros and cons for each procurement category separately, to ensure they select the right solution for each.
Another option for organizations is to make rather than buy. This tends to be an expensive route, but is one worth considering if the materials or parts are of strategic value and there is significant risk attached to breaks in supply.
Fundamentally, supply chain and procurement professionals need to remember that sourcing isn’t about following trends. It’s about evaluating risks and ensuring that their chosen strategy makes operational sense.
If you’re a supply chain or procurement leader looking to build this capability within your team, please get in touch to learn more about our global and local sourcing courses.