Supply Chain Trends for the New Year
In the last few years, it’s become apparent to me that supply chain efficiency has replaced standard cost reductions as the primary focus for operations teams everywhere. In years prior, it was highly popular to shift production to low cost regions, including and especially China and Southeast Asia. With lower labor costs and, in China’s case, cheap raw materials only available for domestic production, outsourcing was the predominant way for operations professionals to achieve their cost targets.
However, what happened afterwards is something many should have predicted but few did. Quality rejections increased. Lead times doubled. Productivity dropped. Employee turnover grew.
It turns out, the cost savings math on the lower labor rates was easy to calculate and therefore easy to implement. The hidden costs of losing customers due to poor quality and/or extended lead times proved much more difficult to identify. And on top of that, the Chinese labor rates continued to grow at an exponential pace, further mitigating the initial cost savings.
As a result, companies have become wise to these hidden costs, even if they are still impossible to calculate. A renewed focus on process excellence has replaced outsourcing, resulting in many companies moving production to areas with higher labor rates! One reason is that the productivity of these more experienced workers in part makes up for their higher wages.
The other reason is that companies are finding better uses for cash that was previously tied up in inventory. When one goes from a 12 week lead time to a 3 week lead time, you can cut your inventory by 75% and free up cash to make investments with a stronger ROI. When one finds value-focused suppliers (instead of cost-focused suppliers), minimum order quantities can cause a further reduction in inventory. In the next blog, we’ll discuss Alpha Wire’s take on inventory and minimum order quantities.