Export or Shift Manufacturing? Impact on Inventories to Meet External Demand

1/11/2011

In the last article I discussed about the impact on inventory levels if a manufacturer was to move the plant outside of USA to meet the domestic demand. In the last few decades this has been one of the most common pattern. The total supply chain costs attempted to find the low water mark. Initially it was the low wages that offered the benefits of shifting the plant outside. In recent past it is the presence of the manufacturing eco-system in countries like China. In last few years the search for low wages and other costs such as land is taking manufacturers to previously ignored geographies like Vietnam.

There is, however, another shift that is affecting the location of plants. It is the shift in global demand patterns. Asia-Pacific region is expected to present the lion’s share of demand in coming decades. Many of the manufacturers are bracing for such a shift in demand pattern and struggling with the question of how best to meet it. They can locate the plant in US and export or locate the plants closer to the demand centers itself. It’s a hard question and the discussion obviously goes well beyond just inventory levels. However, inventories are just as good a place to initiate the discussion as any.

Manufacture in US and Export

This is probably the most obvious choice for many of the manufacturers. They can explore the shifting waves of demand while not spreading their operational base too thin. Further more, if they can leverage some of the naturally occurring advantages of manufacturing in US the added cost is minimal when compared to shifting the manufacturing base itself.

The only added inventory for selling in a new geographies while manufacturing here would be finished goods. The outbound portion of supply chain from plant to customer site would see a rise in inventory levels. The greater transit times and larger batch sizes would require a substantial increase in inventory levels across the outbound chain if we were to maintain good service levels.

For highly complex and technologically sophisticated products, where we have a competitive edge in manufacturing in US, the increase in finished goods inventory may not be sufficient to warrant moving the manufacturing closer to the demand points. You can easily pack thousands of smart phones in a small enough package to air ship it anywhere in the world at a short notice.

In this scenario manufacturers can easily leverage our competitive advantages like “made in USA” brand that could be easily diluted by shifting the manufacturing outside. Similar arguments can be made for the new products. Perhaps this is why manufacturing innovation is so important for our economy.

Manufacture close to demand

The shifting global demand pattern and availability of low wage workers is a strong incentive to locate the manufacturing base close to the demand points. Imagine a scenario where a US company locates a plant in China, sources the raw material locally, manufactures and sells in local market. A small team of US managers with capital to invest and know how to make it happen is a scenario is too good to pass up. If you think this scenario is far fetched, think again. This is happening all around the globe and may be the seed for the emergence of US manufacturing base.

Once a company has established the demand, the inventory risks in this scenario are minimal. In fact, it makes sense to locate the plant close to demand centers if the capital and the managerial capability allows it. Risks that needs to be managed are the potential negative impact on brand image and loss of intellectual capital. The inventory levels should in fact go down in this scenario.

In conclusion…

The global demand pattern is shifting. For us to compete effectively across the world in many situations it makes sense to leverage the local raw material and talent pool by locating the manufacturing plants close to demand points. The inventory effects in most cases should be favorable except when the skills or raw materials or technology etc give a natural advantages to locating the plant in US.

This topic of export vs make closer to demand points is a fascinating one. The discussion naturally goes well beyond the inventories. In fact, it is a minor consideration in bigger supply chain context. I look forward to discussing this more in coming days as I believe that the global shift in demand is one of the catalyst in reviving the US manufacturing base.

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  1. 9/12/2014Impact on Supply Chain Flows in Moving Manufacturing Outside America for Domestic Demand - Mani Agrawal says:

    […] one of my earlier post I discussed the impact on inventories when a manufacturer chooses to locate the plant outside of USA for meeting domestic demand. Inventories, however, present a small part of the overall supply chain […]

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