Impact on Supply Chain Flows in Moving Manufacturing Outside America for Domestic Demand

5/11/2011

In 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 impact which includes issues such as logistics cost, labor wages, plant infrastructure and so on.

supply-chain-flow

The first step in understanding the impact on over all supply chain is to better grasp the impact on various flows like material, information and financial. The diagram above shows a simple model of various flows in supply chain and forms the basis of our discussion below.

Information flows

Information flow refers to the movement of electrons (or paper) from customers to the manufacturer to the supplier and back. I am assuming that one has moved beyond the age of moving papers (as in fax or mail) to electronic communication. If not, then may be that is something you should look at first. In the internet based communication age the flow of information is not hampered by the physical geographical limitations as it was in the age of paper based information movement. Irrespective of where the plant is located a manufacturer can know in real time what the stock situation is or if the plant is idle or if the raw material is not delivered on time or in full (OTIF).

One does not need expensive supply chain or ERP systems to make this information flow seamless. I have seen quite a few companies effectively use spreadsheets and emails to overcome any lack of systems. One can do even better by putting a simple web based portal with simple work flow management as an interim solution before spending millions on an ERP system. I was involved in designing such a solution for a building material products company with operations in over 50+ countries. A system like this can be rolled out over few months and at a fraction of the cost.

If a company has not achieved a frictionless flow of information between various entities then this probably should be a high priority item. It can be achieved rather easily in a relatively short time. In the past where I have seen poor flow of information in a supply chain. It often had little to do with where the plant is located but more to do with outdated supply chain practices like lack of consistent naming scheme for various products. In one instance a company had 26 product codes for strawberries.  Do you really need that!

Material flows

Material flows are almost always affected by the plant location outside of America to meet the domestic demand. The supply chain invariably lengthens with higher lead times, as a minimum, for outbound flow of materials. The second most observed phenomena is lumping of the material flow – a large batch moving at infrequent intervals. Think of buying coffee for your office and compare buying it every day vs once a week. You buy a bigger batch and need more storage space in later case. Similarly, the inventory levels go up for the finished goods in this scenario.

The value density (think of bulky items that cost less vs small items that cost more) of a product has a significant impact on the material flow, inventory levels and often on level of service offered to customers. The lower the value density the higher the impacts. In one of the situation, for an industrial product manufacturer, it had 9 months of finished goods inventory on hand. Less than 2 inventory turns! Needless to say that the company faced a high inventory obsolescence risk along with carrying cost. For high value density products such as chips, smart phones, or medicines the impact on material flow could be minimized significantly by using higher cost but faster transportation systems like air.

In general, in most circumstances the inventory levels should go up, lead time to customers should be higher, obsolescence risk greater and customer service levels (OTIF) lower with locating the plant outside of America to meet the demand at home. A manufacturer essentially needs a much more efficient supply chain to counter these negatives.

Financial flows

Probably one of the biggest change in financial flows on a supply chain in this scenario is the currency risk that a company faces. The revenue from the sales is in US dollars while a significant amount of expense is in a different currency due to plant being physically in a different country. Moreover, the complexity of financial flows increases as the touch points go up. Now you have different accounting systems, cash management policies, more ways to disburse money and higher need for financial controls.

Essentially, the lengthening of supply chain increases the cash-to-cash cycle in many instances. The velocity of cash flow slows down. On positive side, one may see a reduction in working capital requirement if the supply chain cost savings are significant enough.

In conclusion…

The scenario where a plant is located outside of US with sole purpose of supplying the product to US market is rather simple. I wanted to present this simple case to keep the discussion some what contained. One can easily expand it to include multiple markets and multiple plants supporting them. The information goes from simple bi-directional linear flow model, as discussed here, to a multi-directional flow with all its associated complexity.

There is 1 comment in this article:

  1. 9/12/2014Export or Shift Manufacturing? Impact on Inventories to Meet External Demand - Mani Agrawal says:

    […] 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 […]

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