Manufacturing in America – Supply Chain Flows

20/10/2011

At the beginning of these articles on manufacturing in America, I presented a simple model of supply chain. It served it’s purpose for the last few articles but it’s now time to complicate things a bit. Let’s start adding various other flows to the model like information and financial. Also making the material flow bi-directional. After all when you return the sweater to the store that your aunt gave you for Christmas it triggers a flow of material in other direction. Here is a simple graphics depicting various supply chain flows:

supply-chain-flow

One of the flow that I have deliberately ignored is the “service.” This is not to say that the services are not important in a supply chain. They are. However, I think that many aspects of the “services” can be understood within the context of the decisions we make about strategic and operational issues in a supply chain.

You may be wondering why complicate the model. Well, as the discussion progresses we need something more to refer to. I will try to make this point more clear with the examples below.

Consider a manufacturer making and supplying widgets to 10 stores in the city. For the sake of simplicity let’s assume that the plant and warehouse are located in the same city. It is in the best interest of both the manufacturer and the stores to minimize the total inventory. This is the inventory in the warehouse, in-transit and in the stores. If the manufacturer has ongoing visibility into the selling pattern of the stores he can deploy advance inventory management techniques like “vendor managed” as opposed to sending a truck every other day to these stores only to be returned back as they did not sell enough in last few days. A good information flow paired with good supply chain decision making mechanism has tremendous potential to lower, for example, inventory levels across the chain. Thus the lower total cost and high availability of products on the shelf. Yes, there are free lunches in this world.

Further improvements can be achieved by combining the information flow with the financial flows. For example, efficiently managing the account receivables and payable with the 10 fictitious stores above. This reduces the capital requirement per unit of production (or sale) enhancing the ability of manufacturer to expand the business.

So, what happens when a manufacturer decides to locate the plant outside of US to satisfy the domestic demand. A company may achieve lower labor cost (to be discussed later in a separate article) but various supply chain costs go up. Consider our widget manufacturer above, now he has to import the widgets from say China. A long journey resulting in increased inbound transportation cost and higher inventory level. After all you can’t get a shipment everyday for most of the products. The advantages gained by an improved information flow are reduced and the cash-to-cash cycle now much longer.

In the coming articles I will discuss various trade-offs between material, information and financial flows in a supply chain with manufacturing in US and outside of US. In many situation you will see that the cost savings due to cheaper labor may not be sufficient to offset the supply chain savings by locating the plant in US. A further incentive for CEOs to evaluate their supply chain for potential for lowering the cost structure.

There are 2 comments in this article:

  1. 9/12/2014Impediments to Manufacturing in America: Shifting Global Middle Class Consumption - Mani Agrawal says:

    […] we discussed earlier, the logistics cost (both inbound and outbound) plays a significant role in deciding where to locate a manufacturing plant. All else being equal, closer a plant is to the […]

  2. 9/12/2014Impact on Inventories by Moving Manufacturing Outside America for Domestic Demand - Mani Agrawal says:

    […] (operations) to outside of our boarders to meet domestic demand has a significant impact on various supply chain flows. The general belief is that inventory levels across the whole supply chain will rise for most of […]

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