Low Cost Sourcing Grows Complex - Part II

Will Rising Logistics Costs nullify Global Sourcing?

o Rising logistics costs are beginning to nullify the cost advantages of sourcing from low cost economies across the globe. Simultaneous with the logistics costs approaching the 10%-of-US-GDP mark for the first time since the nineties, these costs are already over a tenth of the sales revenue of most global corporations. This is putting a major squeeze on the already thin margins of manufacturers and traders.

o While the initial knee-jerk reaction to this - over the last two years - was to tighten the thumb-screws on the logistics and supply chain managers, the pressure is now moving up to the C-levels of global corporations, in response to expectations that logistics costs could increase by over 10% in 2007.

o The trade-offs being considered are the advantages of sourcing from low cost economies versus the fast-rising logistics costs plus the longer lead times involved in global sourcing. Software-based simulations of alternate network designs are being explored to maximize supply chain optimization and supply chain strategies are being completely revamped to get a firm handle on the fast-rising logistics costs.

Factors contributing to the Rising Logistics Costs

o Sky-rocketing energy costs have been raising concern levels for the last couple of years; however the rising energy costs are just one component of the rising logistics costs. Fuel costs are today about a quarter of the total transportation costs, which means the overall impact of fuel cost increases on pricing could probably be of a far lesser magnitude than it is being made out to be.

o A severe shortage of labor - from truck drivers to compliance and supply chain professionals - is pushing up logistics-related wage and salary bills across the globe (labor cost has traditionally been the single largest cost factor in logistics). In addition, interest rates are shooting up across the globe: From the Bank of England, to the Central European Bank, to the US Federal Reserve to the Reserve Bank of India to the central bank of Japan - monetary policy makers are raising interest rates in a bid to control inflation.

o Then again, increasing cargo security costs in the post-9/11 world has become an unavoidable factor contributing to the rising logistics costs. Infrastructure costs necessitated by the boom in International Business, rising warehousing costs and higher inventory-carrying costs are another side-effect of the rising finance rates coupled with the rising transportation costs and longer lead times. Lastly, logistics bottlenecks are increasing at International borders due to the inability of most corporations to meet the increasing Regulatory complexities in Global Trade today, which has its inevitable impact on the bottom-line.

Impact of rising Logistics Costs

o Global corporations are being forced to reevaluate their logistics strategies: The first casualty - most unfortunately - could be the Lean movement, which has traditionally depended on low logistics costs. For example, organizations are carrying more inventory to compensate for disruptions during transit. Supply chain differentiation and segmentation for different product segments is becoming a best practice to optimize costs. Global corporations are also moving away from ownership of warehouses and transport fleets towards outsourced logistics operations.

o Technology is playing a major role in combating the price rise; for example, automation of decision making through software is becoming an accepted practice. Supply chain network design is being revamped and optimized using simulation algorithms, while Enterprise-wide logistics planning is being embraced to reduce the fragmentation of internal logistics operations in a bid to optimize resource utilization.

o And finally, global corporations are re-evaluating their strategy of sourcing products and components from low-cost economies, as the cost of logistics is becoming an increasingly larger component in product price. How this is going to change the global equation is not easy to predict at this point - however a great deal of disruption in the current business models looks certain!

The next post will be up on May 25th 2007! Please keep writing in with your feedback at scm.primer@gmail.com