First high oil prices, and then the financial black hole meltdown worldwide are forcing companies to rethink long-held strategies they use to make and move goods to market. Supply chain tactics that in recent years were considered essential to success-things like moving factories offshore where labor is cheaper and making quick and frequent deliveries to retailers to keep inventories low- are losing luster in an economy where every $10 counts. Considering this companies have to re-evaluate the design and operation of their supply chain on a continual basis if they are to survive, even if it means ditching recently adopted strategies. Here are some of the changes which are happening.
(Modified extracts from Wall Street Journal, September 2008)
From Overseas manufacturing to Market Localization of factories
In the past when the oil was cheaper, transportation costs was cheaper, overseas labor was cheaper, the strategy was to move factories overseas. Costs associated with manufacturing and low inventory storage outweighed the cheaper transportation costs. Large warehouses were built to achieve economies of distribution costs in the market places, which implied more stocks and hence higher inventory levels and costs. Some companies have cut shipping time and other costs by moving factories closer to the markets they served. Sharp Corp, for example had moved a larger portion of its flat-screen TV factories to Mexico from Asia to be closer to customers in North and South America. This applies primarily to companies where the products are larger to transport and where components support are cheaper to ferry in from overseas.
Flexible Manufacturing
As companies seek to reduce costs and serve markets from the closest factory, there may be a switch from dedicated to flexible manufacturing strategies. In flexible manufacturing, each factory is capable of making multiple products. In dedicated manufacturing each factory specializes in making just a few products. Dedicated manufacturing reduces costs through economies of scale in volume and fewer assemblies’ setups. However, given the flexible changing patterns of consumer demands created by the financial meltdown, volume and costs no longer match in the old way.
