The Regionalization of the High Tech Supply Chain

The speed of technology innovation is growing constantly, as technological products become more powerful and affordable.  Saying that, it has also been difficult, if not impossible, to find these products made close to home…unless your home is Asia.   This is not a recent phenomena but one that has been happening over the last few decades. 

Are we at the beginnings of a change?  Will Apple be alone in its decision to start producing some of its Mac computers in the United States? We all realize that these days the Macs are only a part of Apple’s business empire but the imagery is powerful.

The fact that Motorola followed suit with their announcement of producing the Moto X Smartphone in Texas could be an indicator of things to come.  

So the question to ask is; does that mean technology companies will be shuttering their overseas facilities and bringing manufacturing back to the US?  The answer is no!  

What is happening the regionalization of this industry?  It is not re-shoring but near-shoring, or in other words having production near the consumers.  

Some of the production in China and other parts of Asia will continue to serve that region while the production in South America and Mexico will serve the United States.  This is not even near-shoring but realignment.  

The primary reason for this is the cost differential has been shrinking.  In 2000 labor cost in the U.S. were 23 times higher than in China or other parts of Asia. At present the cost is only 8 times higher.  In addition, transportation costs are soaring in 2000 and before China produced items arrived in the United States costing 22% less than same items made in America.  At the close of 2011 that cost gap was only about 6%.  

Another reason was the complexity of the technology which may have dictated the need for production to be closer to Research & Development.  The complexity of the production process and continuous innovation required in the high tech industry commands close approximation between production and Research & Development. This development has caused some ‘opposite’ things to occur – a resurgence of technology manufacturing in Silicon Valley. 

Deciding where to place an R&D facility has become more complicated for two reasons – costs and training.  To offset those costs many companies are developing R&D facilities at the local market level to meet local demand and then expand globally.   

Yet another factor is the large supply of college trained workers.  The American intellectual wealth makes it easier to develop first of its kind products.    The United States has only 5% of the entire world’s population but has one third of the high tech researchers.  

There are three factors which need to be watched to see if they help or hinder this future.  They are the following:

1.      Intellectual property – Will the United States intellectual property continue to outweigh the labor cost savings?  How will technology development costs increase or decrease as a share of the total product cost? 

2.      Labor quality – Will labor quality become more important than labor cost?  The quality of the available work force will be determined by the quality of our K-12 education and the institutes of higher learning.   I am specifically referring to the STEM – science, technology, engineering and mathematics.  

3.      The states to be truly business friendly – Unreasonable government regulations are toxic to establishing new manufacturing operations.  Successful states are building cooperatives between university and industry to build the type of work force that will be required.

All locations should offer incentives to build and support new manufacturing facilities.  Areas in the United States which are newer to the high tech industry – those areas other than Silicon Valley, Boston and Austin – should offer the best packages which include tax concessions, economic grants, reimbursements and training partnerships with local universities.   

Navigate Clear of Supply Chain Disruptions

Port Labor Negotiations

When dealing with maritime supply chains it is anyone’s guess how port labor negotiations will pan out or affect inbound and outbound traffic. A prime example of this was the U.S. West Coast port negotiations amongst the Pacific Maritime Association and the International Longshoremen and Warehouse Union.  Imperative to evaluate your supply chain on a constant basis and introduce contingency plans to avoid potential trouble that negotiations such as these might cause. 

As the dock employees and employers prepared for an intricate contract negotiation we need to be aware of the disruption to their supply chain and to the effect on the U.S. economy.  The concern is well-founded.  In prior negotiations the Pacific Maritime Association brought in new technology such as scanners, sensors and bar-coding system to make cargo flow more efficient. But at the same time these improvements eliminated 10 percent of longshoremen positions.  Passionate talks resulted in a 10 ten lockout and only intervention by President Bush settled the lockout. 

While all this occurred in 2002,  a few years later, 2008 to be exact, saw another dispute cause major  interruption.  The Pacific Maritime Association (PMA) charged the International Longshoremen & Warehouse Union with deliberately creating work stoppages at all West Coast ports. The International Longshoremen & Warehouse Union (ILWU) counter charged that individual members were merely exercising their rights to protest the war in Iraq.  Ultimately, the sides compromised agreeing to wage rates and to have automated cargo handling systems.  

Once again in 2014 uncertainty reared its ugly head.  The primary issues for both the ILWU and PMA were healthcare c costs, pensions, etc. Compared to past port disruptions based upon automation and wages these discussions were very time consuming.   

These negotiations resulted in unpredictable work stoppages, increased costs, capacity challenges, transit time delays and lack of supply chain stability.

Not only did each of these three incidents cost the U.S. economy about $1 billion dollars per day but the resulting six months to recover deeply affected retailers, importers, manufacturers and  agricultural exporters.  While companies can track negotiations over time they cannot gain any certainty about the process until contracts have been signed. 

The best way of protecting your business is to assess the impact of potential disruptions on the current state of the supply chain.  Afterwards, create response plans to minimize the landed costs and delivery times.  Be proactive and appraise potential disruptions before they occur is critical and will make a response plan.

There are three phases to this appraisal that need to be followed:

1-      Assess the impact of disruption.  Port disruptions will cause companies to deviate from their existing supply chain strategies.  For example, cost-driven companies may be forced to reroute through different ocean routes which have longer transit times.  This will lead to lack of product availability and lost sales. 

2-      Explore options.  Form contingency plans for the affected product flows. 

a-      Develop alternative sources of supply.  Suppliers closer to distribution centers will avoid material movement via transportation.

b-      Build onshore inventory. Increase safety stock of materials normally routed through ports.

c-       Plan for alternate routes. Map out and assess the viability of these routes.

d-      Evaluate airfreight strategy.   Examine the impact of changing modals from ocean to air by comparing costs, transit time and service.

3-      Prioritize the response options.  The building of onshore inventory and finding alternate routes require long term planning and execution perspectives.  These options should be considered along with three factors: severity, occurrence and detection (SOD).

a-      Severity of impact. A contract negotiation could differ from no impact, a slowdown or a complete work stoppage.  The severity depends on the duration of each scenario.

b-      Occurrence. Use a rating system of 1 to 10. More frequent occurrences will pull the scale toward a ten (most severe and occurrences).

c-       Detection. This is most difficult factor. How can one pre-judge the severity and occurrences of a work disruption? The option here is to build relationships with neutral logistical service providers. 

To minimize the impact of port disruptions firms should monitor developments of the negotiations from both parties, use response planning options throughout the disruptions and find impartial logistic providers for transportation capacity, alternate routes and space for additional inventory. 

The sooner planning is initiated for any and all impending disruptions; your supply chain will be able to withstand the disorder.