How to stay on target when offshoring

A shifting manufacturing base has kept logistics professionals hopping in an attempt to build networks to support supply chains that look distinctly Asian.

As companies chase lower production costs, logistics must take responsibility for keeping total costs in line to avoid losing the advantage created by cheap labor. Wrapped up in this effort are issues as diverse as origin, content rules and security. In this context, supply chain mobility is both a blessing and a curse.

Though much of the attention is currently on China as a high-quality, low cost offshore sourcing alternative, shifting sourcing from one country to another is not as logistically complex as it once was, says Rick Moradian, president of international logistics for APL Logistics. Logistics providers have more capability throughout the region, and there is more standardization of logistics service products, he notes.

Very few logistics providers are China-only, so when sourcing or manufacturing arrangements change, the logistics choice comes down to a question of capacity and resources. The complexity comes when a manufacturing decision subjects the company to a different set of content and country-of-origin rules on imports to the U.S.

The logistics picture may actually be less rosy, according to a study by Mercer Management Consulting. Leading companies on the carrier and third-party (3PL) side of logistics face a challenge integrating physical networks that have expanded geographically and operationally after a wave of acquisitions.

These newly diversified providers have followed customers into new regions and have added to their range of services. Now they must integrate their physical networks, coordinate sales and customer service activity, streamline processes and harmonize information technology infrastructures, according to the study.

Business designs that have served cargo carriers well over the last several decades are running out of steam, says Mark Kadar, a Mercer director. For instance, even as air cargo became more indispensable to global manufacturing and distribution, the supply of reliable air cargo capacity is increasingly at risk. Available cargo capacity plunged almost overnight in the face of the SARS epidemic in 2003 as airlines cancelled passenger flights and belly space disappeared.

Though mergers and acquisitions have been represented as providing benefits such as global services, integrated services, supply chain visibility, one-stop shopping and Internet-enabled commerce, the Mercer study shows shippers are not changing their established buying patterns to turn over more control of their supply chains to third parties.

Logistics professionals are still buying separate services from separate suppliers, according to Kadar. Pointing to the confusion the financial community has in distinguishing between the different approaches of the logistics providers, Kadar may also have hit on the answer as to why shippers continue to avoid turning critical supply chains over to a single logistics provider.

Survey after survey confirms over 80% of 3PL projects are straightforward warehousing and distribution contracts, Kadar notes. At the same time, outsourcing contracts have been getting shorter.

All of this adds to the concerns logistics professionals have in following manufacturing and sourcing overseas. While there is no shortage of logistics services, finding the right sources can be complex when the preference is to buy
a la carte. The challenges logistics providers face in following customers into new markets contribute to the difficulty of integrating in the areas identified as problematic by the Mercer study.

As Asia attracts more manufacturing and as logistics needs increase, more companies are entering the fray. As a result, the growth rate for logistics outsourcing in Asia is at 15% per year, well ahead of any other region, according to Singapore’s Economic Development Board. Over the next eight years, the 3PL market in Asia is expected to quadruple to $80 billion.

Factors driving this rapid growth include the complexity of far-flung supply chains, as well as a desire to avoid the risks of owning facilities and managing labor in countries where the political or economic climate could change without warning.

Cost is still king, says APL Logistics’ Moradian. It’s one of six factors driving manufacturing shifts, adds John Hafferty, vice president Europe and Asia for UPS Supply Chain Solutions (see sidebar at bottom, “Six forces driving manufacturing shifts”).

Companies outsourcing to Asia are looking for more than low production costs. They need well developed logistics infrastructures, Hafferty continues. Logistics spending in China is higher as a percentage of gross domestic product than in many other countries, according to industry reports. While the situation is improving, there are still challenges ahead for China.

Some of this may be dealt with as China opens the door to more private and foreign business ownership. The Closer Economic Partnership Agreement, which would create a free trade zone among China, Taiwan, Hong Kong and Macau, includes commitments to liberalize regulations governing joint ventures and wholly owned foreign enterprises that should admit more logistics providers and thus improve the logistics and distribution system (see table below, “Hong Kong Trade Flows”).

In addition, news reports in mid-March indicated China was nearing action on private ownership of businesses. This could fuel an internal entrepreneurial expansion of transportation and logistics services.

“A nearly endless labor pool” is how Moradian describes China, pointing out that highly educated talent is available. John McKenzie, partner in the international law firm Baker & McKenzie, agrees but notes labor availability is also a plus for India, a growing alternative for U.S. companies outsourcing functions such as research and development, software programming and service activities like call centers. Language improves India’s prospects since in many developed areas, people are fluent in English.

This does not fully outweigh some of the issues Moradian sees ahead for India (see cover story, “Offshore leave”). China has the lead and is moving faster, he concludes.

More liberal trade conditions may make sourcing and manufacturing easier in the region, but it will not sidestep