How Hybrid Sourcing Can Lower Costs

March 1, 2011
This new approach to sourcing emphasizes visibility and control while reducing total landed costs.

Over the years, manufacturers have learned to live with the complex challenges of managing global supply chains. The labor savings of offshore production outweighed long transit times, quality problems, customs bottlenecks and other headaches.

Inventory buffers near consumption points helped protect supply chains from unplanned demand surges, last-minute product modifications, delivery problems and other disruptions.

The most recent recession forced some changes. North American manufacturers shed assets and reduced excess inventory to cut overhead costs and improve margins. However, the rush to cut costs has had unintended consequences: Fewer inventory reserves at consumption points means less room for error. The slightest disruption or process change can damage service levels, increase costs and even bring down a globally extended enterprise.

Offshoring’s Hidden Costs

Worldwide supply chains are not only more vulnerable today than they were 10 years ago, they are also more costly. A recent AMR Research report reveals that more than half (56 percent) of companies that had moved production offshore saw significant increases in total landed cost (TLC), even though they expected to see cost reductions. In some cases, transportation costs cancel out labor savings. According to IHS Global Insight, fuel has officially surpassed labor as the largest cost component for the trucking industry.

Moreover, Archstone Consulting reveals that the cost of producing products in Southeast Asia has risen dramatically in recent years due to:

Ocean freight costs, which have increased 135 percent within a three-year time span;

The global commodity price index, which has risen by 27 percent;

The Chinese yuan, which has gained 18 percent in value compared to the U.S. dollar;

Chinese wages, which have risen by 44 percent.

Archstone’s in-depth survey of manufacturing firms based in the United States and Europe shows that 40 percent of senior executives saw the direct costs of offshore production increase 25 percent or more within a three-year time span. Executives also expressed major concern over the “soft” costs of offshoring, including:

Slower cycle/delivery time (59 percent);

Poor supply chain flexibility and responsiveness (56 percent);

Loss of visibility, coordination and control over the supply chain (50 percent);

Bottlenecks in logistics networks (50 percent).

According to an Aberdeen Group survey, companies are suffering from a lack of supply chain process visibility due to the longer distances created by offshore manufacturing operations. At the same time, they must respond more quickly to changes in customer demand while struggling to keep costs down.

Add highly publicized quality problems and brand-damaging recalls, sustainability programs designed to reduce carbon footprint and the ever-present risk of intellectual capital theft, and the benefits of offshoring may have to be re-examined.

It’s no surprise, then, that the trend to move production closer to consumption is on the rise. In recent months, manufacturing giants such as General Electric have been moving production out of China, Japan, India and Mexico and bringing it back to North America. GE cited rising foreign costs as the reason it moved assembly operations for its energy-efficient water heaters out of China and into the United States.

Government incentives are also helping to make offshoring less attractive. Local and federal incentives totaling $25 million over 10 years helped make the case for GE to relocate manufacturing to Louisville, Ky.

Of course, a shorter supply chain by itself won’t create competitive advantage. Companies must build flexibility, real-time visibility and responsiveness into their supply chains so they can efficiently react to changing market needs and unplanned logistics events.

Hybrids: A New Approach

Hybrid sourcing may lower TLC and improve supply chain control. It leverages the specialized capabilities of a third-party logistics (3PL) provider to improve a company’s access to regional markets while providing real-time visibility into intricate logistics processes and reducing costs at the same time.

The 3PL centralizes a manufacturer’s inbound shipments using multi-client flow-through centers that can also function as foreign trade zones. The facilities receive full container loads from Mexico or overseas suppliers via low-cost rail and over-the-road trucking. This intermodal approach ensures complete utilization of trailers and takes the freight burden off of the manufacturer, reducing its transportation costs.

Outsourced, multi-client facilities can offer more agility at a lower cost than a manufacturer could achieve running its own dedicated facility. Since the manufacturer no longer needs to manage and maintain a warehouse to receive product, all the costs associated with the facility can be dropped from the balance sheet, resulting in improvements in cost-per-unit margins. And, because inventory ownership is postponed until the point of receipt, cash flow can improve dramatically. The multi-client approach also reduces the manufacturer’s dependence on safety stock and improves speed to market.

To streamline the receiving process and ensure inventory accuracy, the 3PL receives electronic advance shipment notices (ASNs) via EDI transmissions from offshore or near-shore production-parts suppliers and then converts the ASNs into advance shipment consolidation (ASC) signals that are sent to the manufacturer based on its pull signals.

When shipments reach a flow-through center, a set of receiving processes are automatically set in motion by an advanced information system that interacts with barcode scanners at receiving docks. Each load is visually inspected to protect the manufacturer from quality problems. The material is verified against the ASN, and part numbers are scanned and uploaded into a supply chain intelligence system.

The intelligence system automatically generates a unique lot number to ensure full traceability. The lot number functions as a dynamic genetic code that is accessible by the manufacturer 24 hours a day, seven days a week, over the Internet. Each material movement is logged as an event transaction available for on-demand viewing on a computer or smartphone.

Within the facility, the system creates a plan for every part based on first-in, first-out (FIFO) routing rules. Built-in logic directs workers to unload the material, repack if necessary and prepare the shipment for outbound delivery. Product is metered into smaller quantities and cross docked for efficient line-side delivery. Material is scanned once again as it leaves the facility to record another transaction in the system and tie the material to a specific dock door to further enhance accuracy, visibility and lot-level traceability.

The manufacturer receives product when and how it’s needed. Materials can be sequenced for just-in-time, line-side delivery to maximize the company’s productive space. Parts can be reoriented as part of line-side presentation to enhance ergonomics and reduce operator effort. And, complete subassembly modules can be delivered directly to production lines to speed product build rates and streamline production flows.

Process Control & Visibility

A hybrid sourcing strategy requires partnering with a 3PL capable of providing end-to-end, lot-level traceability and web-based supply chain visibility.

Sophisticated supply chain intelligence tools that offer real-time event notifications help a manufacturer identify opportunities for savings, prevent production downtime and make more informed supply chain decisions that reduce TLC.

With full visibility into material flows, a company can better control its outsourced logistics processes without investing in capital-intensive facility and labor resources. End-to-end transparency also allows a business to monitor production levels and make adjustments on the fly.

Refined processes, sophisticated controls and a commitment to continuous improvement allow the outsourced operation to turn on a dime when any change occurs. If a manufacturer issues a product design change, for example, the 3PL can easily incorporate the change into established processes without causing any downtime or shipment delays. This increases cycle time and reduces inventory requirements while simultaneously decreasing TLC. Multiple redundant error-proofing systems can reduce the probability of non-conformances to near zero. Plus, the ability to ensure the right parts arrive at the precise moment and in the exact sequence they’re needed on the production floor dramatically reduces the need for expedited shipments.

That’s the kind of flexibility, reliability and responsiveness modern enterprises need to free up production capacity, reduce inventory and operating costs and ensure a competitive edge for years to come.

This article is based on a white paper developed by Comprehensive Logistics Inc. (CLI). To request a copy of the full report, call 800-734-0372, ext. 288, e-mail [email protected], or visit