Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I’ll be reviewing a whitepaper entitled “Supply Base Localization:
A Different Look at Low-Cost Country Sourcing” from Ariba.
First, let’s talk about what “localization” is. Localization is a term that has become more and more widely used (and misused) over the last couple of years. Based on conversations that I’ve had with individuals in the field, I’ve noticed that there is not a lot of consistency with regard to how people define localization.
For the purpose of this blog post – and not claiming to be the be-all, end-all definition – I am going to define localization (with respect to supply chain management) as the process of re-directing purchases of materials and/or goods to suppliers that are geographically closer to the points where those materials and/or goods are used, sold, or stored. Maybe not the most eloquent definition but, hey, do a Google search for “define:localization” and you get nothing supply chain-related (as of today).
OK, on to the whitepaper.
In the very beginning, the whitepaper sets the stage for the emerging popularity of localization by saying that “Companies of all sizes in nearly every sector of business in the United States and
Europe are developing and implementing strategies not just to source from low-cost regions but also to actually produce goods in those countries.” However, it points out that the sourcing of goods and materials doesn’t always follow the manufacturing process, noting that “it is very common for companies to maintain their current supply base in high-cost regions and simply have their suppliers ship to the new region.”
So what’s the problem with not localizing the supply base?
The whitepaper points out three:
- A non-localized international inbound supply chain can bloat lead time and inventory requirements
- If the manufacturing process in a country is low cost, the inputs from that country should also be available at a lower cost
- By supplying a local facility, the local suppliers can generate the experience and cash necessary to grow to a global supplier supplier with whom you can have preferred terms and conditions
The whitepaper goes on to cite a few examples of (unnamed) companies that have successfully implemented localization strategies, discuss nearshoring, and review the choice of localization at the time of moving manufacturing vs. localizing later.
One final tidbit that I’ll mention is that the whitepaper references an “analysis [that]shows that with an average supply chain pattern…non-material costs equal 25 percent of total costs
(including all logistics and working capital costs).” That’s a pretty significant data point for companies that are trying to identify their costs and price their products.
I would love to see that analysis as I’m sure many CSCO’s and CEO’s would. Unfortunately, the whitepaper does not name the analysis or indicate if and where anyone else could get it.
If your company is moving its production operations and you’re responsible for managing the supply base, this whitepaper is a must read. Not so much for the direct tips that you would get from it, but moreso to ensure that you are thinking about all of your options for optimizing the supply base.