Supply Chains of the Future – Local vs. Global
Today’s Pain Point(s)
Two Southern California ports account for nearly 40% of all goods entering the United States and as of the writing of this article, there are serious delays in and out of both (Los Angeles and Long Beach). NY/Newark, Savanna, Seattle, Houston, and Alameda make up a bulk of the remainder, with smaller ports dotted all along the U.S. coastlines. Most of them have been impacted as well. We hear about the backups, both on the West Coast and East Coast and some reports show over 100 vessels waiting at sea outside these entry points. We see images of shelves empty or nearly empty in our favorite stores. However, the problem went much deeper than finding that perfect toy in stock this year; these delays are causing U.S. manufacturers huge headaches as well.
In the world of manufacturing today, timing is everything. Most manufacturers run on a “Just in Time” scheduling platform, meaning as they need materials for production, they show up on their docks. In the past this has allowed companies to reduce the amount of raw inventory on the shelves, lowering overhead costs and streamlining the production floor. However, when the materials don’t show up on time, it’s a disaster! If the ships containing those materials are stuck out at sea, then the goods they carry certainly are not going to show up on time! This is where the “chain” in supply chain becomes important. Break one link and the chain fails.
Think about it as it pertains to building a house. The foundation must be in place before the framing. The framing takes place before plumbing and electrical, those must be complete before shoring up the walls, windows, doors and so on. There’s a predictable pattern of materials showing up just in time for use. If for some reason any one of those items are late, then the entire project gets delayed, and unused materials stack up. Worst case scenario could be workers laid off or moved around inefficiently from job to job. It’s the same for a manufacturer, when the materials are late, everyone suffers.
With the rise of globalization, it seems that everyday Americans are becoming more reliant on goods imported from outside the U.S. From clothing to electronics, to cars, we consumers rely heavily on overseas products and many manufacturers have become dependent on foreign materials. However, this trend could have significant implications for the U.S. supply chains that count on these overseas materials showing up on time.
Overseas Shipping Woes and Supply Chains
Supply chain efficiency has a big impact on the consumer. For example, a few weeks ago, a container ship carrying automobiles from Japan to the U.S., was diverted to Canada when the ship’s captain went on strike. This is just one example of how disruptions in shipping can create major headaches for all parties involved in international trade, and this was just one boat! What happens when a large number of container ships get delayed?
It doesn’t take much to disrupt the effort as it is akin to a choreographed ballet; each cargo ship moving in and out of port in a timely and efficient manner, allowing the flow to continue – think airplanes landing and departing at O’Hare. One major disruption and we have planes stuck on the tarmac and stacked at the gates!
The United States is currently experiencing a series of these shipping disruptions at the major ports of entry. This shortage has led to a rise in freight and delivery costs. The problem is affecting all of us in some manner, and it’s not clear when (or if) the situation will return to normal.
It’s not just being felt here in the U.S. either, winter is upon us and there are going to be some significant shortages this year. Food will be a major issue as a response to a lot of the world’s food coming from the Southern Hemisphere. This means that with the exception of countries near the farming and/or production, supplies of food products making it to the stores may be significantly lower. The consequences will range from empty shelves to protests from hungry populations.
What is the Big Difference Between Local and International Supply?
A local supply chain is a system of organizations, activities and resources involved in the production and distribution of goods and services within a regional boundary – typically within a day’s drive. The most common way it differs from an international supply chain is in the number of countries involved. Local chains contain operations within one country or region, and rely on mostly rail and trucking to move goods from one point to another. International chains can encompass very large regions and are multinational by nature.
These multinational efforts are mainly handled via overseas shipping, utilizing large cargo vessels. These ships can take weeks, or months to get the materials to their desired location. Of course, once the goods hit an entry port, they essentially become regional and move the goods to the final destination via rail or truck; this simply adds to the transportation time after the long ocean voyage.
The Future of Local Supplies and Why It Matters
In order to have a sustainable business, we need to consider our supply chains. In the modern world, the supply chain is no longer linear as it was in the past. Instead, it is now a complex network that has many interactions and different types of suppliers. This makes it harder for businesses to have an accurate picture of their total costs and environmental impact because they are not able to monitor every step in the chain.
What’s more, most companies that grow into multinational corporations begin to rely on a global supply chain since they find it more cost-effective (on the surface) than relying on suppliers from one country or region only. However those overseas routes are increasingly teaming with delays, and they are only getting worse.
According to a Reuters report, a record number of containers are waiting at U.S. ports for inspection by customs officials. This has led to delays in shipping and cargo backups at U.S. ports which in turn has caused a ripple effect across the United States by upsetting the “ballet” of ship-rail-truck interaction. Thus causing manufacturers to lose business and retailers to lose revenue due to an undersupply and/or delay of goods.
While there are some benefits for global supply chains such as having access to a wide materials base, and some better “first-cost” points, those advantages can be quickly wiped out with a single disruption of the process. Local supply chains may offer a better solution, even if at first glance the costs may be higher.
One company in NY (Nanotronics) has redirected all supply chains inward, and has been able to beat the competition to the punch. From an article in the New York Times – “There is nothing we have right now that is behind schedule,” said Matthew Putman, the chief executive of the company, which makes items like robotic microscopes. “We don’t rely on ships right now that are stuck at ports in Los Angeles.” Nanotronics makes many of its components at its 45,000-square-foot office and factory space in Brooklyn. What it doesn’t make, it acquires locally.
More Benefits of a Local Supply Chain
Local supply chains are more responsive
One of the beneficial aspects of choosing a local supplier is that they can be more responsive to customer needs. Also, when sourcing locally, you will often find that your suppliers are neighbors in your community and in many cases understand your business and its associated challenges better than someone on the other side of the globe.
Local suppliers may source more sustainable materials
This reduces the carbon footprint and environmental impact of your product(s). Even if they are not using bio-based or more natural materials, it is much easier to start that conversation with a local supplier. Plus, with today’s higher focus on sustainability, they have the added incentive to search for more eco-friendly solutions from other local sources.
Local economies are more resilient in the face of disasters
It is no secret that the effects of natural disasters are devastating. Hurricane Katrina, for example, caused widespread damage to homes and infrastructure including the port at New Orleans. That impact was felt for many years afterward. Local chains are more resilient in the face of these disasters.
Local transportation costs are lower
The rising costs of transportation have been a concern for businesses. We are seeing the rapid increase in transportation cost due to our port delays simply because of the law of supply and demand. Less availability to ship products always means higher transport costs. However, with a more local supply chain, that impact is much lower. Also, with the development of innovative transportation/delivery technologies, such as self-driving trucks and drones, the shortage of drivers (which also adds costs), may be a thing of the past.
Local suppliers aren’t subject to import duties and taxes
Local manufacturing has a number of advantages over overseas production, the most notable being the lack of import taxes as well as the costs of overseas middlemen. When you source within your own country, it is possible to save on those taxes. Some tariffs exceed 25% for imported products, and that’s a huge burden when you consider most manufacturers run between a 20-35 point profit margin. We know of businesses that have been completely shuttered because of excessive tariffs.
Costly shipping also becomes irrelevant when goods are made close to where they will be sold. Sourcing locally also allows you to maintain better control over quality standards and safety regulations.
Local Supply Chains are Better for the Environment
The need for a global economy has increased the demand for products made in other countries and many of those are considered “low Cost Regions”, or LCRs. These products are often made in factories with poor environmental protections, making the global environment suffer even more. But what if we rethink the problem and create a local supply chain?
We can produce goods locally, which will cut down on transportation costs, and does not require excess packaging to be shipped across oceans. Export packaging can add hundreds if not thousands of dollars to the transport costs, and adds voluminous amounts of packaging and crating material.
Local production also helps reduce power usage. When sourcing from other parts of the world, the goods are typically warehoused while waiting for customs inspections. These warehouses consume power, and combined with the current delays, goods can sit for weeks or even months in these warehouses, wasting power with every day in storage.
We call this shift towards local supply a “Circular Economy” and it has many benefits. A circular economy is designed to maximize resource efficiency by reducing waste and unnecessary depletion of our natural resources. It moves away from the traditional linear economic model of extract, produce, dispose and moves toward local supply supporting regional sales, consumption and recycling.
How to Increase the Local Supply of Goods
In the age of globalization, companies have been moving their production overseas to take advantage of cheaper labor costs. This trend isn’t going anywhere, but there are some resources available that can help you reverse this trend for your business and save money.
In large corporations, reverse logistics has become a key strategy to reduce overhead costs. Companies need to make sure they coordinate their product returns with their suppliers so they don’t end up stuck with the excess inventory and the associated depreciation expense. Imagine how hard it is to cancel, or return goods to China vs. a supplier who is just across town.
In addition to the lack of local goods, the costliness of importing goods from abroad is a major issue in developing countries. The trade imbalance between these countries and more developed ones has been a problem for decades.
One of the most promising solutions would be a system that increases the availability of credit to domestic entrepreneurs so they can start their own businesses and become involved in local production.
Your choice of materials can also add benefits. Choosing local, natural sources for materials will become increasingly important for manufacturers. By design, natural materials are a good choice for local sourcing, since many bio-products are inefficient to ship internationally anyway.
There’s a new focus on sustainability, lowering carbon footprints and generally being more aware of environmental impact that our companies are responsible for. Sourcing natural materials is a great first step to meeting ESG mandates, and natural products are more inherently local.
At Heartland, we believe that many products made today can benefit from adding natural materials like hemp to the mix. Hemp can be grown virtually anywhere, and is a perfect substitute for so many materials from plastics additives to building materials to nanotech materials such as graphene! We have witnessed supply fulfillment in just hours utilizing our local farms and processing facilities!
As more companies are focusing on predictability and sustainability, many are looking into sourcing their materials locally. Not only will these companies be able to better monitor the environmental impact of their supply chains, but they will also be able to provide better customer service by being able to quickly fulfill orders. By simplifying the supply chain we can reduce sourcing costs and that will ultimately lead us to higher profits and happier customers!