Right-Shoring is the New Black (as in Profitability)

WHITE PAPER Right-Shoring is the New Black (as in Profitability) Leveraging Supply Chain Segmentation to Balance Global Demand and Production Strategies Two decades after many manufacturing companies started moving their production operations to lower-cost countries — especially China, and more recently India, Vietnam and other Southeast Asian countries — the industry is again experiencing a major global shift. Many of the offshore cost advantages that once existed have now eroded. Wage inflation, high transportation costs — even natural disasters — are among the factors affecting offshore supply chain profitability, agility and risk. Many manufacturers underestimated the impact of long lead times and high inventory carrying costs from offshore operations. They are discovering that maintaining service levels, in addition to the inventory and logistics buffering costs necessary to support the long-distance supply chain, far outweigh any labor cost advantages. In addition to higher than anticipated overall delivered costs, offshore production also introduces latency in bringing new products to market and responding to market trends. Balancing production, transportation and inventory costs is no longer the only factor, however. Today’s consumer-driven marketplace is much more demanding and volatile than when offshoring became the rage. Time-to- market and the agility in responding to changing demand now outweigh a few pennies saved on production costs. Market focus is also changing. While offshoring was predicated on the flow of goods from low-cost countries to western markets, today western markets are saturated, with slow growth at best. Growth is coming from emerging markets in Asia, South America, Africa and Eastern Europe. Serving these far-flung markets is both more rewarding and more difficult. Consequently, companies have begun to reevaluate production networks and consider production shifts to locations that more profitably match market strategies. While it’s clearly time for companies to reassess their global manufacturing strategies, they must do so with a deliberate, balanced approach that considers the total cost of manufacturing for a specific market before making any long-term capacity decisions. Manufacturers must move beyond thoughts of off-shoring, near-shoring or re-shoring to instead focus on right-shoring— matching production to market growth and service strategies in the most profitable way possible. A Gartner study said that enterprises must analyze their supply chain networks through segmentation and cost-to-serve analysis that accounts for agility and risks, like quality problems and intellectual property theft, in addition to per-unit costs.1 Dell Inc., which revolutionized both the computer industry and supply chain management with its direct-to-consumer business model in the 1990s, is one of a number of companies that have transformed their supply chains by leveraging segmentation. Instead of using a one-size-fits-all approach to supply chain processes and policies, segmentation is helping these companies determine specific channels and markets that should be sourced from specific locations within their supply chain networks— and how these supply chain segments should be managed to profitably service customers. By understanding the profit profiles of their markets, customers and products, companies can tailor more profitable supply chain strategies to meet growth objectives. This is driving a more innovative approach to building tailored strategies within supply chain networks for production planning, lead time and inventory policies, network flows and transportation modes. All of these considerations play into the decision of where best to source production for each market segment. Finding a Balance with Supply Chain Segmentation Thoughtfully approaching this paradigm shift to right-shoring can help manufacturers avoid repeating the same mistakes made in the offshoring surge. Blindly sourcing the manufacturing footprint based solely on production costs is not the right answer. Striking the right sourcing balance requires continuous holistic analysis, dynamic processes and the flexibility to rebalance as quickly as conditions and strategies warrant. In order to address fluctuating global cost structures and pinpoint the best production strategy for reliable, profitable customer service, manufacturers should leverage supply chain segmentation and create strategies based on those results. Supply chain segmentation is a process by which companies can create profitable relationships between customers, channels, products and supply chains. This approach should start with understanding the markets that the company serves — the customers, regions and products that are grouped together to define a market. Under this model, customers associated with different channels and products are served through different supply chain processes, policies and operational modes. The overarching objective is to optimally balance supply chain processes and policies with growth strategies for each market to maximize profitability and customer service. 1 N. Tohamy, M. North Rizza and M. Dominy, “Predicts 2012: Supply Chain Predictions: Talent, Risk and Analytics Dominate,” Gartner, Inc., November 18, 2011. Copyright © 2015, JDA Software Group, Inc. All rights reserved. JDA is a Registered Trademark of JDA Software Group, Inc. All other company and product names may be Trademarks, Registered Trademarks or Service Marks of the companies with which they are associated. JDA reserves the right at any time and without notice to change these materials or any of the functions, features or specifications of any of the software described herein. JDA shall have no warranty obligation with respect to these materials or the software described herein, except as approved in JDA’s Software License Agreement with an authorized licensee. 1.20.15 Americas US +1.800.479.7382 Canada & Latin America +1.480.308.3555 Europe UK & Northern Europe +44 (0) 1344.354500 France & Southern Europe +33 (0) 1.56.79.27.00 Asia Pacific Singapore +65.6305.4350 Australia +61.3.9860.1000 Japan +81.3.4461.1000 China +86.21.2327.9400 South Korea +82.2.3016.0700 India +91.22.6700.0794 jda.com [email protected] Key Considerations Manufacturers should consider the following when leveraging segmentation to assess, define and create the best market sourcing strategies: • Regionally match supply to demand—It might make sense to continue producing products that are sold to Asian channels in China, for example, but for products being sold in other markets, a manufacturing right-shoring strategy may help companies more economically serve each market by being closer to the source of demand. • Recognize the trade-offs—Before finalizing any decisions, evaluate the balance between costs for labor, logistics, inventory, and quality assurance with the importance of speed to market. • Execute with flexibility and efficiency—Optimally execute against differentiated production and service strategies, including make-to-stock, make-to-order, configure-to-order and engineer- to-order, with flexible capabilities that match specific segments with the most efficient supply chain strategy. • Factor in the value of speed-to-market—When it represents a speed-to-market advantage, right-shoring production should be strongly considered. Moving manufacturing close to demand can substantially decrease go-to-market timeframes, which is especially valuable for companies with frequent new product introductions and short product lifecycles. • Drill into the cross-sections of different market attributes and dimensions—Companies need to move beyond simply looking at market demand and better evaluate the attributes of the customers, channels and markets they service. For instance, a high-volume, low-configuration product with few options that moves through a particular channel to a specific market might warrant a different overall supply chain strategy than other products that have volatile demand and high production costs. • Strive for better service at lower cost—Managing the global supply chain with a holistic approach helps companies gain visibility and determine where they can realize the quickest speed-to- market with the lowest cost-to-serve. This means that as consumers change their preferences, companies are able to swiftly devise an appropriate strategy and guide product inventories through channels and into the end customers’ hands. Time will tell how profoundly right-shoring will affect global and national economies, as well as what role governments will play in making global manufacturing capacity decisions. What is clear is that today’s manufacturers can and should leverage innovative technology, such as network optimization, inventory optimization, segmentation management, transportation management and supply chain optimization solutions, now available to revisit their global production strategies and modify production footprints, where needed, based on thorough, intelligent analysis and planning. Supply chain segmentation capabilities enable companies to profitably align supply chain manufacturing and distribution assets with local market demand. This enhances sales and customer service by enabling companies to more reliably deliver on their promises. With successfully deployed segmentation and right-shoring strategies, manufacturers are well-positioned with the visibility and information necessary to intelligently balance supply and demand for each market.