Trends—June 2013

Trends—June 2013

Is American-Made on the Mend?

Rumors abound that U.S. manufacturing is making a comeback. The promise of cheaper domestic energy sources—and rising labor costs elsewhere around the world—are tipping the total landed cost balance off its Far Eastern axis. Does this portend a domestic manufacturing renaissance?

A recent report by AlixPartners suggests companies are open to the idea. The consultant’s annual Manufacturing-Sourcing Outlook, which surveyed 137 C-level manufacturing company executives, reports that the cost of U.S. production will reach the cost to produce and import from China by 2015.

The study also finds that the United States has reached parity with Mexico as the preferred location for nearshoring production of goods intended for U.S. consumers (see chart below).

Most Attractive Nearshoring Locations

The United States continues to close the nearshoring gap with Mexico. Thirty-seven percent of respondents to an AlixPartners survey chose the United States as their preferred nearshoring location—the same percentage that chose Mexico.

Source: AlixPartners Manufacturing-Sourcing Outlook

While perceptions are changing, countless variables predicate whether certain industries jump to bring production home, maintain the status quo, or look elsewhere.

Over the past few years, Inbound Logistics illustrated some notable examples of smaller companies that successfully reversed course in their sourcing strategies. Idaho-based Buck Knives, and Utah-based Mity-Lite, a folding table and chair manufacturer, leveraged Lean manufacturing principles to create more production bandwidth and drive down costs—allowing them to pull back production from Asia to serve U.S. customers. Nearsourcing is also gaining traction among energy-intensive industries, where the promise of natural gas is a major consideration.

But speculation of a seismic manufacturing shift is tempered by equal doses of reality. Structural changes have to happen for Made in the USA to become fact rather than fiction.

“Evidence for a structural renaissance is scant so far,” says Goldman Sachs chief economist Jan Hatzius. “Measured productivity growth has been strong, but U.S. export performance—arguably a more reliable indicator of competitiveness—remains middling at best. And at least so far, there is not much evidence for large positive spillovers from the U.S. energy cost advantage to broader manufacturing output.”

A.T. Kearney researchers Patrick Van den Bossche, Pramod Gupta, and Chui Lee reach a similar conclusion in a recent article, Is the United States Ready to Take Manufacturing Back? In 1970, 25 percent of the U.S. workforce was involved in manufacturing; today, that number is less than nine percent.

As a consequence of this generational shift, the researchers point to two specific challenges: equipment maintenance and upkeep that has been ignored or postponed; and the loss of operational expertise and experience as older laborers, engineers, and technicians retire.

Hatzius and others suggest that recent U.S. manufacturing upticks have been a reaction to Europe and Japan’s struggles, not a sign of long-term change. But one supply chain trend favors more nearshoring developments throughout the Americas, which may bring focus back to the United States.

Global companies are decentralizing their supply chains as a means to reduce transportation costs, increase market responsiveness, and allay risk. In effect, regionalization is trumping globalization.

More companies are looking at postponement strategies that allow them greater flexibility to add value to inventory closer to demand. This way they can achieve greater economies of scale through better mode allocation and optimization as product moves inbound.

Another point: In the next 15 years, one billion new people will enter the middle class, bringing with them $14 trillion in consuming power.

“Ninety-five percent of the world’s consumers and purchasing power is outside the United States,” said Adam Feinberg, vice president of U.S. international sales for UPS, at the Georgia Logistics Summit. “Yet only one percent of the 30 million U.S. businesses participate in exports. And of that one percent, 60 percent ship to only one other destination.”

It’s not only Americans who like Made in the USA. Global demand for U.S. consumables will grow as middle-class demographics change. Feinberg cautioned against protectionist measures that artificially stimulate the buy-American philosophy at the risk of other countries retaliating by not buying U.S. exports—which could indirectly threaten U.S. jobs.

Moreover, companies that have invested significant time, effort, and capital building supplier connections in offshore networks—notably Asia—will likely resist pulling back in the short term, especially if they have future aspirations of growing their sales reach into that region. Total landed cost analysis works both ways.

U.S. manufacturing may be better positioned to serve certain markets (U.S. included) and industries moving forward. But manufacturing and export competitiveness are intrinsically linked—and dually depend on energy, environmental, and transport policies that defray higher production costs. U.S. agriculture exports have always been a strength largely because of the transport system’s efficiency, not labor cost. One balances out the other.

But what if antiquated transportation networks continue to fail? And how will U.S. manufacturing fare if a carbon taxing scheme ever takes hold?

U.S. manufacturing hype is real. But it’s tempered by the fact that companies are taking a measured approach to re-shoring. It’s part of a risk-averse regional supply chain strategy rather than a full renaissance.

Growth will be incremental, not monumental. And a number of policy pieces and structural changes must fall into place before any larger change is realized.

Ethnic Foods Beef Up Supply Chain Challenges

Ethnic diversity is increasingly apparent in the food supply chain, presenting challenges for food suppliers, distributors, and retailers that have to ship and stock to changing demand.

“We offer a variety of ethnic foods; that’s part of the excitement,” explained Mike Hardy, distribution manager for Austin, Texas-based Whole Foods, during a presentation at the Georgia Logistics Summit in spring 2013.

Like Whole Foods, many food retailers are tailoring SKU selectivity to different markets and ethnic communities—which means their inventory profiles are changing and expanding. And it’s not just imports.

FPL Food, an Augusta, Ga., beef company, operates three plants in the Southeast that are certified to produce Halal beef in accordance with Islamic law. Much of the product is bound for locations such as Qatar, Kuwait, and Dubai. While American diversity is driving “food excitement” at the store shelf, global homogeneity—namely an expanding middle class—is radically changing U.S. agriculture prospects.

That shift is crystal clear to Lee Bonecutter, vice president of FPL Food. “Over the next 20 to 30 years, the world population will grow; that includes an additional three billion middle-class people around the world who like beef,” he explained at the Georgia Logistics Summit.

In the United States, however, the love affair with beef is waning—partly due to economy, changing demographic shifts, cultural mores, and consumer tastes. Between 2011 and 2012, U.S. beef consumption dropped six percent.

Meanwhile, U.S. beef exports continue to rise. Producers averaged $277 per head in 2012, a six-percent increase year over year. More telling, in 2008, the global population consumed 58 pounds of beef, pork, and poultry on average per year; in 2012, that number jumped to 75 pounds.

The change is overt within the ranching industry. The U.S. cattle herd is the lowest it has been since 1952, added Bonecutter. Ranchers are losing nearly $100 per head because of rising feed costs—partly attributed to corn ethanol subsidies that are increasing demand and raising prices, as well as recent droughts.

To meet demand—particularly offshore—FPL is bringing beef in from farther away. In just three years, the company has expanded its sourcing activity from 12 states to 26 states and Canada. This increases transportation costs, which is reflected in the marketplace.

But retailers and distributors such as Kroger, Walmart, Tyson, and U.S. Food Service are getting smarter at how they manage these downward pressures—and it may be a sign of things to come as the food supply chain tackles food quality and safety regulations.

When Bonecutter joined FPL in 2007, less than five percent of the company’s outbound product was backhaul or customer-coordinated truck moves. Today, 85 percent is controlled by the customer. Food shippers are making a commitment to inbound logistics to manage variability, quality, safety, complexity, and cost.

3PL Relationship Key to Competitive Advantage

The third-party logistics (3PL) industry is one of the supply chain’s fastest-growing segments. In 2011, the U.S. value of the 3PL market was close to $134 billion, with estimates suggesting 2013 growth will hit 12 percent—compared to overall U.S. GDP expansion of just three percent. The importance of relationships between shippers and their 3PL partners was the topic of a panel discussion among leading 3PL representatives at KC SmartPort‘s second-annual Momentum industry forum in April 2013. Here are some highlights of that discussion, which was hosted by Chris Gutierrez, president of KC SmartPort.

CG: What strategies do companies need to leverage over the next few years to increase efficiencies and/or improve competitiveness as it relates to using 3PLs?

Carl Fowler, senior director, Menlo Logistics: The first strategy is collaboration with customers, competitors, carrier partners, and other supply chain parties. Maximize all the assets in the network, ask why you need to move a product, and look for collaborative ways to do that more effectively. Second, establish an organization-wide supply chain strategy; turn your supply chain into a competitive advantage.

Roger Scarbrough, CEO, Scarbrough International: Data has become critical to the global supply chain. Understand how to integrate data so you can feed it to your 3PL. Accurate, real-time information is key to finding the best solutions.

CG: What advice can you offer to companies looking to improve or add to their international supply chain?

Scarbrough: Study your supply chain and know your needs. Do a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis, and interview multiple 3PLs to find a compatible partner. Also, accept that compliance is here to stay. Companies are no longer able to protect confidential information from the government. Embrace government programs. You can be on one of two lists: the trusted trader list or the target list.

CG: What regulatory actions should supply chain companies be following?

John Wagner Jr., president, Wagner Logistics: As the economy improves, carrier capacity—and anything that limits it—is a concern. As CSA regulations are refined, some will be good, but some penalties will be unfair and affect competitiveness. On the warehousing side, watch FDA food safety requirements, especially traceability, which can be a minefield for 3PLs.

Fowler: Another regulation that bears mentioning is cap and trade. It is already in effect in Australia and parts of Europe, and many in the industry believe it is inevitable. Don’t wait for a mandate. Successful companies will be those that thought ahead and put plans in place to implement it.

Todd Snyder, vice president, UPS Customer Solutions: One group on the forefront of the healthcare industry is the Pharmaceutical Distribution Security Alliance, of which UPS is a founding partner. Twenty-five other companies are joining with us to address widely differing state regulations. We are working now to stress to Congress the importance of passing regulation for a single platform across the United States, which would help to defray rising healthcare costs.

CG: Many small changes happen over time in the supply chain then, all of a sudden, there is a paradigm shift. What is the next major change?

Snyder: I’m hearing a lot about vested outsourcing. Companies need to look at the right measures, work together to do more than just scrutinize rates, and search broadly for the right partner.

Scarbrough: Technology will continue to automate the 3PL business. This adds serious vulnerability to technical systems and the supply chain. Contingency planning is critical due to our dependence on technology.

Wagner: I am watching the growth of online purchasing in retail. Inventory is expensive to carry and vendors are responding by adding consumer fulfillment. That multi-channel fulfillment will continue to grow because it makes so much sense.

Taking the LEAD

In a move that reflects an emerging generational gap within the transportation sector, the American Trucking Associations (ATA) started the LEAD ATA program to help groom tomorrow’s trucking leaders.

“In the 80 years since ATA was founded, we have always relied on industry leaders to be our spokesmen and our examples of what trucking means to the country,” says Bill Graves, president & CEO, ATA. “LEAD ATA will help us nurture and cultivate our next generation of leaders, and ensure that the legacy those giants have left us is entrusted to sure, steady hands.”

The program is sponsored by onboard communications hardware company PeopleNet, and provides young trucking executives with educational opportunities designed to highlight how the regulatory and legislative process affects the trucking industry, as well as demonstrate the tools available to industry executives through ATA. Eachyear, a new class will be accepted into the program.

Shipper Forecast: Cloudy

Shippers are operating in a slightly improved but negative environment, according to transportation forecasting firm FTR Associates‘ most recent Shippers Conditions Index (SCI). Trucking capacity and supply “remain in precarious balance at the moment, with very limited demand growth keeping shipping costs in check,” says the report.

The SCI for March 2013 eased from February’s level of -9.5 to a current reading of -7.3. The index is a compilation of factors affecting the shipping environment. Any reading below zero indicates a less-than-ideal environment for shippers. Readings less than -10 signal conditions are approaching critical levels based on available capacity and expected rates.

FTR expects shipping conditions will further deteriorate as freight improves seasonally and Hours of Service rule changes go into effect on July 1, 2013.

“Current shipping conditions remain calm, but storm clouds are on the horizon,” says FTR senior consultant Lawrence Gross. “FTR projects the Hours of Service changes will reduce trucking productivity by about three percent.

“While our estimate of the productivity hit is less severe than some, even a three-percent decline will be sufficient to tip the balance of supply and demand significantly away from shippers, assuming the economy continues to maintain at least the anemic growth levels seen recently,” he adds.

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