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Over the past decade, international sourcing has come to take up an extremely large portion of the supply chain for U.S. companies. The ubiquity of “made in China” products and call centers in Bangalore speaks for itself. But it doesn’t tell the whole story. In fact, there is a rising tide of manufacturers and distributors moving sourcing closer to home. Consider the outrage over U.S. Olympic athletes wearing uniforms made in China. This is emblematic of a growing pressure to bring sourcing back to the United States or, at the very least, to more proximate locations such as Canada and Central America.
Supply Chain Insights
Nearshoring: Then and now
Grant Thornton Consumer and Industrial Products practice Part 1 of 3 — August 2012
Each year, Grant Thornton LLP collaborates with World Trade 100 magazine on a series of three surveys concerning the supply chain. These surveys are intended to provide a snapshot of issues and opportunities in the supply chain industry. We hope that this 2012 survey (part 1 of 3), along with insights from Grant Thornton’s supply chain professionals, helps inform your sourcing and supply chain decision-making.
High fuel prices, rising transportation costs and longer transit times initially drove this surge in nearshoring, which began in 2008 and has continued unabated. While nearshoring doesn’t necessarily overcome all the challenges of dealing with international suppliers — since distance, language, culture and time zones may still be problematic — the greater proximity allows for more flexibility to align with suppliers. Grant Thornton LLP’s 2012 Supply Chain Insights survey, conducted in partnership with World Trade 100 magazine, highlights the expectations of manufacturers and supply chain professionals for the coming year, and the issues that are most on their minds.
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Over the past decade, international sourcing has come to take up an extremely large portion of the supply chain for U.S. companies.
2 Supply Chain Insights — Part 1 of 3 — August 2012
A shifting landscapeA growing percentage of goods are sourced outside the United States, with 34% of goods expected to be sourced from outside the United States in 2012, up from 30% in 2010. But where these goods are sourced is somewhat of a shifting landscape. While China remains a major offshore supply source, an increasing number of manufacturers are bringing their sourcing closer to home, to locations such as Canada or South America, or truly back home — to the United States.
Nearshoring: Then and now (continued)
International sourcing, but closer to homeEighty-one percent of manufacturers report that they are increasing their sourcing from the United States, up from 59% in 2009 — a 22% rise (see chart on next page). This is undeniably good news for the U.S. economy. It’s worth noting that some of this U.S. nearshoring represents the relocation of certain back-office functions and call centers as a means of improving responsiveness and customer service.
What percentage of your supply chain purchases are sourced internationally (from outside the United States)?
2010 30%2011 32%2012 (proj.) 34%
Did you bring international sourcing closer to the United States (e.g., Mexico, Canada) over the past 12 months?
* Responses may not total 100% due to rounding.
Yes 19%No 81%
Yes 25%No 75%
20122009
Number of respondents: 313 Number of respondents: 357
“One trend we are seeing is an uptick in nearshoring IT and shared services. For instance, companies might locate their IT call centers in small towns in the States rather than large cities in India. The clear advantage is that U.S. locations are culturally a known quantity. There will be some cost savings, although not nearly to the order of magnitude of India. But you pay more to get more,” explains Graham Tasman, principal, Finance Operations Solutions Group. “There are some locations in the United States that are favorable for hosting business operations such as shared services,” notes Tasman. “Factors that we look at include labor pool availability and language and time zone considerations, along with proximity to higher education institutions.” continued>
3 Supply Chain Insights — Part 1 of 3 — August 2012
Nearshoring: Then and now (continued)
Three in 10 manufacturers — up from 18% in 2009 — have increased their sourcing in Canada. But sourcing in Mexico has actually declined, falling to 20%, from 49% in 2009. Offshoring versus nearshoring: What’s at stake?The issues that are driving companies to consider nearshoring vary. Frequent complaints about international sourcing include late deliveries (23%, the same percentage as in 2009) and poor quality (21%, down from 25% in 2009). Higher total costs are also a problem cited by 12%, compared with 7% three years ago. But it’s worth noting that 17% have no difficulties with international sourcing, an increase from 14% in 2009. “You want a supplier that can provide what you need at a high quality — when you need it. When considering sourcing origins, companies must factor in not only the cost of goods, but also the cost of late deliveries, the cost of getting the product to distributors and customers, and intellectual property issues, as well as warranty and service costs,” says Steve Lyman, Advisory Services managing director.
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In which countries are you increasing your material and service purchases?*
*Respondents were able to select more than one answer.
United States
Canada
Mexico
59%81%18%30%49%20%
2009 2012
Understanding conflict minerals disclosuresConflict minerals are essential in the manufacturing processes of a variety of devices such as mobile phones, laptops and MP3 players. Conflict minerals are so named because they are sometimes used to finance conflicts in the Democratic Republic of the Congo and its adjoining countries (DRC countries). In December 2010, the SEC issued a proposed rule on conflict minerals to help implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1502, also known as the conflict minerals provision, is intended to highlight, via public disclosure, the exploitation and trade of minerals originating in the DRC countries. The SEC expects to issue the final rule in 2012, and compliance will be required one year after that.
The rule will require domestic and foreign issuers to disclose their use of certain minerals such as:
• Cassiterite — Tin, tin alloys, tin plating and solders for joining pipes and electronic circuits.• Columbite-tantalite (coltan) — Tantalum, which is used in electronic components such as mobile
telephones, computers, video game consoles and digital cameras. Tantalum is also used as an alloy for carbide tools and jet engine components.
• Gold — Jewelry. Gold is also used in electronic, communications and aerospace equipment.• Wolframite — Tungsten, which is used in metal wires, electrodes and contacts in lighting, electronic,
electrical, heating and welding applications.
Domestic and foreign issuers that make use of conflict minerals will be required to implement new procedures and disclose in their annual reports whether the conflict minerals that are necessary to either the functionality or the manufacturing of the company’s products originated in DRC countries. Issuers will need to provide a separate conflict minerals report when they either (1) use conflict minerals that are known to have originated in the DRC countries or (2) use conflict minerals but cannot determine their country of origin.
What does your company stand to gain by nearshoring?*
*Respondents were able to select more than one answer.
Shorter lead timeLower costsBetter-quality productsBetter supply chain controlMore reliableBetter communicationLess inventoryOtherN/A
39% 30% 19% 9% 2% 1% 1% 14% 7%
4 Supply Chain Insights — Part 1 of 3 — August 2012
Nearshoring: Then and now (continued)
International sourcing: 2009 versus 2012In 20091, the largest percentage of survey respondents that sourced internationally relied on China (28%), but we believe that this trend may be changing based on our most recent data. Today, many respondents are reducing their international sourcing, with China seeing sourcing reductions from 57% of manufacturers surveyed. But that percentage has shrunk slightly since 2009, when more than six in 10 respondents (61%) cut back on sourcing from China. India and Pakistan have also experienced sourcing reductions (17%, down from 20% in 2009). And a growing number of U.S. manufacturers have slashed sourcing from other Asian countries such as Japan (19% in 2012 versus only 5% in 2009), Korea (14%, compared with 3% three years ago), and the Philippines (13% as opposed to 5% earlier). These findings represent a substantial rise in sourcing reductions from several major Asian countries besides China.
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Percentage of international sourcing (dollar volume) by origination of goods/services
*Respondents were able to select more than one answer.
China
Asia (excluding China)
Western Europe
Canada
Mexico
South America
Eastern Europe
Other
28%25%15%15%13%14%9%11%8%8%2%5%4%3%21%19%
2009 2012
From what countries are you reducing your sourcing?*
*Respondents were able to select more than one answer.
China
Japan
India/Pakistan
Korea
Philippines
Other (specify)
61%57%5%19%20%17%3%14%5%13%21%20%
2009 2012
Are you in compliance with the California Transparency in Supply Chains Act? California’s Transparency in Supply Chains Act (SB 657) became effective Jan. 1, 2012. Retail sellers and manufacturers that do business in California and have annual global gross receipts in excess of $100 million are required to make disclosures on their websites about their efforts to eradicate slavery and human trafficking from their direct supply chains for goods offered for sale.
Specifically, each company is required to disclose:• towhatextent,ifany,itevaluatesandaddressestheriskofslaveryandhumantraffickinginitsproducts’supplychainandwhetherathirdpartyconductstheevaluation;• whetheritauditsitssuppliersandwhethertheauditsareindependentandunannounced;• whetheritrequiresitsdirectsupplierstocertifythatmaterialswithintheirproductscomplywithapplicablelawsonslaveryandhumantrafficking;• whetheritholdsemployeesandsuppliersaccountableand,ifso,whattheconsequencesareforemployeesorsuppliersthatfailtomeettheaccountabilitystandards;and• whetherittrainsemployeesonmitigatingtheriskofslaveryandhumantraffickingintheproductsupplychain.
Are you in compliance? Our team can help you perform a risk assessment of the supply chain in order to identify the risks of slavery and human trafficking and develop correctiveactionplanstoaddressthoserisks;assistyouasyouevaluatespecificsuppliersandestablishasupplychainduediligenceprogram;andhelpyouconductauditsof domestic and international suppliers and vendors in order to verify their compliance with applicable requirements. We can also help you establish policies and procedures to confirm that employees and contractors are following company standards regarding slavery and human trafficking, formulate internal control procedures for verifying compliance, and develop and implement training for employees who have direct responsibility for supply chain management.
1 Our Supply Chain Solutions 2009 survey was based on data gathered in 2008.
Managing supplier risk“A best-in-class sourcing strategy involves a risk-based approach to managing the supply chain,” explains Tasman. “Companies need to be looking at reliability and performing due diligence on vendors’ ability to deliver. They need to ask — and be able to answer — a crucial question: ‘What if there’s a break in the supply chain?’”
5 Supply Chain Insights — Part 1 of 3 — August 2012
Nearshoring: Then and now (continued)
It’s important to look at the financial health of suppliers because they can pose risks to both a manufacturer’s production schedule and its strategic objectives. But 31% do nothing to monitor their suppliers’ financial condition. If a supplier is not a public company, how can a manufacturer confirm its financial stability? Wally Gruenes, national managing partner of Consumer and
What process did you go through to select a supplier?*
*Respondents were able to select more than one answer.
Used an existing supplier, so no process was used
Used a supplier that was previously in our supply chain, so no process was required
Conducted remote assessment based on supplier submission of data and/or response to questionnaire or assessment
Conducted on-site assessment at supplier location
Conducted no assessment
Other (specify)
28%36%
20%23%
20%14%
28%21%
2%
3%
3%3%
2009 2012
Industrial Products asserts: “The best way to monitor the financial health of your key suppliers is to form strategic relationships with them. In addition to sharing current financial information, your key suppliers can participate fully in strategic planning, continuous improvement and product development efforts. When you are engaged in that sort of relationship with your key suppliers, you will be keenly aware of their financial health.”
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What are you doing to monitor the financial health of your suppliers?*
*Respondents were able to select more than one answer.
Only review financial health during negotiation of new contracts
Use data from third-party source
Regularly request and review financial data directly submitted from supplier
Other (specify)
Nothing
23%
28%
27%
7%
31%
Nearshoring: Then and now (continued)
6 Supply Chain Insights — Part 1 of 3 — August 2012
About the surveyGrant Thornton partnered with Clear Seas Research, a subsidiary of BNP Media, to produce this original research on supply chain strategies. A total of 357 responses by readers of World Trade 100 magazine were gathered from May 22, 2012, to June 6, 2012.
About Grant Thornton’s supply chain advisory servicesGrant Thornton provides a broad spectrum of supply chain insights related to commodity planning, sourcing process evaluations, pricing reviews, IT solutions, supplier assessments and action planning, risk response protocol analysis, inventory and asset management solutions, and consolidation and resource management.
About Grant Thornton LLPGrant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity.In the U.S., visit Grant Thornton LLP at www.GrantThornton.com.
About World Trade magazine World Trade 100 magazine is a business-to-business logistics journal delivering news and information to U.S. subscribers active in domestic and international trade. World Trade 100 magazine covers every aspect of the global supply chain, from the movement of products across the United States to the procurement from and delivery to international markets.
Content in this publication is not intended to answer specific questions or suggest suitability of action in a particular case. For additional information on the issues discussed, consult a Grant Thornton client service partner.
© Grant Thornton LLP All rights reservedU.S. member firm of Grant Thornton International Ltd
Contact informationFor more information about how Grant Thornton can help your organization or to offer comments about this survey, please contact:
Wally GruenesNational Managing PartnerConsumer and Industrial ProductsT 214.561.2640E [email protected]
Steve LymanManaging DirectorAdvisory ServicesT 404.475.0070E [email protected]
Graham TasmanPrincipalFinance Operations Solutions GroupT 215.376.6080E [email protected]
Looking aheadAs the global supply chain grows more complex, staying on top of critical sourcing issues — such as nearshoring (versus offshoring), cost cutting, transfer pricing and supplier reliability — is more important than ever. Decision-makers must consider all of these factors and more as they strive to create a flexible, adaptable supply chain. A growing number of manufacturers are realizing that in addition to hard costs, there are many other risks and uncertainties that need to be factored into a robust and informed approach to global sourcing. In deciding whether to move offshore, bring operations home or maintain the status quo, supply chain executives need to consider a multitude of factors — factors that can and do change at any given time.
A nimble and cost-effective supply chain, one that can react promptly to changes in customer demand or supply while keeping costs in check, offers companies a lasting strategic advantage. It is our view that — at least for the time being — more U.S. companies that serve U.S.-based customers will bring certain aspects of their operations closer to home. •
