• Tips to Help Guide Supply Chain Decisions

    The US Commerce Department has a website that's worth checking out before making supply chain decisions. The site, called “Assess Costs Everywhere” ( discusses ten different areas that should be considered when making supply chain decisions. Some of the questions the information tries to address include:

    • Will wage rates in other countries remain stable?
    • How productive is the workforce and how easy is it to find and retain staff?
    • How much time will US Managers have to spend overseas, and how much will it cost?
    • How much time will it take the goods to arrive in the United States?
    • How stable are shipping costs?
    • How do export and import regulations affect costs and time of delivery?
    • Will inventory carrying costs grow when sourcing from abroad?
    • How much do other important inputs, like energy, cost overseas relative to the United States?
    • Does the foreign jurisdiction protect and enforce intellectual property rights?
    • Are special arrangements needed to finance goods purchased abroad?
    • How does the regulatory environment compare with the United States'?
    • Will the quality of goods meet expectations?
    • If a quality control issue arises, how quickly can it be resolved?
    • How difficult and costly will it be to resolve a contract dispute?
    • How quickly can an overseas supplier react to changing product specifications?
    • How stable is the political and economic climate?

    The tool contains links to public and private resources and also includes a number of case studies - all designed to help businesses assess the TOTAL costs of their sourcing decisions. There is a lot of information on the site and I want to share the interesting points with our customers and prospects.

    First, the area that most people point to when arguing for off-shoring manufacturing production: Labor Costs. In many developing countries where labor costs have been low, the rate of increasing salary and wages is generally much much higher than the U.S. This means that over time, the gap between the U.S. and other “low cost” countries continues to shrink. This includes countries like China where wages increased at a 14.1 annual rate between 2000 and 2012 (while U.S. wages increased 3.0% over the same time period). If this trend continues, the delta between US wages and Chinese wages will shrink from 24x in 2008 to 5x in 2020.

    The take away: while labor savings per hour can still be had by going overseas or south, those savings are shrinking every year.

    Second, if you include productivity (labor cost per unit), the delta between U.S. manufacturing labor and low-cost country labor is shrinking even faster. Once you have a chance to visit a factory in a low-cost country this is easy to see. The investments in productivity enhancing technology are not being made at the rate that they are in the U.S. Custom Rubber Corp. is making large investments to upgrade our equipment and we're regularly re-arranging equipment to insure that we are setting ourselves up to make our direct labor force as productive as possible.  (See Graph).

    Other wage-related issues that the ACEtool website discusses include Turnover, Exchange Rates (these can dramatically shrink the wage delta over time), Labor Market Risk (this measures things like the likelihood of labor strikes and restrictive labor laws).

    Lastly, something that the ACEtool website doesn't point out is that when the direct labor cost is a relatively small percent of the total costs of your product, this labor delta becomes even more insignificant. There is (or should be) a big difference between molding rubber parts and hand-stitching running shoes - making labor parts at Custom Rubber Corp. is very machine-intensive and the direct labor content is kept to a minimum for our customers.

    The other sections of the ACEtool website discuss additional costs associated with long supply chains - costs that are often hidden and sometimes don't show up as a direct component of the piece price. It's important to look at all these areas when making decisions about where to source.

    Posted Wednesday, April 1, 2015 by: Charlie Braun
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