How to Bring Your Production Back Home

Bringing your production closer to your customers can help you gain a competitive advantage against your competitors!

Step 1 – Start with Your Customers

The design of your supply chain needs to align with the current and expected future needs of your customers and your strategy. This was a mistake that many businesses made during the offshoring process. They treated off shoring as purely a purchasing decision and created inflexible extended supply chains that were simply incapable of delivering what customers needed.

The result was high inventory, expediting and lost sales. Therefore, avoid making the same mistake twice by taking a clear-eyed look at your market, analysing your customers and competitors and deciding where you want position your business. What is the performance your customers expect in terms of lead time and on time delivery? Beyond that though, what would be the benefit of being to offer better service and shorter lead times? It can also be good to see what the best performers in your market internationally are doing, even if you are not competing directly with these companies.

Step 2 – Understand the End to End Supply Chain

Once you have decided the service that you need to deliver to customers, then the next step is to design your supply chain from the ground up to deliver that service – reliably, on time in full every time.

Map Your Current Value Stream

Start by mapping your current extended supply chain. We use an extended supply chain value stream map to do this. The current state map will show both the product and information flow for your offshore supply chain. The boundaries of the future state need to at least start with inputs to your supplier and end with delivery to your customers. However, you may even need to go further upstream than that and consider your suppliers’ supplier. This can be important if the real value add happens up stream in the supply chain or if supply of critical raw materials is likely to influence the location of production.

Apart from lead time and inventory, overlaying metrics such as cost and quality on the value stream can also show a clearer picture of what your offshore supply chain is delivering, or not.

Once you have mapped the current state, you will have a good idea of whether your current supply chain can meet your current and future customer needs. You should know the key risks and costs and how and why they arise through the supply chain.

 

Developing Your Future State

The next step is to develop your future state. This starts with clearly defining your customer needs and working backwards. It might be necessary to consider a range of future state options in a re-shoring situation and then model these for cost and feasibility. It can be helpful to start with an “ideal” future state, which is the one closest to one-piece flow and which most effectively delivers your customer’s needs. This may not end up being a feasible option. However, it allows you to evaluate each option against the ideal.
If you build a cost model to compare options, make sure you model costs such as working capital, holding costs, warehouse costs, stock obsolescence, quality costs and costs of supporting international suppliers. It would also help to consider currency movements and inflation. Often major projects are evaluated using “current day” values, but with international sourcing, the products are manufactured in one economy and consumed in another. Changes in relative inflation and currency can be the biggest influences on total costs over time, so they cannot be ignored. Qualitative factors such as protection of core intellectual property and risk of supply disruption also need to be considered in the equation.
If your product has a short life cycle, then the development lead time can be even more critical than the supply lead time.

Step 3 – Make or buy

 Once you have mapped your supply chain, considered the various options, and opted for a local supply chain, don’t assume that it is only about finding local suppliers to replace your offshore suppliers.  Your “Ideal” future state will aim to minimise lead time and waste, so it will encourage bringing processes in house. Where this is not feasible, you can capture the costs and benefits of moving to an external supplier. Key reasons to outsource might be:
  • Your volumes and spending do not justify developing the in-house capability.
  • The capital cost or technical barriers to setting up the in-house capability is too great.
  • Environmental or location related issues (e.g. with electroplating).
However, having decided to source a local supplier, it is essential that you end up with a better service level than your current offshore supplier. Selecting the wrong supplier can potentially mean you end up with higher costs, poorer quality and no appreciable improvement in lead time or flexibility. Therefore, it is crucial that you have a well thought out supplier selection process.

Step 4 – Selecting a Local Supplier

Suppose you have done a value stream map. In that case, this will give you a clear idea of how you want your local supply chain to operate, as it would have determined the lead time, order quantities and quality parameters, which will help identify and narrow the potential suppliers. If the products you will be purchasing represent a significant value, it might be worth doing a competitive bid process. There is no requirement for this to be a formal tender. Meet with as many suppliers as you can, visit their premises, and understand their capabilities and culture. You can then apply some criteria to identify the few suppliers who are best suited to meet your needs. A proposal document should specify exactly how you want the supply chain to work and what suppliers need to deliver. The advantage of setting these operational elements upfront is that suppliers know from the start exactly what they are up for and are less likely to try and renegotiate pricing later. Finally, before the bids come in, you need to agree within your business on the selection criteria to avoid the decision just being made on price. Setting up supplier relationships this way means that your new suppliers are aligned with your business needs from the start, delivering the level of service required in your value stream.

Step 5 – Implementing the Change

Plan Your Transition

Changing your supply chain is a complex and risky task. The implementation timeframe can be a lengthy process and vary from business to business. This plan should cover the time for local suppliers to get set up and build up stock from your new supply chain and rundown inventory for the old supplier.

It is good to define a breakpoint to ensure traceability of which parts went into which end products if a quality issue occurs down the track. Due to this lengthy process, much discipline is required to carry out the implementation from start to finish.

Our advice would be to get your prospective local suppliers to sign confidentiality agreements before engaging them in the bid process to control how and when the change is communicated with your overseas supplier. Otherwise, your overseas supplier may decide that it suits them to end supply to you early, creating a gap in supply. You should ensure that your new supply chain is up and running and ready to go before you notify the outgoing supplier. Again, this may extend your transition further, but the alternative is to run the risk of stopping supply to customers.

Summary

Transitioning your supply chain closer to home is a change that we will see many over the next few years. However, it is vital to carefully plan when making this change to ensure that it delivers the benefits you expect. Start by being clear about what you need to provide to your customers. Then design your new supply chain using an extended supply chain value stream map. Consider the option of vertical integration – bringing production in-house to get maximum flexibility.
If you switch to local suppliers, take the time to conduct a proper selection process to ensure that you achieve the supply chain performance improvement you want. Once you have decided on how to structure your supply chain, plan carefully to allow for a smooth transition from imports to your new, local supply chain to avoid creating obsolete inventory or interruptions to customer supply. Finally, use Lean thinking in your new manufacturing and supply chain to decrease your lead time from weeks to days. This will ensure that you deliver substantially better service and create a competitive advantage over your competitors.

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