Fueling Efficiencies: Sourcing Closer to Home

By George Post

These rising energy costs are leveling the playing field for deciding between the cost of labor and the cost of transportation.

The longtime notion that savings in labor costs when sourcing suppliers and facilities overseas will outweigh additional transportation costs is no longer universally true for all companies. Complex ocean moves and complicated customs paperwork go hand-in-hand with such operations.

The rules are changing

Transportation costs are eating into companies’ bottom lines, and it all comes down to the cost of the fuel necessary to transport products across an ocean and then cross-country to its final destination. And while Asia continues rapid economic development, the labor bargains in China are diminishing as more of the workforce earns better pay.

For those businesses that need to outsource, but cannot or do not want oceans between them and their suppliers, there is an option: Move your facilities closer to your suppliers. One way to do this is by “near-sourcing,” a supply chain strategy that minimizes the distance goods travel between suppliers and distributors. Near-sourcing reduces the total cost of doing business, which has risen exponentially in the last few years, making profitability more difficult to maintain.

Finding pathways to reduce transportation costs, including fuel costs, while maximizing the routing of goods is the guiding principle of near-sourcing. In fact, a large percentage of a company’s potential savings can be achieved through smarter sourcing.

For example, if a business has a 10 percent margin on sales, it can either try to sell $10 million in products to achieve a $1 million profit or, through smarter sourcing, they can shave $1 million off of the cost of goods outright. A large part of smarter sourcing in today’s environment can be found in reduction of transportation costs and better routing of trade lanes.

The benefits of near-sourcing are numerous. In addition to potential transportation and fuel savings, complex overseas operations are minimized. Plus, carbon footprints are reduced due to less fuel consumption.

Global adoption

Foreign automakers are already taking advantage of the weaker U.S. dollar and labor advantages by moving some assembly plants to the southeastern United States. The move not only gives automakers closer proximity to suppliers, but it also reduces shipping timeframes and ultimately helps ensure that automobile dealerships receive finished vehicles sooner.

And while European companies are moving facilities to the United States, U.S. automakers are looking south of the border. South America has become an attractive location for U.S. companies looking to reduce the cost of ocean crossings from facilities in Asia.

Mexico, in particular, is benefiting from U.S. automakers choosing to source closer to home. According to the U.S. Commercial Service, between 2006 and 2007, the Mexican automotive industry – which includes vehicle production and assembly – reached record production levels. Further, the U.S. Commercial Service estimates that Mexico will be fifth in the world in automotive production by 2011, competing with stronger economies such as India, United States, and China. Ailing U.S. automakers can reap transportation savings by sourcing in Mexico, since parts, components and finished vehicles would be shipped across a border – not across an ocean.

For companies that believe uprooting and moving facilities closer to their headquarters would be an impossible venture, remember that reputable third-party logistics providers have established offices in most major and growing economies throughout the world. Be sure to contact your logistics provider for additional local insights when you begin contemplating a strategic move.

With today’s economic challenges and increased pressures for environmental responsibility, having suppliers and facilities in the same hemisphere makes good fiscal sense. With this comes an epic opportunity for businesses to rethink sourcing strategies. In doing so, they will restore their profitability in a thoroughly modern and sustainable way.

George Post is the Supply Chain Solutions Global Marketing Director for UPS. He oversees key UPS services that assist automotive and manufacturing sectors move freight and packages across borders.