How Feasible Is The Idea Of Shifting Procurement Closer Home?
Companies are looking to improve the resilience of their procurement operations after the disruption it came under since the pandemic. We explore what will come of such decisions.
A hearty welcome to the 52nd edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
Since the pandemic, there’s much debate in the supply chain circles on the changing procurement landscape, causing businesses to doublethink how they work through their upstream operations.
For instance, there’s significant media limelight on the emergence of the just-in-case (JIC) process against the long-established just-in-time (JIT) method, which has optimized inventories and helped keep logistics costs on bottom lines down for decades. However, widespread product and raw material shortages, worsening transport delays, and freight capacity shortages saw businesses get stuck in a quagmire of logistics uncertainties brought by the pandemic, throwing supply planning processes in disarray.
Supply wasn’t the only problem, though. Spiking consumer demand saw businesses drown in orders that, in the case of manufacturers, were challenging to meet as their procurement wasn’t going as per plan. JIC contends that companies are tired of being squeezed on supply and demand, pushing them to consider stocking buffer inventories.
That said, JIC is a concept with no fundamentals. Unlike JIT, which is a product of exhaustive research and studies, JIC has no single definition or consensus. To begin with, holding onto buffer stocks was never precluded in JIT. In all likelihood, JIT is here to stay, maybe with higher tolerance on the ceiling decided for inventory volumes.
Unlike JIT, which is a product of exhaustive research and studies, JIC has no single definition or consensus.
Next comes nearshoring, a practice that companies have looked at since the US-China trade war, which saw duties spiking over commodities from energy to cotton. Surveys have reflected business sentiments, with top management giving serious thought to nearshoring by transitioning procurement out of the Asia Pacific and much closer to North America.
Nonetheless, sentiments do not directly correlate to what happens on ground zero. Unlike bulking up inventories that can be a company-centric decision, building operational resiliency via nearshoring involves several externalities — including prospective vendors, infrastructural buildup at concerned geographic markets, labor availability, and skill level, amongst others. In essence, nearshoring is not something that can materialize as a knee-jerk reaction, especially in firms with massive procurement operations.
However, nearshoring does offer a lot of promise as a long-term trend, considering it can effectively cut transport costs, improve upstream visibility, and add resiliency afforded by the proximity of sourcing.
For companies in the US, nearshoring procurement would likely have Mexico on the list. While the Mexican workforce would possibly not work for wages that cheap labor in the Asia-Pacific is okay with, their demands are still stomachable for companies looking to transition sourcing closer to home. That being said, American companies have always run some part of their production lines in Mexico, especially automakers.
“Companies realize they can’t depend on one region for their supply. Nearshoring will slowly turn out to be a competitive advantage, as what matters during disruption isn’t the cost of production, it’s the cost of logistics,” said Everton Viana, the COO and co-founder of Cargamos, a Mexican last-mile delivery platform.
Nearshoring will slowly turn out to be a competitive advantage, as what matters during disruption isn’t the cost of production, it’s the cost of logistics.
However, Mexico has a long way to go, considering the need for infrastructure buildup within the country. But money is flowing in, said Viana. “A lot of American, and even European, venture capital is invested in Mexico. These days, corporate companies are investing directly in local startups that align with their mission — unlike before, when they used VC firms as a vehicle of investment.”
Such investment is godsent, as Mexican startups now have the fuel to build their solutions and ramp up innovation. “In Mexico, the lack of business infrastructure is telling. Companies haven’t been as productive as they can be due to this. With better infrastructure and restructuring, companies can look to be more productive, increase their margins, and attract even higher investment,” said Viana.
The Mexican supply chain ecosystem, like most other markets, suffers from a lack of visibility, inhibiting network optimization at all levels. Cargamos, Viana pointed out, has visibility as one of its objectives in orchestrating the last-mile, which helps them utilize unused built-up areas — like parking lots and garages as delivery stations.
“What we urgently need in the country is to build infrastructure that acts as the base to hold and connect different business verticals. Mexico has abundant natural resources and brainpower, and so if it solves the disconnect between the public and the private sector, the country has great potential to be a global manufacturing hub.”
Mexico has abundant natural resources and brainpower, and so if it solves the disconnect between the public and the private sector, the country has great potential to be a global manufacturing hub.
But this aside, the Mexican society also struggles with adopting tech-forward financial solutions, and in many cases, even lacks digital transaction activity. “Over 80% of transactions are cash based here. People are underbanked — they either don’t have a bank account or only have an account to receive their paycheck at the end of the month. Once money is deposited, they withdraw all that they have and spend it in cash,” said Viana.
For Mexico to gain prominence as a nearshoring possibility over an already-established manufacturing market like China, it needs a lot to go right — adequate infrastructure, a skilled and affordable labor force, and a society that can adapt to the times to stay relevant. Nonetheless, all said and done, companies will not completely shapeshift to militantly follow nearshoring possibilities from the current procurement protocols. Diversification will eventually be the cornerstone of procurement activities, with Mexico gaining a foothold in the post-pandemic world where the manufacturing dominance of China and the Asia Pacific comes under the scanner.
The Weekly Roundup
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…said who?
“We expect the increases in costs to ease somewhat this year, but they will ease from these very high levels of the past year.”
- Balika Sonthalia, a partner at management consulting firm Kearney, commenting on how unsustainably high market rates will continue to go down as consumer spending continues to pivot.
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