Best-Cost vs. Least-Cost Sourcing

The “reshoring” of manufacturing operations from China and elsewhere to the United States continues to make headlines. Back in December 2012, for example, Apple announced that it is investing $100 million to build some of its Mac products in the US. A month later, Walmart announced that it will increase its sourcing of US products by $50 billion over the next 10 years. And earlier this month, the Wall Street Journal published an article about how the toy maker K’Nex has moved most of its manufacturing operations from China to its factory in Pennsylvania.

What are some of the main supply chain factors that are fueling this reshoring trend?

I asked Kevin O’Meara that question last week on Talking Logistics. Kevin is currently the Senior Vice President for Supply Chain Effectiveness at Breakthrough Fuel, but prior to that he was the Senior Director of North America Logistics Operations at Whirlpool, another company that decided to invest in US manufacturing a couple of years ago.

Kevin discusses three factors that are helping to drive the reshoring trend, but the one that caught my attention the most was how companies are shifting their focus from least-cost sourcing to best-cost sourcing. Here is what he said:

[Reshoring] is happening, probably not as much as the hype has been happening, but it’s going on. A couple of things have changed. One is the thought process around best-cost sourcing versus least-cost sourcing. Now that’s a pretty dynamic change in thought process. I think the massive rush to offshore manufacturing was done at a time when people looked at a very small component of the overall supply chain — i.e., the manufacturing portion of it — and they said the cheapest place I can get this done is overseas and off they went. Now it’s much more about what is the most efficient and lowest-cost way I can get a product to market and get it on the shelf available for a consumer to buy it, and that’s best-cost sourcing. That means that some portion of the supply chain may actually have an increase in cost so that another portion can have a decrease in cost and [better] efficiency. So I think that is first and foremost [why reshoring is occurring]. More and more people that I talk to who are in the decision points of these types of things are thinking more about best-cost sourcing rather than least-cost.

I agree that this shift in how companies think about cost is an important factor. But if the best cost isn’t necessarily the lowest cost, then what makes it best?

There are many ways to answer that question, but at the risk of oversimplifying, here is my quick litmus test: The best cost is the one that enables you to respond faster than the competition to shifts in demand and supply, and also lowers your overall supply chain risk profile.

Best cost, therefore, is proportional to increased responsiveness and reduced risk. Do you agree? Post a comment and share your thoughts.

Also, check out the rest of my conversation with Kevin for additional perspectives on this topic, as well as his thoughts on transportation management, sustainability, social media, and other industry topics. Kevin also wrote an interesting response to my recent posting “Forget Innovation, Just Execute Better” on his blog that’s worth reading.

Finally, if you’re interested in this topic, don’t miss my upcoming Talking Logistics episode with Chris O’Brien, Senior Vice President at C.H. Robinson, where we’ll discuss “Beyond the Calculation: How to Use Total Landed Cost for Supply Chain Benefits” on April 11th at 12 ET.