The high-tech industry has spent the better part of two decades working the kinks out of a supply chain that expanded rapidly into China. In addition to the bureaucracy the move entailed – many companies had to partner with a Chinese company in order to literally get a foot on the ground—the logistics of designing a product in one region and manufacturing it in another (with a 12-hour time differential) challenged the best supply chain minds and technologies.
Now, according to an annual survey by UPS, Change in the (Supply) Chain, manufacturers are struggling with a mix of strategies that include offshoring, right-shoring and near-shoring. Nearly half of the high-tech manufacturers surveyed by UPS are utilizing offshoring; 45 percent are utilizing right-shoring; and 35 percent near-shoring. (Multiple responses were allowed.)
Of these three strategies, UPS identifies near-shoring—moving manufacturing and/or assembly closer to the location of demand-- as the trend to watch. This strategy is likely to see the most growth in the near-term. Thirty-five percent of high-tech logistics decision makers globally are planning on near-shoring, up 25 percentage points from 2010.
The shift isn’t exactly new, UPS points out: 68 percent of survey respondents began moving manufacturing closer to demand two years ago. This year, 38 percent say they plan to move assembly closer to demand. Looking even further ahead, 20 percent of companies are likely to add assembly facilities closer to demand and 23 percent are likely to add manufacturing.
This trend has significant implications for the component makers that supply high-tech OEMs and the distributors that manage inventory and ship orders to manufacturing lines. Both of these constituencies followed their customers to China at a significant cost. Many suppliers established manufacturing plants in the Far East and distributors acquired companies that conducted business in China. Although it is unlikely companies will dissemble their Asian infrastructure, near-shoring comes with its own challenges, UPS said.
Similar to the offshoring trend, near-shoring faces some barriers. The location of key suppliers is one barrier to near-shoring: many suppliers went to China to take advantage of lower costs and closed facilities in other regions. In 2013, the top barrier to near-shoring was the benefit of low-cost manufacturing, which companies didn’t want to give up. That has dropped to fourth on the “barrier” list. The other two leading barriers this year: manufacturers have a fixed infrastructure that is not moveable, and their current sourcing footprint best supports their anticipated demand.
Like suppliers, component distributors have had to shift their global footprints to support their OEM customers. Global distributors such as Arrow Electronics Inc. now have business units in the three major regions of the world: the Americas, Europe, the Middle East and Asia (EMEA), and the Pacific Rim. Global distributors have also built mega-warehouses serving those major regions. Still, the electronics supply chain doesn’t necessarily operate on a global basis: many companies still manage their P&Ls (profit and loss) regionally. For distributors, the ability to manage services on a global scale allows maximum leverage and savings. For example, said Tim Kolbus, vice president of global logistics solutions for Arrow, the distributor is looking for global contracts, payment terms and service requirements from its partners. “At the global level there has been a big change in logistics—some companies are better prepared to manage this and treat us globally,” he said.
At the same time, low-volume/high mix distributor Digi-Key Electronics has managed to service global customers without a physical footprint in every region. Longtime Digi-Key President Mark Larson, who recently announced his retirement, said that was always a tough decision for the distributor. “It used to be that if you reached a certain level of sales in a region it justified opening an office or putting a warehouse there,” Larson said. Yet when Digi-Key provided access to its entire linecard globally via e-commerce, the distributor found it could still service customers from a single warehouse out of Thief River Falls, MN. In fact, that turned out to be an advantage for Digi Key: it was able to leverage its relationships with logistics providers such as UPS because Digi-Key was such a big customer.
So why are OEMs realigning their footprints again? Manufacturers found their service levels dropped when they moved offshore. Other drivers toward more near-shoring are improving control over quality and intellectual property. Interestingly, these are the same reasons distributors cite for expanding with their customers overseas. “We have evolved our network and our warehousing in the right places to service our customers,” Arrow’s Kolbus said. “We are looking at our logistics footprint and making sure we are in the right places.”
It may not be necessary for distributors to reconfigure their businesses: most already have a significant presence in major global regions. Those that do not are working on that balance. Germany-based distributor Rutronik Elektronische Bauelemente GmbH recently announced it set up a U.S. headquarters in Cleveland. Rutronik has had a number of customers that have wanted to award the distributor global contracts, but the U.S. segment of the market was missing. “Our [current] success has been because of those relationships, and people [in the Americas] will find out about us because the success is already there," said Rutronik’s Vice President for North America Jeff Shafer.
The only thing that will remain constant is change, UPS said. The electronics supply chain will have to continue to be flexible. The market hasn’t stopped expanding: companies plan to move into Brazil, Russia and India within the next year. “There’s one question high-tech executives should be asking themselves,” the UPS report concluded. “Is my supply chain optimized for growth?”