If North American supply chains were looking for a theme song, the Carpenters' "Close To You" might be an appropriate choice, because everything from sourcing to DC site selection seems to be headed in that direction.
"From the emergence of near-shoring in Mexico to the continued growth of e-commerce, U.S. companies have more reasons than ever to hit the refresh button on their logistics strategies," said Will O'Shea, chief marketing officer of 3PD, the last-mile logistics division of XPO Logistics.
Expansion Solutions recently sat down with O'Shea to find out why the concept of close-to-home has become more attractive to many companies, particularly manufacturers and retailers – and why the last mile may now be the most important mile of all.
Q: Over the past few years, several experts have indicated that Mexico is overtaking China as a preferred manufacturing venue for U.S. businesses – a trend you first wrote about in this magazine in 2012. Talk to us about what's behind this migration.
A: For a long time, China offered some of the world's lowest manufacturing costs, even after the expense associated with operating a longer, more complex supply chain was factored in. However, as China's property prices and average wage rates have increased, the cost advantage to certain types of manufacturers has eroded. This opened the door for countries like Mexico to make their way back onto many companies' short list of potential production locations. In 2011, Mexico surpassed China as the country that offered U.S. companies the lowest total landed manufacturing cost. It's maintained that edge ever since.
Q: What does this mean for companies with supply chains originating on the other side of the world?
A: It depends. If companies are manufacturing high-end or highly technical products, they may elect to keep production facilities in China, where the workmanship for these goods is still superior to most other countries. And some companies may retain a presence in China to meet domestic demand there. But for many manufacturers, the prospect of bringing production closer to North American consumers, with faster speed-to-market and lower cost, is rapidly becoming more appealing.
Q: Speaking of consumers, let's talk about another topic that's been cropping up in a lot of supply chain headlines and discussions – the omni-channel.
A: That's undoubtedly a term that's here to stay, especially as e-commerce gains traction.
According to a study from Pitney Bowes, 89 percent of U.S. consumers made at least one online purchase during 2013. And during last year's CyberMonday, online sales reached a record $2.3 billion. Plus Comscore reported that online holiday sales grew 10 percent – almost three times the rate of in-store retail sales.
Q: Put those numbers into perspective for our readers.
A: Although online sales are growing rapidly, they still represent just a fraction of overall consumer purchases, currently somewhere in the neighborhood of 10 percent. However – and this is a big however – online purchases may be the most pivotal 10 percent of the equation, because they've raised the bar on customer expectations about delivery and changed how companies structure distribution points to meet these expectations.
To illustrate, consider that there were two big retailing stories in late 2013. One was about how many consumers were disgruntled because they didn't get their online holiday purchases by Christmas, even though only a small percentage of these purchases – somewhere in the neighborhood of three to four percent – were actually delivered late.
The other focused on Amazon's possible use of drones to facilitate same-day delivery of certain purchases in the future. Stories like these underscore the fact that people are increasingly expecting their purchases to be delivered quickly and reliably, no matter what. And they might create a lot of negative noise if they don't get it.
Q: But aren't those stories extreme examples?
A: Not really. They're actually just a microcosm of what's going on throughout the retail industry. Consumers are using the shipping experience to influence their shopping decisions. For example, the Pitney Bowes survey revealed that 80 percent of consumers now regard shipping options to be a major factor in their shopping experience.
Q: Is timely delivery the only decision point?
A: No, delivery cost is also a major factor. Most consumers have a price threshold, and research shows that half will abandon their online shopping cart if that threshold is exceeded. As a result, it's imperative for companies to find a way to shave as much time as possible off their delivery transit times without adding too much cost.
Q: So the omni-channel has created a breed of consumer that has started to demand speed and economy with delivery service. And companies have no choice but to deliver it if they want to maintain their competitive edge.
A: Correct. And it's not just a matter of protecting a single sale.
It's a matter of protecting their future sales, too, because customers won't tolerate more than one or two negative delivery experiences. A recent Capgemini Supply Chain Impact study showed that almost 90 percent of U.S. consumers are likely to abandon a retailer for future purchases if an item is delivered late.
Q: How does this impact companies' finished product distribution strategies?
A: Just as the promise of lower costs and improved speed-to-market has compelled many companies to consider bringing their production closer to home, the growth of the omni-channel is pushing companies to find new ways to meet today's ultra-high delivery standards – for example, by positioning their finished goods closer to concentrated residential areas or by finding new transportation partners that can provide them with greater agility.
Q: What does this mean for logistics site selection?
A: For one thing, it makes it more difficult for companies to maintain a highly centralized DC network with just one or two facilities, unless those facilities are in very strategic locations and supported by extremely agile and reliable carriers. A company may need to consider operating a greater number of smaller in-house distribution centers, or making more use of third-party logistics providers' public warehouses or cross-dock operations in outlying areas.
It also highlights the need for companies to make sure they have good access to highway and intermodal transport before committing to a facility site – because even the smallest bottlenecks can add up to large delays or significant additional expense.
Q: It's interesting that you mention intermodal access, since that's traditionally not the fastest form of transportation.
A: True, but it's the fastest-growing sector of transportation logistics after last mile. There are good reasons for this: rail is greener and more fuel-efficient than over-the-road transportation for long-haul freight that travels more than 600 miles. It can reduce a shipper's cost by up to 20 percent. That's a huge selling point, even with the added time in transit. Companies have to balance these considerations with their inventory management systems and customer expectations.
Q: Any final takeaways for our readers?
A: Much of logistics will always be about location. But that doesn't mean a company needs to lose ground if its access to capital or pre-existing commitments preclude it from changing its DC network. A lot of flexibility can be gained by working with outside transportation service providers, using pay-as-you-go shipping services, utilizing advanced technology or engaging in collaborative relationships.
Just as important, companies shouldn't make the mistake of thinking this advice doesn't apply to them, just because they're not currently engaged in e-commerce or manufacturing outside the U.S. – because there's a good chance they will be engaging in these activities in the future.
Q: In other words, now's the time to begin working on a game plan?
For further information, please contact: Lori Lockman, 678/581-8421; firstname.lastname@example.org.