7.4 Where to Buy From: Evaluating Supply Location Strategy

The late 20th century marked a significant shift in global supply chain management, with a pronounced trend towards offshoring in Asia, particularly in China. This strategic realignment was driven by cost-focused approaches, leading many manufacturers from the United States and the European Union to relocate their production facilities to Asian countries. Starting in the 1990s, the offshoring movement was largely directed towards China, leveraging the country’s economic landscape to achieve significant cost savings and operational efficiencies.

7.4.1 Advantages of Offshoring to China

The decision to offshore manufacturing to China came with several distinct advantages, aligning with the primary goal of cost reduction and operational efficiency:

• Large Labor Pool: China offered a vast labor pool, providing manufacturers with a diverse range of skilled and unskilled workers. This abundance of labor was a key factor in China’s appeal as an offshoring destination.
• State-of-the-Art Facilities: Chinese provinces, keen to attract foreign investment, often provided modern manufacturing facilities equipped with the latest technologies.
• Competitive Labor Costs: Labor costs in China were substantially lower than in Western countries, offering a cost advantage, particularly in labor-intensive manufacturing processes.
• Smoother Operational Workflows: The differences in labor laws and practices in China often translated to fewer complexities in managing labor, leading to more efficient operations.
• Access to Expanding Markets: Offshoring to China also opened doors to the burgeoning Chinese and wider Asian markets, offering new opportunities for business expansion and revenue growth.

These advantages made China a central hub in global manufacturing and supply chain strategies, underlining the significance of cost and operational efficiencies in strategic sourcing decisions.

7.4.2 Challenges of Offshoring to China

Despite the advantages, offshoring to China presented several challenges that evolved over time:

• Rising Labor Costs: Over the years, labor costs in China have increased significantly. This rise eroded one of the key benefits of offshoring to China, making it less cost-effective compared to other Asian countries or even regions like Mexico.
• U.S.-China Trade Tensions: Escalating trade tensions between the United States and China, particularly evident in the trade war involving tariffs and trade barriers, created uncertainties and increased costs for companies reliant on Chinese manufacturing.
• COVID-19 Pandemic Impact: The outbreak of the COVID-19 pandemic further exacerbated the vulnerabilities of relying heavily on Chinese supply chains. Lockdowns and transportation restrictions led to significant delays and logistical challenges, highlighting the risks of long-distance, centralized supply chains.

These challenges prompted a strategic reevaluation of offshoring, with companies increasingly looking for alternative locations and approaches to balance cost efficiency with supply chain resilience and risk management.

7.4.3 Sourcing Strategies for Risk Mitigation

In response to the highlighted challenges, it became evident to businesses that an excessive reliance on China for manufacturing posed significant risks. This realization spurred the adoption of various strategies for managing and mitigating these risks:

1. Risk Elimination: Some companies chose to eliminate risk by moving a substantial part of their production from China to alternate countries. A notable example is Samsung, which set up a massive facility in Vietnam, employing over 100,000 workers. Samsung’s significant investment in Vietnam, totaling billions of dollars, underscores a strategic shift away from reliance on Chinese manufacturing.
2. Risk Mitigation: Other companies opted for risk mitigation by diversifying their production locations. For instance, Apple began setting up operations in India, partially moving away from its China-centric production model. This approach aims to reduce dependence on a single country while still maintaining global manufacturing capabilities.

A key form of risk management strategy adopted by American companies is nearshoring. This approach involves relocating manufacturing facilities closer to the United States, particularly to neighboring countries like Mexico. Nearshoring offers several benefits, including reduced transportation costs, shorter lead times, and greater control over the supply chain.

Integral to this nearshoring trend is the maquiladora system in Mexico. These are factories that import materials duty-free and tariff-free for assembly, then export the assembled products. The maquiladora system provides significant cost advantages and operational flexibility, making it an attractive option for U.S. manufacturers seeking to balance cost efficiency with increased supply chain resilience.