I bought a new calculator recently. I thought my old one was faulty: the numbers didn't add up! Let me explain. Over the past 10 years businesses have been moving manufacturing and sourcing away from their main markets. The shareholders were told that labour was cheaper elsewhere, so the company could reduce costs, prices and make more money. I kept going through my own maths but I couldn't come to the same result.
Cross-industry research has shown that the total cost of a product is split between material (60%), labour (30%) and overheads (10%). I am conscious that these are averages, but they clearly show that material is the biggest cost.
So when businesses decide to extend their supply chain halfway around the globe to save labour costs, what happens to the material element? It increases. A longer supply chain means more inventory and more time spent shipping when no value is added.
I cannot help thinking that most of the savings achieved would have been possible if the original shorter supply chain had been made leaner in the first place. I also think that the obsession to reduce labour costs is psychological rather than rational: we cannot stand paying someone to be under-utilised ... But what about all the stock sitting around doing nothing?
With the current economic situation, new data has entered the equation. Raw material and transport costs have increased sharply. The environment is also costing the brands dearly.
So is it all worth it? Both my calculator and my common sense say 'No'. Will businesses admit it? Of course not, especially when you add the cost of reshaping the supply chain and moving the facilities. A small number of firms are already moving their manufacturing back, closer to their main markets. Rumours of a supply chain rethink are also coming from western farmers ... Meanwhile, I realise that there was nothing wrong with my old calculator after all!
Hugh Williams is founder of supply chain planning specialist consultancy Hughenden.