I did something this morning that I have never done before in my life. I got up at 4am to join the first rush of the Black Friday buying frenzy. OK, my wife was snoring up a storm and we have a house full of Thanksgiving guests, meaning I had no other bed for escape. So I got up and visited Best Buy, Lowe’s, Target and Wal-Mart. It was a madhouse at 5am in the morning at Best Buy. By luck, I scored a Sharp 15inch LCD TV for $190, about $400 less than I paid for an identical set 4 years ago.
However, I digress. The unbelievably cheap electronics–$30 microwaves at Wal-Mart, $50 color TV’s at Target and the $300 laptops at Best Buy– got me thinking that we are likely bumping along the bottom of the global cheap sourcing curve. Whether it be energy costs, environmental costs, wage costs or security costs, the American love affair with cheap goods has to come to an end sooner rather than later. When it does, we will need to completely redesign our supply chains as on shoring and other options come back into favor. And it may be a lot sooner than we think.
A new Accenture Executive Issues Study cites enterprise risk as the major risk facing corporations today, according to the senior executives surveyed. A major component of enterprise risk is supply risk, according to Accenture, the inability to get key components or products from far away sources to meet customer demands. Just think Sony with the huge shortage of Playstation 3 boxes, missing holiday sales in the millions of units, or the Elmo TMX doll, where Chinese labor shortages (right, I said labor shortages) are being blamed for critical production shortfalls.
So what’s a good supply chain strategist to do? For starters, perhaps we can begin to explore sourcing options closer to home. In the rush to be the first into China and to take advantage of low cost sourcing, many companies put all their eggs in one (Chinese made) basket. Look to South and Latin America for skilled labor forces with wages (for the moment) higher than China, but with much lower logistics costs and service times. Next, hedge your bets on US manufacturing. The press has been full of examples in recent weeks of companies who are making lots of profit by manufacturing all products in the US–Viking Range and Bobcat being two examples. Why not commission an analysis of producing some or all of your product in the US? Finally, look to reduce risk in your Far East supply sources by designing more professional grade supply chains for these regions. Many of the earlier Far East supply chains were cobbled together in the early days of off shore manufacturing moves. Often, local logistics suppliers were used as they were the only option. Now, many more global players have entered these markets and are less likely to experience a serious meltdown in their operations compared to a local, less sophisticated player.
Our ability to source low cost goods from China and perhaps other nations will not end tomorrow. But the pressure on wages, like we have already seen on the Indian subcontinent, will put upward pressure on Chinese sourcing costs in the coming years. Why else would global auto makers target China as the next boom automobile market unless they believed that wages would rise to allow the average worker to buy cars? Trust me, that means wages are expected to rapidly increase in the next few years.
The final thought? Begin planning your new supply chain strategy sooner rather than later. It is a lot more fun starting a smooth transition now than to wake up a 4am wondering how you are going to survive a serious supply chain operational shortfall sometime in the next few years.
A VC in Vacationland 
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