Moving production abroad: How does this affect the supply chain?

Moving production abroad to capitalise on lower operating costs is nothing new, but there are a lot of factors to consider before businesses take the plunge. Cheaper labour, less regulation, and more lenient tax regimes are all valid reasons for considering relocation. Operating in countries with minimal government controls can also allow businesses to be more innovative and take more risks as well as driving growth in new markets.

It pays to be careful though. Countries that are attractive for economic reasons can also be politically unstable. The upheaval caused by sudden changes in government can have serious implications for companies used to the stability of western democracies, and relying on one country for all production can be risky.

Contributing factors

 

The reasons for companies considering moving production abroad are many, with cutting costs and seeking new opportunities at the top of the list. Occasionally something happens which accelerates the trend and the current US/China trade war is a good example.

 

The US’s attempt to reduce its massive trade deficit with China has led to an escalating trade war now into its second year. The effects of increased tariffs, along with rising labour costs, is causing businesses to move elements of their supply chains out of China with the main beneficiaries being in the Southeast Asia region.

Who’s making the move?

 

Dell and HP for example, have moved server production out of China and Google are planning to move production of their Pixel 3A phone to Vietnam. Google intends to move most of its production for the US market away from China and, given their current relatively low production levels, now is the perfect time to move.

For Apple, which produces 90% of its products in China and sells a lot to the Chinese market, moving carries more risk. They are, however, slowly building manufacturing capacity in India which will gradually reduce their reliance on China.

An increasing number of Steve Madden’s handbags are being produced in Cambodia and other producers of luggage such as Tapestry and Vera Bradley are planning to follow suit in shifting production away from China and into Southeast Asia.

What can manufacturers do?

 

Relocating production facilities is a long-term move that comes with high levels of risk and cost. Large companies can mitigate the risk by gradually moving production from one country to another, but for smaller businesses, it might not make sense to split production that way.

For supply chain managers, adaptability, in what is an increasingly complex and uncertain environment, is essential. Having alternative options for suppliers and manufacturing locations allows the flexibility and resilience to deal with any situation. Decision making can be enhanced with the use of digital modelling of supply chain networks so that proposed changes can be simulated and evaluated.

Whatever the outcome of the US/China trade war, global trade will always have a degree of unpredictability. For companies to survive and thrive, managers need to stay aware of the actions of governments that might affect their businesses and be prepared to adapt as necessary.

 

If you’re a supply chain professional looking for a new opportunity or have any questions about the market then please don’t hesitate to get in touch by emailing info@x4engineering.co.uk or visiting or jobs page.

Author

Brogan Lee

Consultant

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