Supply Chain InsightsGrant Thornton Consumer and Industrial Products practice Part 1 of 3 — August 2012Nearshoring: Then and now Over the past decade, international High fuel prices, rising transportationEach year, Grant Thornton LLP collaborates withWorld Trade 100 magazine on a series of three sourcing has come to take up an extremely costs and longer transit times initiallysurveys concerning the supply chain. These surveys large portion of the supply chain for drove this surge in nearshoring, whichare intended to provide a snapshot of issues and U.S. companies. The ubiquity of “made began in 2008 and has continuedopportunities in the supply chain industry. We hopethat this 2012 survey (part 1 of 3), along with insights in China” products and call centers in unabated. While nearshoring doesn’tfrom Grant Thornton’s supply chain professionals, helps Bangalore speaks for itself. But it doesn’t necessarily overcome all the challengesinform your sourcing and supply chain decision-making. tell the whole story. In fact, there is a rising of dealing with international suppliers tide of manufacturers and distributors — since distance, language, culture and moving sourcing closer to home. Consider time zones may still be problematic — the outrage over U.S. Olympic athletes the greater proximity allows for more wearing uniforms made in China. This is flexibility to align with suppliers. emblematic of a growing pressure to bring Grant Thornton LLP’s 2012 Supply sourcing back to the United States or, at Chain Insights survey, conducted in the very least, to more proximate locations partnership with World Trade 100 such as Canada and Central America. magazine, highlights the expectations of manufacturers and supply chain professionals for the coming year, and the issues that are most on their minds. continued> Over the past decade, international sourcing has come to take up an extremely large portion of the supply chain for U.S. companies.
Nearshoring: Then and now (continued)What percentage of your supply chain Did you bring international sourcing closer to the United States (e.g., Mexico, Canada)purchases are sourced internationally over the past 12 months?(from outside the United States)? 2009 2012 2010 30% Yes 19% Yes 25% 2011 32% No 81% No 75% 2012 (proj.) 34% Number of respondents: 313 Number of respondents: 357A shifting landscape International sourcing, but closer “One trend we are seeing is an uptickA growing percentage of goods are to home in nearshoring IT and shared services.sourced outside the United States, with Eighty-one percent of manufacturers For instance, companies might locate34% of goods expected to be sourced report that they are increasing their their IT call centers in small towns in thefrom outside the United States in 2012, up sourcing from the United States, up from States rather than large cities in India. Thefrom 30% in 2010. But where these goods 59% in 2009 — a 22% rise (see chart clear advantage is that U.S. locations areare sourced is somewhat of a shifting on next page). This is undeniably good culturally a known quantity. There will belandscape. While China remains a major news for the U.S. economy. It’s worth some cost savings, although not nearly to * Responses may not total 100% due to rounding.offshore supply source, an increasing noting that some of this U.S. nearshoring the order of magnitude of India. But younumber of manufacturers are bringing represents the relocation of certain back- pay more to get more,” explains Grahamtheir sourcing closer to home, to locations office functions and call centers as a Tasman, principal, Finance Operationssuch as Canada or South America, or truly means of improving responsiveness and Solutions Group. “There are someback home — to the United States. customer service. locations in the United States that are favorable for hosting business operations such as shared services,” notes Tasman. “Factors that we look at include labor pool availability and language and time zone considerations, along with proximity to higher education institutions.” continued>2 Supply Chain Insights — Part 1 of 3 — August 2012
Nearshoring: Then and now (continued) Three in 10 manufacturers — up In which countries are you increasing your material and service purchases?*from 18% in 2009 — have increased 2009 2012their sourcing in Canada. But sourcing in United States 59%Mexico has actually declined, falling to 81%20%, from 49% in 2009. Canada 18% 30% Mexico 49%Offshoring versus nearshoring: 20%What’s at stake? *Respondents were able to select more than one answer.The issues that are driving companiesto consider nearshoring vary. Frequentcomplaints about international sourcing What does your company stand to gain by nearshoring?*include late deliveries (23%, the same Shorter lead time 39%percentage as in 2009) and poor quality Lower costs 30%(21%, down from 25% in 2009). Higher Better-quality products 19%total costs are also a problem cited by Better supply chain control 9% More reliable 2%12%, compared with 7% three years ago. Better communication 1%But it’s worth noting that 17% have no Less inventory 1%difficulties with international sourcing, an Other 14%increase from 14% in 2009. N/A 7% “You want a supplier that can provide *Respondents were able to select more than one answer.what you need at a high quality — whenyou need it. When considering sourcingorigins, companies must factor in not only Understanding conflict minerals disclosuresthe cost of goods, but also the cost of latedeliveries, the cost of getting the product to Conflict minerals are essential in the manufacturing processes of a variety of devices such as mobile phones, laptops and MP3 players. Conflict minerals are so named because they are sometimes used to financedistributors and customers, and intellectual conflicts in the Democratic Republic of the Congo and its adjoining countries (DRC countries). In Decemberproperty issues, as well as warranty and 2010, the SEC issued a proposed rule on conflict minerals to help implement Section 1502 of the Dodd-Frankservice costs,” says Steve Lyman, Advisory Wall Street Reform and Consumer Protection Act. Section 1502, also known as the conflict minerals provision, is intended to highlight, via public disclosure, the exploitation and trade of minerals originating in the DRCServices managing director. countries. The SEC expects to issue the final rule in 2012, and compliance will be required one year after that. continued> The rule will require domestic and foreign issuers to disclose their use of certain minerals such as: • Cassiterite — Tin, tin alloys, tin plating and solders for joining pipes and electronic circuits. • Columbite-tantalite (coltan) — Tantalum, which is used in electronic components such as mobile telephones, computers, video game consoles and digital cameras. Tantalum is also used as an alloy for carbide tools and jet engine components. • Gold — Jewelry. Gold is also used in electronic, communications and aerospace equipment. • Wolframite — Tungsten, which is used in metal wires, electrodes and contacts in lighting, electronic, electrical, heating and welding applications. Domestic and foreign issuers that make use of conflict minerals will be required to implement new procedures and disclose in their annual reports whether the conflict minerals that are necessary to either the functionality or the manufacturing of the company’s products originated in DRC countries. Issuers will need to provide a separate conflict minerals report when they either (1) use conflict minerals that are known to have originated in the DRC countries or (2) use conflict minerals but cannot determine their country of origin.3 Supply Chain Insights — Part 1 of 3 — August 2012
Nearshoring: Then and now (continued)International sourcing: 2009 Percentage of international sourcing (dollar volume) by origination of goods/servicesversus 2012 2009 2012In 20091, the largest percentage of survey China 28%respondents that sourced internationally 25%relied on China (28%), but we believe that Asia (excluding China) 15% 15%this trend may be changing based on our Western Europe 13%most recent data. 14% Today, many respondents are reducing Canada 9% 11%their international sourcing, with China 8% Mexicoseeing sourcing reductions from 57% 8% 2%of manufacturers surveyed. But that South America 5%percentage has shrunk slightly since 2009, 4% Eastern Europewhen more than six in 10 respondents 3% 21%(61%) cut back on sourcing from China. Other 19% India and Pakistan have also *Respondents were able to select more than one answer.experienced sourcing reductions (17%,down from 20% in 2009). And a growing From what countries are you reducing your sourcing?*number of U.S. manufacturers have 2009 2012slashed sourcing from other Asian China 61%countries such as Japan (19% in 2012 57% Japan 5%versus only 5% in 2009), Korea (14%, 19%compared with 3% three years ago), India/Pakistan 20%and the Philippines (13% as opposed to 17% Korea 3%5% earlier). These findings represent a 14%substantial rise in sourcing reductions Philippines 5% 13%from several major Asian countries Other (specify) 21%besides China. 20% continued> *Respondents were able to select more than one answer.Are you in compliance with the California Transparency in Supply Chains Act?California’s Transparency in Supply Chains Act (SB 657) became effective Jan. 1, 2012. Retail sellers and manufacturers that do business in California and have annual globalgross receipts in excess of $100 million are required to make disclosures on their websites about their efforts to eradicate slavery and human trafficking from their directsupply chains for goods offered for sale.Specifically, each company is required to disclose:• to what extent, if any, it evaluates and addresses the risk of slavery and human trafficking in its products’ supply chain and whether a third party conducts the evaluation;• whether it audits its suppliers and whether the audits are independent and unannounced;• whether it requires its direct suppliers to certify that materials within their products comply with applicable laws on slavery and human trafficking;• whether it holds employees and suppliers accountable and, if so, what the consequences are for employees or suppliers that fail to meet the accountability standards; and• whether it trains employees on mitigating the risk of slavery and human trafficking in the product supply chain.Are you in compliance? Our team can help you perform a risk assessment of the supply chain in order to identify the risks of slavery and human trafficking and developcorrective action plans to address those risks; assist you as you evaluate specific suppliers and establish a supply chain due diligence program; and help you conduct auditsof domestic and international suppliers and vendors in order to verify their compliance with applicable requirements. We can also help you establish policies and proceduresto confirm that employees and contractors are following company standards regarding slavery and human trafficking, formulate internal control procedures for verifyingcompliance, and develop and implement training for employees who have direct responsibility for supply chain management.1 Our Supply Chain Solutions 2009 survey was based on data gathered in 2008.4 Supply Chain Insights — Part 1 of 3 — August 2012
Nearshoring: Then and now (continued)Managing supplier risk It’s important to look at the financial Industrial Products asserts: “The best way“A best-in-class sourcing strategy health of suppliers because they can pose to monitor the financial health of your keyinvolves a risk-based approach to risks to both a manufacturer’s production suppliers is to form strategic relationshipsmanaging the supply chain,” explains schedule and its strategic objectives. with them. In addition to sharing currentTasman. “Companies need to be looking But 31% do nothing to monitor their financial information, your key suppliersat reliability and performing due diligence suppliers’ financial condition. can participate fully in strategic planning,on vendors’ ability to deliver. They need If a supplier is not a public company, continuous improvement and productto ask — and be able to answer — a how can a manufacturer confirm its development efforts. When you arecrucial question: ‘What if there’s a break financial stability? Wally Gruenes, national engaged in that sort of relationship within the supply chain?’” managing partner of Consumer and your key suppliers, you will be keenly aware of their financial health.” continued>What process did you go through to select a supplier?* 2009 2012Used an existing supplier, so no process 28%was used 36%Used a supplier that was previously in our 20%supply chain, so no process was required 23%Conducted remote assessment based on 20%supplier submission of data and/or 14%response to questionnaire or assessmentConducted on-site assessment at 28%supplier location 21% 2%Conducted no assessment 3% 3%Other (specify) 3%*Respondents were able to select more than one answer.What are you doing to monitor the financial health of your suppliers?*Only review financial health during 23%negotiation of new contractsUse data from third-party source 28%Regularly request and review financial data 27%directly submitted from supplierOther (specify) 7%Nothing 31%*Respondents were able to select more than one answer.5 Supply Chain Insights — Part 1 of 3 — August 2012