Maintaining a Good Supply

Last year I read an article, Zagis USA to Invest $75 Million in Two New Louisiana Textile Mills, about a Mexican company opening up yarn factories in the United States.  In reading through the article, it became clear that the driving reason for the new plants was economics.  It will be cheaper to manufacture the yarn in the United States then in Mexico.   Even with U.S. workers earning, on the average, ten times more than Mexican workers, Zagis determined it would be cheaper to manufacture in Louisiana then in Mexico City.  The article does go into some specifics about why, but to put it briefly it is due to the supply chain.

By locating near the source of the major raw material for the yarn, cotton, the manufacturer ensures that it will have the lowest yarn production cost possible. That is not the complete story, by locating in Louisiana the company is also near an active international port which translates into lower transportation costs.

Supply chain management is a large and complex subject that covers every aspect from the acquisition of raw materials or components to the delivery to the end consumer.  Although much of the supply chain management efforts are aimed at cost savings, there is significant emphasis placed on ensuring quality and supply.  Take the recent purchase of a sub-contractor’s production facility by Boeing.

Boeing has agreed to pay $580 Million to take over ownership, from a major supplier, of the manufacturing facility of parts for the 787 Dreamliner.  If you follow the headlines you probably already know that the 787 Dreamliner has been delayed multiple times due to supply problems.  Boeing is hoping that by taking over some of the operations of the supplier they can eliminate some of the problems they are currently experiencing. 

One of the problems with supply chain management is that some components of the process rely on a critical mass of activity.  By that I mean that there needs to be a certain level of activity to provide the efficiencies needed to keep costs low.  This is a problem because for every factory that moves offshore, or closes, our nation chips away at that critical mass needed for an efficient supply chain.  For example, as factories close in a particular area the shipping cost to and from the remaining factories, in the area, start to go up.  Delivery companies lose an economy of scale and pass the costs on to the remaining factories. 

Every time a factory closes there is not only a loss of jobs, there is also a reduction in the economy’s ability to support a competitive supply chain.  As the supply chain continues to erode there will be more pressure on companies to relocate to lower cost areas so they can remain competitive.  I am not sure where that tipping point is, but just like global warming, I am not willing to take a chance of reaching it.  The consequences could be devastating.