Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

Guest Commentary: 3PLs are Key Strategic Partners in Real Estate Procurement

Guest Commentary | By •

When the U.S. economy entered its multi-year recession, many businesses softened the blow by engaging a 3PL to help match slower demand with operational savings. Now that the economy is recovering, some of those same companies are expanding. Since this often involves growing their network of distribution centers, companies are increasingly looking to their logistics partners for something new: real estate advice. When offered this type of opportunity, 3PLs can rise to the occasion by leveraging their experience, tools and a healthy amount of clout in the commercial real estate world. By asking the right questions, staying true to the client’s vision, mining their personal contacts, and staying committed in the long term, 3PLs — known for their expertise in doing more with less — can also be key advisors when it’s time to expand a client’s physical footprint.

If a company engages a good logistics provider to help them locate, lease or buy, and run a new warehouse, the first thing the 3PL should ask is: why does the company need it? Logistics providers understand the strategy behind companies’ desire to physically expand, they understand the pain points, and they understand the drivers. They also understand that more real estate won’t always provide the right solution. Good 3PLs will routinely turn down the potential revenue bump from running a new distribution center for the sake of giving contrary advice, should this be the case, and nurturing a long-term partnership.

Consider a manufacturing client whose recent sales results show solid growth in the Northeast corridor. Encouraged by this success, the client reaches out to its logistics partner to discuss opening a new distribution center in New England. Before doing anything, the logistics provider should help the client determine the origin and sustainability of this spike in business, among other data. They’ll also want to know the company’s growth projections, the characteristics of demand, their forecast inbound and outbound, reverse logistics volumes, and more. When combined with the logistics provider’s wide experience across multiple industries, the client’s answers to these questions won’t only spotlight opportunities, but will also identify the hidden pitfalls likely to color the path ahead.

If a company can’t answer the questions above, or if its roadmap is vague, a good 3PL will help its client understand and articulate general goals and vision for the future — the client’s True North. Only after understanding this unique vision can a logistics provider truly act as a trusted and credible partner, articulating both strategic and fiduciary considerations. Only by putting the client’s needs first and ensuring a new site’s projected ROI is achievable, can a provider help keep a client pointing toward True North. In this way, 3PLs help their clients make wise investment (or non-investment) decisions that complement their continuous improvement roadmap.

Once it is determined that an expansion makes sense, the site search and analysis can begin. Good 3PLs offer a combination of proprietary analytical tools and models, third-party analytical software, and deep subject matter expertise. These assets combine to form an attractive modular solution that clients can pay for in pieces. With each client, logistics providers will run several models to ensure a target property is right. However, most clients fall some degree short of owning all the data needed for those models. Since 3PLs work with other similar clients across different industry segments, they’re able to fill data gaps using assumptive models informed by experience and refined by logic filters, feasibility tests and stress tests. It bears mentioning there are software products on the market which allow companies to internally analyze property metrics, but without complete data and context, these fall short of providing the guidance that a logistics provider can.

Most large 3PLs should also be able to leverage their own real estate procurement arms to ensure their clients get the best deals possible when negotiating property. 3PLs own or operate millions of square feet of warehousing space globally, and this experience qualifies them to advise clients on a very detailed level. Their databases are full of details about various locations, including past demand, freight flows, freight costs, proximity to highways, freight rates in particular markets, and analyses of reverse logistics and return costs for particular product profiles. Often times, a logistics provider’s level of market share also means they have established relationships with major global players in the commercial property space. Because of these relationships, they can help their customers buy or lease more economically and with better terms.

3PLs know that the choice to acquire a new distribution center isn’t just about docks and doors; rather, its real purpose is to support the client’s operations and its success overall. Good 3PLs see the big picture and act as architects for the entire framework, ensuring a smooth process as the facility gets up, running, and fully integrated. To put it another way, the best 3PLs are not only the architects of future success — they’re also its builders and handymen.

Carl Fowler is Senior Director, Business Development and Solutions Design at Menlo Worldwide Logistics. During his nine-year tenure with Menlo, he has worked in transportation, warehouse operations, account management and business development, and has earned a senior leadership role responsible for the company’s 4PL product offering. With an extensive background in manufacturing and warehousing distribution, Fowler has been immersed in the logistics and supply chain industry for more than 18 years.

This Week in Logistics News (January 7-11, 2013)

Global Trade Management Solutions | By •

No time to waste this morning, as I have a lunch date planned with my soon to be five year old daughter. Here’s the news that caught my attention this week:

The first significant merger of 2013 was announced this week, with GT Nexus and TradeCard announcing that they have signed a definitive merger agreement. According to the press release, the combined company will have “a global network of over 20,000 businesses spanning every major industry—from retail and apparel to high tech, automotive, heavy industry, consumer products, pharmaceutical, chemicals, commodities, finance and logistics. Together, the companies will manage over $100 billion in direct supply chain trade.”

I believe the two companies complement each other well. They are both network-based solution providers, where connectivity to trading partners is at the core of their respective solutions. The merger brings together the financial supply chain (TradeCard, PO to Financial Settlement) with the physical supply chain (GT Nexus, global trade movements and visibility). And the timing seems right too. While I’ve been a big proponent of network-based solutions for a long time, particularly for cross-enterprise business processes (see “Revisiting Supply Chain Operating Networks”), I believe more and more companies are starting to “get it” — they’re starting to understand the unique benefits a network-based solution can provide versus a traditional, standalone, behind-the-firewall one.

Steve Banker at ARC adds, “GT Nexus has not so secretly been positioning itself for an IPO. This merger may slow that down a bit, but it will make the new company much more interesting to the financial community. This is because neither company was in financial distress and both companies were roughly the same size. The new company will have about 1000 employees, and this larger heft should make them more interesting.”

The bottom line is that for supply chain and logistics processes, which involve the exchange of data and information with many external trading partners, software is not enough; you also need network connectivity. My bet is that solution providers will continue to march in the direction of realizing the Supply Chain Operating Network model depicted below.

Represenation of Supply Chain Operating Network (Source: 2010 presentation by Adrian Gonzalez)
Representation of Supply Chain Operating Network (Source: 2010 presentation by Adrian Gonzalez)

In other technology news, Oracle announced this week significant enhancements to its transportation management and global trade management solutions. According to the press release, new capabilities include “enhanced fleet management, transportation sourcing, transportation business intelligence, transportation planning, rail transportation, workflow and event management, freight payment, billing and claims, document management and customs management.” The press release provides more details, but here are a couple of new capabilities that caught my attention:

Mobility enhancements [for Oracle TMS] that improve efficiencies and decision-making by enabling customers to conduct key business processes and common transportation management tasks, such as shipment tendering and shipment visibility, on mobile devices using a configurable mobile web-app.

 

The introduction of Oracle Customs Management, a new module within Oracle Global Trade Management that helps customers manage customs clearance screening and custom filings by directly supporting US export AES filings and enabling data to be easily transferred to any other third-party filing broker solution.

Historically, TMS and GTM have been separate solutions. But over the years, as supply chains have become more global, demand for integrating these capabilities has increased. Oracle was relatively late to GTM, but its decision to build its own global trade management solution on the same platform as its TMS was a smart one. The missing piece, per my comments above, is having a network. Oracle continues to partner in this area, but I wonder if the company will change course this year and acquire a network-based solution provider in the near future.

On the 3PL front, Menlo Worldwide Logistics announced that it has expanded its operations in Singapore. Normally, the opening of a new distribution center is not very interesting, but this one caught my attention because of its “green” design and construction. Here are some details from the press release:

The new distribution centre features advanced building design and construction materials emphasizing environmental sustainability and high levels of energy and water-use efficiency—from the use of recycled concrete aggregates, to sustainably sourced office carpet and ceiling board, to high-efficiency air-conditioning and Philips T5 florescent lighting.

 

These efforts will be part of the criteria to be certified by the Singapore Building and Construction Authority (BCA), designating the Sunview facility as achieving BCA’s Green Mark Gold Plus status. The facility will be among the first to be so designated under the program, which encourages the use of recognized best practices in environmental design and construction and advanced “green” building performance.

Finally, one of my predictions for 2013 is that retailers and service providers will continue to focus on innovating the final mile. There’s been a lot of buzz lately about same-day delivery, with Amazon, Walmart, Google, eBay, and USPS all launching or ramping up their efforts in this area (see “On Amazon’ Quest for Same Day Delivery” and “Google, Same-Day Delivery, and Container Tracking”). The Financial Times published an article this week on the topic, which raised an interesting question: Do consumers even want same-day delivery? Here’s an excerpt from the article:

Profit margins are already under pressure in a sector where aggressive Christmas discounting produced only lacklustre sales growth and same-day delivery could erode retailers’ profitability further.

 

But rather than speed, there are signs that what matters more to some people is a reliable estimate of when their packages will arrive.

 

UPS adds: “Quite honestly, what consumers are telling us is as long as they know what the committed delivery date and time is, they are fine.”

This reminded me of a posting I wrote back in June 2009 titled “Speed vs. Consistency in Logistics,” where I highlighted a project Ace Hardware undertook to reduce lead time variability. I believe many of the points I raised back then apply here too.

And that’s a wrap. Have a great weekend!

Song of the Week: “Hurry Hurry” by Air Traffic Controller

(Note: Menlo Worldwide Logistics is a Logistics Viewpoints sponsor and Oracle is an ARC client)

Guest Commentary: Beyond Sustainability to Supply Chain Resilience

Guest Commentary | By •

Businesses around the world are increasingly becoming more vocal and active around “sustainability” issues and managing the breadth and depth of the “carbon footprint” generated by their operations. While both of these terms are getting lots of airplay, what they really point to is the need to plan for greater “resilience” in supply chain design, management and execution.

How resilient are you in your thinking, and does that reflect itself in your supply chain’s processes and management?

The risk of sudden change is growing, so in addition to optimizing supply chains for current conditions and to cope with traditional disruption scenarios, companies should also give more thought to their macro-vulnerabilities. They can use the same sophisticated network tools they use today for optimizing their supply chains to answer questions like “What should we do to minimize the impact if oil prices were to double?” or “How protected are we against potential consequences from regulation of greenhouse gas emissions or a severe weather event?” And of increasing concern, “How vulnerable is my supply chain to political flashpoints and tensions if they should develop into conflicts that can disrupt trade?”

Having considered worst case scenarios for supply chain disruption, it should then be easier to work towards positions of resilience in case any of the scenarios are realized to any degree.

For example, how do you plan for the effects of climate change? Addressing greenhouse gas emissions is a political, economic and environmental issue. And while the effects of increased carbon emissions are debated, governments are increasingly examining – and implementing – regulatory steps intended to reduce man-made sources. These actions are likely to increase as we experience more instances of extreme weather events, such as intense rainstorms leading to flooding, unseasonal droughts and forest fires, all of which have been reported this year. Hurricanes and typhoons are becoming more frequent and more intense. North China recently suffered an unprecedented assault of three coastal typhoons in one week – forcing the evacuation of well over one million people.

Supply chain planners also should consider more seriously how rising international tensions and competition for global energy and mineral supplies could affect operations, or the sourcing of plants and raw materials. Optimizing existing and projected business flows is a very sophisticated management process, but count for nothing if the underlying assumptions suddenly change. Consider the implications if the Suez Canal – or the Panama Canal – were to close; less likely, perhaps, than other risks, but just as far-reaching in its consequences.

As I write this, two of the world’s top economic nations, China and Japan, are embroiled in a dispute over ownership of a small number of mineral-rich uninhabited islands. To the surprise of many, the incident has touched off domestic protests in China, with citizens threatening to boycott ‘anything Japanese’. Similar actions have taken place in Tokyo.

Macroeconomics around global oil supplies also are becoming more and more volatile. Even with today’s high prices, global energy demand continues to rise, a trend that will not end soon, particularly as developing nations mature. China’s car market, for example, has been growing at an annual rate of 25 percent for a decade, and more cars were sold in China last year than in North America and Europe combined. The Brazilian, Indian and Russian markets are also set for dramatic growth. The increased consumption foreshadowed by this growth is likely to send oil prices even higher.

All of these issues present potential sources of supply chain disruption on a macro scale. While the issues themselves are beyond the control of individual companies, the more businesses explore their vulnerabilities and ask themselves key ‘what if’ questions, the more attention and planning they can devote to avoid or reduce the impact of adverse consequences from these trends.

Part of the unpredictability of these trends is their timing. Some have and will develop at a steady pace, allowing some assessment of their effects and reaction to take place, but others will be swift and allow little response time. This is why business models and supply chains must be flexible; their structure and design must be resilient.

Much is talked about taking cost out of the supply chain. The flight of manufacturing from Europe to lower cost regions in China and Southeast Asia was driven by such economic considerations. Increases in the cost of labor, energy and transport as well as tighter and more demanding consumer markets have encouraged variations in supply bases, which now feature Eastern Europe, Turkey and North Africa. As the incomes of workers in developing nations increase, and their appetites for manufactured goods rises, we may well see the supply/demand map be redrawn once again – with some production capacity returning closer to home.

However, supply chain modeling and engineering in Europe must increasingly take into consideration the ability to consistently supply the businesses it serves with the relevant goods, raw materials and services. These will have to be managed within a future physical, political and economic environment that is more volatile than anytime within the last fifty years. Focusing on resilience may cost a business some profitability in the short term, but will pay dividends in the long term through a sustainable business supported by a supply chain that can flex and adapt to shifting economic, social and environmental developments.

As a senior director at Menlo Worldwide Logistics based in Eersel, Holland, Arthur van Gerven is responsible for business development, solutions design, account management and 4PL/supply chain consulting in Europe. He has more than 20 years of experience managing and directing global logistics for clients in multiple industries across Europe.

This Week in Logistics News (October 1-5, 2012)

Chemical Industry | By •

As reported in the Wall Street Journal, a study conducted by the University of Pennsylvania’s Wharton School found that “men with shaved heads are perceived to be more masculine, dominant and, in some cases, to have greater leadership potential than those with longer locks or with thinning hair.” I was cheering the news, reading the article out loud to my wife in the next room, until I came to this disturbing section: men with shaved heads were also perceived to be “less attractive” than full-haired men. At that point, it was immediately clear to me that the study lacked any credibility, that the Wharton School is not what it used to be, and that even though no bald men were harmed in the research process, some were hurt afterwards.

In more important news…

A few years ago, I conducted a study of the third party logistics (3PL) market, and with the exception of a few niche providers, most 3PLs derived their revenue from only a handful of industries: Automotive, High Tech, Food & Beverage, Consumer Packaged Goods, and Retail. Near the bottom of the list was Chemical, due in large part to the specialized needs of the industry.

Today, however, as 3PLs seek new growth opportunities, they are starting to pay more attention to the chemical industry. Last year, for example, Transplace acquired SCO Logistics, a Philadelphia-based 3PL serving chemical companies (listen to my podcast interview with the CEOs of both companies). And this week, CH Robinson announced that it has formed a new division called ChemSolutions™ which will provide logistics services to chemical manufacturing and distribution customers globally. According to the press release:

ChemSolutions™ is capable of providing chemical bulk shipping, safety and sustainability, freight forwarding, customs brokerage, vendor and supplier compliance, global trade management, and multi-modal transportation to chemical shippers.

 

In order to serve the chemical market more broadly and effectively, ChemSolutions™ has earned RC14001™ certification, which combines Responsible Care and ISO 14001 certifications into a single process based on an international standard that is accepted by chemical manufacturers worldwide.

Also this week, ChemLogix — a provider of chemical industry consulting services, TMS technology, and transportation management services — introduced a new suite of logistics service brands to boost the visibility of its offerings. The new service brands, which include On-Demand Global TMS, RightSource LX, BULKTAINER, and RightRail LX, address the key areas “that support customer needs to Plan, Analyze, Control and Execute their supply chain operations.”

Simply put, and in the immortal words of The Jeffersons, the chemical industry is “moving on up” and “finally getting a piece of the [3PL] pie.”

In other 3PL news, Menlo Worldwide Logistics introduced CarbonNet™, “a carbon management program [that] combines custom-built software to capture, calculate and manage greenhouse gas emissions, with Lean processes and tools to uncover waste, design and implement reduction solutions.” CarbonNet is a cloud-based solution and was developed by Menlo’s IT team. The company has been piloting the program at 60 of its facilities in the United States this past year, and the goal is to offer this program to customers in the future. Here’s an excerpt from press release about how CarbonNet works:

The application is designed to be highly configurable, and can accept a wide variety of data inputs to catalog key emissions characteristics of a facility and the activities performed within, as well as the transport of products and materials between such locations. It can accept input as well from suppliers, vendors and other third parties whose activities could contribute to the makeup of a supply chain carbon footprint.

Although sustainability has dropped from the headlines here in the US since the economic downturn, it seems to me that 3PLs (especially those with global operations) continue to make investments in this area, such as investing in alternative fuel vehicles, participating in the Carbon Disclosure Project, and publishing sustainability reports. Why? A question I’ll address in a future posting.

Mobile, Social, and Cloud were among the technology headlines this week. Manhattan Associates announced the creation of Manhattan Mobility Labs, “a development team with a specific focus on mobile applications and their ability to extend the Manhattan SCOPE® platform of supply chain optimization solutions.” Current Manhattan Associates mobile applications include Store Inventory Management, Distributed Selling, Supplier Enablement, and Mobile Supply Chain Intelligence. Here is a quote by David Landau, vice president, product management, at Manhattan Associates:

“The creation of Manhattan Mobility Labs is a result of the collaboration we have with our customers in creating solutions that enable the mobile workforce and increase employee productivity. In addition to our current mobile offerings, we have several exciting upcoming initiatives, built on a common mobile framework and available on popular mobile devices and tablets.”

Just three weeks ago, SAP announced the opening of its new SAP Mobility Design Center “to help customers meet the growing need for individualized mobile solutions.” Is opening up mobility labs and design centers the beginning of a new trend in the software industry? This reminds me a bit of the days when software vendors were launching similar efforts around RFID — although this time around, customer demand for mobile solutions actually exists.

Oracle held its annual user conference, Oracle OpenWorld, this week. Among the many press releases issued was one announcing Oracle Social Relationship Management Suite, “an integrated enterprise service that enables companies to listen, engage, create, market, and analyze interactions across multiple social platforms in real-time providing a holistic view of the consumer.” I believe it will take a while before we see “social” capabilities embedded in Oracle’s supply chain and logistics applications, but the ball is at least moving in that direction…and another reason why supply chain executives need to think beyond Facebook, LinkedIn, and Twitter when it comes to social business.

The other release that caught my attention was the announcement that Oracle has expanded its Oracle Cloud services portfolio. You can read the press release for all the details, but the company says it has more than 10,000 customers and more than 25 million users worldwide using the services each day. “The pricing model is simple, predictable and based on a monthly subscription model…Customers can choose to sign up for month-to-month subscriptions or longer term contracts.” With regards to Oracle Cloud Application Services, the portfolio includes ERP Services, HCM Services, Talent Management Services, Sales and Marketing Services, and Customer Service and Support Services. I haven’t spoken to anyone at the company, so I don’t know if and when supply chain applications will be added to the list.

And with that, I’m off to shave my head. Have a great weekend!

Song of the Week (inspired by my posting this week): “Maps” by the Yeah Yeah Yeahs. “Maps, wait, they don’t love you like I love you…”

(Note: CH Robinson, Manhattan Associates, Menlo Worldwide Logistics, Oracle, SAP, Transplace are ARC clients and/or Logistics Viewpoints sponsors).

Guest Commentary: Preparing Your Organization for the Impending Cost of Carbon

Guest Commentary | By •

It’s not a matter of “if” the United States will implement a program to reward organizations for reducing emissions and penalize those that do not, but “when.” This means that U.S. companies — particularly global players — can’t afford to keep their sustainability plans on the back burner. In fact, the pressure to reduce greenhouse gas emissions is greater than ever. In 2005, Europe implemented the first large cap-and-trade program in the world under its European Union Emission Trading Scheme, while Australia’s program, the second largest, started this month as part of its Clean Energy Future package. Because of these increasing regulations, many global organizations are designing solutions or building products that adhere to the most stringent requirements. They expect their vendors and suppliers to do the same.

How do you prepare your organization to measure and manage the cost of your supply chain’s emissions? It’s not an easy process, but by taking the following steps your organization will be ready for what will soon become a requirement to compete on a global scale.

Establish a Team
Forming a specific team of employees to help your organization prepare for the cost of carbon is important. But perhaps more important is determining who has ownership over the project. This internal champion is responsible for both charting the course and identifying the team members. If you want the program to take hold, this initiative must reach down through the organization from the very top of the leadership team, ideally the CEO. Once leadership makes the commitment, it demonstrates to the rest of the organization that the effort is important.

You’ll want the team itself to be cross-functional with representatives from as many departments across the organization as possible, from finance and communications professionals to representatives from procurement, operations, manufacturing and logistics. This group is not only going to help establish the vision, but will also execute the strategies and programs at a more tactical level. They should also have exposure to or experience with the standards of the World Resource Institute’s (WRI’s) Greenhouse Gas (GHG) Protocol, the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP). Without an investment in the resources to focus, drive and help align these efforts, it’s very difficult to build a foundation and set a vision. For additional guidance, there are consultants that can help define, direct, develop the team and lead the conversation.

Determine Risks and Opportunities
As with any new undertaking, it’s important to conduct research to gain a clear understanding of your risks and opportunities. Do you know your stakeholders’ (stockholders, customers, employees, regulatory agencies, NGOs, etc.) concerns, questions, wants and expectations regarding your company’s environmental performance? If not, this is where your newly appointed team should focus its efforts.

This in-depth research process also requires identifying your stakeholders and their concerns. If you’re a paper company, for example, environmental groups like the Sierra Club are going to be very interested in your actions. Again, external consultants are available to help with benchmarking exercises, gathering quantitative and qualitative data about competitors, customers, and even governmental and educational institutions. As important as determining your risk is researching the opportunities that exist to capture a return on your organization’s investment. For example, if you’re an appliance company, more than 80 percent of customers are looking for energy and water efficiency, but only 10 percent may be willing to pay a price premium. Alternatively, your sustainability program may open new market potential that was previously unknown.

If you don’t conduct this due diligence, your organization will be susceptible to rework and general inefficiency in terms of laying the groundwork necessary to understand the impact of a cap-and-trade bill and how to lessen carbon dependency moving forward.

Establish a Vision
The GRI, GHG Protocol and CDP provide the framework around which to build your program. It’s critical for the team in place to leverage all of the background research and information against these standards to establish the project’s vision and roadmap. Digesting the information from these guidelines will help you ensure that the metrics and key performance indicators you’re trying to capture also line up with these standards. The vision should be:

  • Integrated – Utilize the existing foundation and structure of the organization, such as core values and corporate culture, and then innovate, strengthen and expand from there to showcase the environmental aspect. Preparing for the cost of carbon should not be an activity that is divergent or separate from the policies, goals and overall vision of the company.
  • Aspirational – Set a lofty target. Maybe the goal isn’t entirely attainable, but it sets the tone for the overall initiative. It’s a touchstone for all to reach toward and drives the right thought processes and behavior to “get there.”
  • Follow a roadmap – It’s impossible to reach your goals if there isn’t a clear path. What do you want to accomplish in the first year? By the fifth year? Which geographies will you focus on initially? Which specific sustainability projects do you want to tackle and in what order? Your roadmap will be defined by the material risks and opportunities you’ve identified, alignment with the various standards, the voice of the customer and your market research.

Establishing a baseline and being flexible enough to change course along the way as you collect data and measure progress is critical. With a solid process, backed by strong communications, transparency, education and a collaborative environment, these preliminary steps will help your organization be at the ready when cap-and-trade legislation re-emerges in the United States. The clock is ticking and now is the time to be prepared.

Ashton Shaw, sustainability engineer for Menlo Worldwide Logistics, designed and is currently implementing Menlo’s sustainability program and related service offerings. Shaw joined the company in 2008 and continues to further Menlo’s sustainability program and meet the growing expectations of the company’s larger supply chain customers.

Guest Commentary: Mexico – Manufacturing Companies Move Toward Near-Sourcing

China | By •

All eyes are on Mexico as the cost of manufacturing in China rises, forcing businesses to rethink their global sourcing strategies. Companies that once flocked to China because of its massive pool of cheap labor and attractive government incentives are now finding themselves at risk of losing the advantages that brought them to China in the first place. A number of factors are to blame: a diminishing population of low-cost workers, rising production costs, and government-controlled incentives to favored industries at the expense of those seen as less vital to China’s growth.

Although China’s minimum wage rates have been increasing by more than 15 to 20 percent per year according to a study by management consulting firm Cost & Capital, China’s overall wage cost remains far lower than that of Mexico, its closest low-cost competitor. It would be logical that companies without a firm understanding of their true landed costs might look at the labor costs per hour between the two countries, which were $1.40 and $5.93, respectively, in January 2012, and determine that China is still the preferred manufacturing point. However, over the next five years, industry projects that China’s wage cost will increase by 80 percent, a far sharper rate than in the past. Moreover, the growing cost differential between China and its low-cost competitors overall — from supply chain to labor to currency to other less tangibles like regulatory costs or value-added tax (VAT) policy fluctuations — is starting to erode the China advantage.

Companies that know their true landed costs account for factors such as energy costs, currency valuation, shipping costs, transit time, and taxes and tariffs. For example, currently, electricity is cheaper in Mexico than it is in China. In fact, China’s electricity cost per kilowatt-hour (kWh) stands at 15 cents, while the cost per kWh in Mexico is 9 cents. Currency valuation against the U.S. dollar (USD) is also telling. The Chinese renminbi (RMB) is expected to appreciate at an annual rate of 3 to 5 percent for the next three years relative to the USD, while the Mexican peso continues to depreciate. Finally, trans-Pacific freight costs are expected to increase 5 percent annually over the medium term. A similar December 2011 study comparing variable cost components between the United States, China, India and Mexico, conducted by the financial consulting firm Alix Partners, predicts that multiple variables of the costs of production could equal costs in the United States by as early as 2015.

In Mexico, safety and stability issues do exist, but overall there’s a business landscape in place that is very appealing to manufacturing companies. The country has a well-educated workforce and a maquiladora system that eliminates tariffs for products exported to the United States.

Moving manufacturing operations to Mexico would seem to have clear advantages — but only if those advantages can be fully leveraged by a particular company. A third-party logistics provider can help clients determine if a move to Mexico makes sense by asking some key questions in addition to ensuring they understand their total landed costs:

  1. How is an increased level of agility going to impact your ability to sell more? If you’re a garment retailer that has to shift quickly with seasonal changes and you need to be increasingly responsive to the needs of your customer base, a 40-day lead time to accommodate ocean carriage from China can be highly damaging.
  1. How important is sustainability within your operations? More customers are becoming very concerned about green supply chains — they want to know where product is being sourced for both safety and environmental reasons. China doesn’t have a reputation for strict environmental regulations, while Mexico has worked closely with the United States to improve environmental standards since signing NAFTA.
  1. Do you know who your vendors and suppliers are working with at every point in the supply chain? If your supply chain involves multiple vendors and suppliers, then the chances are high that those partners are utilizing the services of a network of subcontractors. If those subcontractors begin to have trouble accessing electricity or sourcing raw material as is happening in China today, it could have a damaging ripple effect on your entire supply chain.
  1. How important are intellectual property (IP) rights to your business and how much control do you believe you should have over them? China is notorious for disregarding IP rights, while Mexico is generally seen as being a far more stable environment.
  1. Are you shipping controlled or protected products? A growing number of companies are running into more regulatory issues shipping out of China and would like to keep operations closer to home. Moving operations to Mexico may simplify this for some companies, particularly as the United States has made it very clear that they are going to start to bolster enforcement actions on products that aren’t in compliance with U.S. trade requirements.

All signs point to the fact that near-sourcing to Mexico is no longer a short-lived trend, but — for the right company — is a strategic business formula that has staying power. A Wall Street Journal headline that ran earlier this year, likely said it best: “China’s Export Pain May be Mexico’s Gain.”

Frank Lange has over 20 years of international experience in the supply chain industry, focused on Asia, Europe and Latin America. Currently responsible for Menlo’s global strategic investment out of its headquarters in San Mateo, Calif., his most recent overseas posting was leading Menlo’s operations in China, based in Shanghai.

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