In addition to key industries such as food production, parts manufacture, and others that produce high-turnover, quick-demand items, other industries are actually being pushed by current trends to consider proximity to the end user when deciding where to establish their new plants.
Pressures and Adaptations
The world is, of course, always in flux. Current trends have forced a new look at transportation costs, impacts, and ultimately the relationship between location optimization and proximity to the end consumer. Hence, a sensitivity analysis to determine the relative importance of direct access to the product's end-user becomes critical. Let's look at what has driven this need:
Shelf Life: Traditionally, product shelf life or perishability drove the greatest need for direct proximity to the end consumer. Some businesses - such as the preparation of fresh foods, blood products, and other perishables - have such short product lives and difficulties in long-distance shipping that proximity to the end users became an absolute necessity. Any increase in distance had a direct and remarkable increase in risk that the product would not make it to market in time for it to have any usable shelf life. In these cases, the proximity of the consumer market absolutely defined the search area for the function. Any location outside of a certain delivery time was simply not a reasonable option.
Just-in-Time: The "shelf life" model increased to include just-in-time production for some industries. Consumption zones defined the areas where manufacturing and distribution had to happen. Access to customers also became a distinct advantage when there was a direct give-and-take relationship between the producer and the consumer. This was certainly the case for highly customized products, such as some forms of consumer electronics and even automotive products. While not a direct producer-to-end-user relationship, component manufacturers and Tier I suppliers simply needed to have direct access to their end customers (electronics and automobile manufacturers) to understand their customers' needs, to meet their requirements for velocity to market, and to cut the logistics costs as close to the bone as possible and thereby retain maximum cost advantage.
Location-independent: Other industries simply did not gain any direct advantage from closer access to the end-user market. In fact, while electronic component manufacturers gained benefit from direct access to electronics manufacturers, neither gained any true advantage from locating closer to their eventual consumer pool. This lack of direct interaction, coupled with such trends as containerized freight and free-trade policies, led to the massive movement of manufacturing to a global model over past decades.
Put simply, the producer did not need to put much weight on proximity to the end user. Either transportation costs were cheap or the advantages of a distant location vastly outweighed the cost and other benefits of getting close to the end consumer.
Fuel Costs: The "location independent" manufacturer may become something of a relic if fuel costs continue to escalate. While annual oil price increases of about 100 percent are likely to prove to be an anomaly, manufacturers have been especially sensitive to the issue. Stories abound of companies that have outspent their 2008 transportation budgets before June, and there is speculation that we may very well be looking at the beginning of a significant change in the types and locations of distribution facilities.
Green Pressures: The greening of North America and of manufacturing, warehousing, and distribution generally has fed this same dynamic, but in a different fashion. While the oil crisis has forced behaviors that reduce the use of energy in an attempt to reduce costs, consumer and government pressures have forced companies to reduce reliance on carbon-based fuels and to generally make less of an impact on the environment. So although the driver is different, many of the strategies have been complementary. A distribution strategy that reduces a company's carbon footprint because of efforts to use less fuel has been embraced by environmentalists and accountants alike.
Security and Sourcing: Whether for nationalistic, regional, human rights, or product safety reasons, consumers have recently gained an acute curiosity about where their products originate. And, as noted in such infamous and diverse examples as Mattel's difficulties with lead paint last year and our difficulties with tomatoes this summer, the ability to track the exact route that a product takes from initial mining or seeding through final delivery can be very important. Simplifying and shortening this process through moving production closer to the end consumer market can provide as much of a marketing advantage as a risk-management strategy for manufacturers.
Rising oil costs are very likely to cause manufacturers and distributors to move their facilities closer to population centers as a cost-cutting measure. Proctor and Gamble has announced that they are developing strategies to do exactly this, using some of their Chinese facilities as a test-bed. The company has already noted that this is only the first step in moving toward a more decentralized and customer-market-oriented manufacturing and distribution location strategy.
Likewise, Wal-Mart recently announced a new strategy for sourcing food products for its mega centers. As part of a larger initiative to broaden its offerings, the retailer is moving toward buying more of its produce directly in local markets and from local farmers. In addition to providing more local flavor to the food offerings, this also gains the company a host of cost and product-safety advantages.
In sum, some measurable advantages have evolved for locating more manufacturing and distribution in close proximity to the direct zones of consumption. Even so, it's important to note the sensitivity of these decisions to environmental and economic changes. Certainly, we did not foresee the circumstances that would push for on-shoring even a short five years ago. Given the compelling dynamics outlined above, it is important to remember that times change, and remaining flexible is the best strategy.