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The cost advantage when supply chains get shorter

Being able to respond quickly to changing markets and cutting logistics costs in the supply chain has become a key consideration for companies who are keeping their supply chains short.

General Motors (GM) is planning to relocate about 600 jobs from Mexico to a new industrial park in Texas next year, CNN reports. The US auto manufacturer's plant in Arlington, Texas, produces parts for the auto industry rather than assembling whole vehicles, and from 2018 it will employ 1,250 workers, half of which will do jobs that are currently done across the border in Mexico.

GM hasn't said that this move is a result of pressure applied by the Trump administration but it's well known that in January this year, Trump threatened GM directly with a tweet saying “Make in USA or pay big border tax!” In response to the tweet, GM chief executive Mary Barra said that the company had no plans to change where it produces small cars.

Supply chains get shorter

However, GM spokesman Nick Richards said the company has been shifting supplier contracts closer to its assembly facilities for several years to cut logistics costs and respond quicker to market changes. Being able to respond quickly to changing markets and cutting freight, transport or tax and tariff costs in the supply chain has become a key consideration for companies not just in the auto industry but in other sectors too.

It's a strategy that has long been used by fashion retailer Inditex, parent company of Zara, which produces the majority of its clothes in Europe (mainly in Spain), compared to many of its competitors that have production supply chains extending across Asia. As discussed in this article, Zara uses sales data from its retail outlets to influence its designs and production within a very quick turnaround time. This, together with the proximity of its manufacture and distributions centres, allows it to react quickly to fashion trends while also offsetting the higher costs of employing staff in Europe.

Has globalisation had its day?

Is this something corporates can expect to see more of in future? Much has been said about geopolitical risks rising across the world, and any number of unforeseen events, whether political, social or climate-related, could cause disruption to manufacturing or to logistics in the supply chain. GM's relocation away from Mexico may or may not be motivated by fears of higher taxes or by uncertainty over how the North American Free Trade Agreement (Nafta) could be renegotiated under the Trump administration. And Inditex bosses may well feel more secure knowing that their Spanish clothes factories are governed by EU safety regulations. They also don't have to concern themselves with the logistics of shipping goods from China, India or Bangladesh.

As well as being easier to control and direct, shorter supply chains are also better for the environment and can be more resilient, flexible and allow for more innovation. From a treasury point of view, shorter supply chains could mean a reduced need to hedge FX risk, less need for trade financing, reduced logistics costs and a simplified cash management and tax footprint. With these considerations in mind, outsourcing manufacturing to foreign countries to save on the cost of production and employees may become far less popular in future.

CTMfile take: Do you think you're likely to see a simplified supply chain in your company over the next few years? Would you welcome this from a treasury point of view?

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