Does Regionalization Make Sense?

For one of the sessions at the TFI Quarterly Forum in April we asked the members to break into groups and discuss regionalization and whether a regionalization model for their product manufacturing would make sense.

We defined regionalization as “manufacturing products on the continent on which they are sold.” As Senior Consultant Charlie Barnhart, the session leader, aptly pointed out, regionalization was common practice before the mass migration to China in the last 1990s. Now with higher oil prices and exchange rates that weaken the US dollar, we wanted to know if Forum members - OEMs and Contract Manufacturers - were considering returning to a regional strategy and whether it would become more common practice in the future.

When the nine breakout groups reported back on their discussions, we heard a common refrain: “It depends.” Yes, we are considering/need to consider regionalization and yes, it will become more common in the future. On the “pro” side of regionalization the groups agreed that oil prices and exchange rates were having a major impact on costs, in particular logistics costs. Other benefits include greater customer responsiveness, and faster communication, proximity to developing markets, and environmental considerations.

On the “con” side, the groups agreed that regionalization doesn’t necessarily make sense for high-volume, low-mix production, especially when suppliers are onsite and integrated into the manufacturing process through VMI programs and other supply chain services. And regionalization may lead to higher overhead costs as it necessitates more duplication of effort, and more local management and oversight. Then there are quality concerns - with more manufacturing locations and more complex supply networks, maintaining consistent product quality may become harder.

The consensus was that a hybrid model will emerge. For some products and industry segments, one global manufacturing center makes sense. For others, regionalization is the way to go. It all depends on which way total cost tips the balance.

Let us know what you’re company is considering. Does regionalization make sense, and if so why?

Posted by Bruce, June 20th, 2008