With new technology adding to the interconnectivity of the global supply chain, distribution networks are growing more complex and expensive to manage. Harnessing opportunities for supply chain improvements against these added costs will be the key to distribution growth in the new year.

As supply chain tracking systems and logistics networks become more sophisticated and better able to support remote production sites, supply chains are expected to grow longer and more costly to manage. Monitoring and findings ways to rein in these added expenses will be crucial in maintaining the advantages provided by expanding into regions with lower labor costs.

According to a September report from the industrial and commercial properties firm NAIOP, global shifts in manufacturing, changing consumption trends and international competition will be the three leading factors shaping the future of goods movement and driving demand for warehouse and distribution space.

Understanding the increasing competition between domestic and foreign manufacturing capabilities, as well as how the logistics industry is adapting to support new manufacturing requirements, will be priorities for supply chain professionals in 2011. These issues are also likely to drive how distribution and storage sites are selected in the future.

Advances in supply chain tracking systems, such as electronic seals on containers and GPS navigation in trucks, coupled with wider-ranging logistics networks have enabled manufacturers to reach more remote production sites offering less expensive labor costs. As a result, companies have moved quickly to shift their manufacturing to lower cost regions and seek out countries with favorable production policies.

“[P]roducts with high labor content have historically sought global production centers where they can access the lowest possible labor costs in wages and benefits,” NAIOP explains in an announcement of the findings. “Manufacturing in the United States has been subjected to competition from countries with lower wages and viable platforms for business operations with an infrastructure to support production of labor intensive products.”

In recent years there has been a significant decline in investment in new non-residential construction in the U.S., indicating that more manufacturing capacity is shifting abroad. NAIOP reports that construction of manufacturing facilities went down from $6.8 billion in April 2009 to $4.8 billion in April 2010, a 30.9 percent decrease.

“There is a fundamental economic shift in manufacturing away from developed countries to emerging economies, such as India and China,” NAIOP explains. “These two countries are and will continue to be dominant in their role within the world’s manufacturing economy. Russia and Brazil also will have a role in these shifts toward emerging manufacturing economies.”

According to NAIOP, in 2011 China is expected to out-produce the U.S. for the first time, creating $1.87 billion in goods output while the U.S. produces $1.71 billion. China will also take the leading role in manufacturing, generating 18.6 percent of the world’s manufacturing output. By 2025, it is estimated that China and India combined will account for 25 percent to 40 percent of global demand for goods and services.

Increasing demand for consumer goods such as clothing, food, cars, phones and pharmaceuticals will be driven by growing populations in emerging markets. These new consumer patterns are likely to have a major influence on site selection for manufacturing facilities and distribution centers.

However, shifting manufacturing resources to cheaper remote locations also causes certain problems. The added distance between the production center and the final product’s destination makes it more difficult to maintain predictability in the supply chain. Moreover, managing a longer and more complex supply chain requires added expenses, which must be carefully tracked to ensure they don’t offset any gains made from low-cost labor.

U.S. government policies will also be crucial in distribution growth in 2011 because international markets are proving themselves increasingly attractive to manufacturing operations. Foreign countries are competing for international marketing and investment funds, as well. According to NAIOP, the following four policy areas will play a vital role in U.S. manufacturing and supply chain competitiveness:

• Corporate income tax policies;
• Research and development policy;
• Export policy; and
• Environmental policy

“U.S. government policies have a profound impact on manufacturing and manufacturing-related employment in the United States,” NAIOP adds. “Decisions that are made by multi-national corporations go well beyond the selection of manufacturing locations, and include decisions about where to locate corporate headquarters, research and development centers, production centers and distribution networks.”

Related

Downturn Highlights Supply Chain’s Importance

How Sustainability is Transforming Logistics

Resources

Trends in Global Manufacturing, Goods Movement and Consumption…
by Curtis D. Spencer and Steve Schellenberg
NAIOP Research Foundation, September 2010

Report Examines Trends in Global Manufacturing, Goods Movement and Consumption…
NAIOP Research Foundation, Nov. 12, 2010