One of our topics in Chapter 11, Supply Chain Management, is “Cost of Shipping Alternatives,” in which we compare the cost of shipping providers from Asia (see Example 3). The Wall Street Journal (Feb.28,2012) just provided a perfect example of this
issue to share with your class. The article describes how retailers like Abercrombie & Fitch (A&F) are shifting away from air delivery in favor of bringing more goods to the US by slower, but cheaper, ocean freight. A&F has slashed the percentage of its inventory flown into the US to 12% from 60%, a level its supply chain VP says was “crazy.”
The choice involves a trade-off. It cuts shipping costs drastically. But it can take weeks, rather than days, to transport clothes or other goods from manufacturing centers in China and other Asian countries. That leaves retailers with less control of their inventory, making them more vulnerable to fashion changes. But while the switch to ocean freight lowers average unit costs, retailers typically take possession of finished goods when they leave the factory. That means the goods spend more time on a company’s balance sheet and tie up cash.
Partly to reduce those risks, US firms that outsource production to China are starting to move operations closer to home. Hampshire Group, for example, which manufactures for brands such as Geoffrey Beene and Levi Strauss, chose a site in Honduras. This means it can ship to distribution centers through the Panama canal in 6 days vs. 27 days from China. Although faster shipping can make sourcing to Central America competitive with Asia, many of these countries “don’t have the fabric mill infrastructure in volume like China,” says the A&F VP.
Discussion questions:
1. What will it take to make Central America more competitive with Asia for clothing manufacture?
2. What are the 2 main reasons why US firms choose air freight over ocean shipping?