Accenture Academy Blog

While perusing the local newspaper, I noticed that the local farmers’ market is in full swing for the next three months. What started as a basic vegetable stand for local growers a few years ago is now a weekly market for fresh produce, bakery, dairy, and meat products. This local exchange is an extreme example of the nearshore and onshore sourcing strategy to reduce risk, transport costs, and delivery time.

The buy-local concept has been around for some time, with the original focus on self-reliance and combating big-box retailers, according to a Bloomberg Businessweek article. The goal then shifted toward helping independent businesses survive the economic downturn. Today, the intended targets of the buy-local movement—big-box retailers—have jumped on the bandwagon and are pursuing their own local initiatives to capitalize on the potential benefits of cost reductions and product quality improvement that translate to market share gains.

Walmart is a prime example in the drive for localization and regionalization of supply. A New York Times article notes that Walmart plans to double its sales of local produce to nine percent in the US and to 30 percent in Canada. Small and medium farmers in emerging markets will also supply Walmart with $1 billion of fresh produce in the near future.

The transportation ramifications of sourcing regionally versus nationally are highlighted in the example graphic. Using an Arkansas grower for slicer tomatoes allows the company to reduce travel between 500 and 1,500 miles per delivery for their Gulf States region. This sourcing strategy helps Walmart cut transportation costs, improve food quality, and mitigate their environmental impacts.

A key proponent of the localization movement is the Agile Agriculture initiative at the University of Arkansas' Applied Sustainability Center. Their Agile Ag overview highlights the tri-fold supplier, distributor, and consumer benefits of linking smaller local suppliers and large-scale buyers. These opportunities are identified in the example graphic.

Yet while the benefits sound great, no initiative is perfect. Before buying into the localization concept, companies must consider the potential challenges and supply chain implications. In a Supply and Demand Chain Executive article, David Morgenstern discusses the challenge of having a purchasing staff large enough and capable of finding quality local suppliers. He suggests staffing local teams or utilizing third parties to find and negotiate with new suppliers. Strong support from headquarters is also needed to ensure a smooth transition to local suppliers.

Another primary issue is supplier capacity. Local suppliers must be available and able to support the demand requirements of large-scale buyers. Seasonal production of some items, such as fresh produce, can further affect local product availability. It may take multiple years of working with local suppliers to build up enough local capacity to support demand fully.

There are also transportation issues to consider. With volume shifting from distant suppliers to local and regional suppliers, the delivery network must be significantly altered. Routes will change and a different set of carriers will likely be needed. The change may necessitate negotiation of new contracts, an increased use of transportation brokers, or backhauls via private fleets. On the plus side, the much shorter routes will allow for faster replenishment, fewer potential disruptions, and fresher product.

Finally, the cost implications of localization are not yet fully known. Few studies have been conducted regarding the effect of localization on supply chain costs or the final cost of goods for consumers, notes Charles Nicholson and his colleagues in a Food Policy journal article. Though the transportation benefits appear to be obvious, it is critical to evaluate the cost and service tradeoffs with purchasing, inventory, and other supply chain activities. Also, local producers may not have the economies of scale to sell goods at prices that are competitive with large national suppliers. Organizations should evaluate the total landed cost of products sourced nationally versus locally before making major changes.

As always, new strategies and emerging trends such as localization are not perfect solutions. Localization is a good idea only if the price and quality are right. Most consumers won't pay more for subpar product just because it is local, and supply chains may not operate more efficiently just because the suppliers are in closer proximity. You must analyze your situation independently of the media hype and the pressure of vocal consumers.

What do you think about localization and its challenges? Is localization just a fad or a long-term trend that is gaining traction? Weigh in with your thoughts and feel free to add concerns that were not mentioned in this posting.

Until next time, I'm headed to the farmers’ market for some tasty treats.

 

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