Q&A with Don Hicks of Optilogic: Evaluating Trade-offs of Nearshoring

David Maloney, Editorial Director, DC Velocity   00:01

Is nearshoring the answer? Signs of optimism in freight markets. And there’s progress on electrifying vehicles. Pull up a chair and join us as the editors of DC Velocity discuss these stories, as well as news and supply chain trends, on this week’s Logistics Matters podcast.

To begin today: as manufacturing is declining in China, many companies are turning to Mexico and other Latin American countries to ensure a steady supply while shortening their supply chains. But will nearshoring actually resolve many of the problems that supply chains have faced in the past few years? To find out, here’s Ben with today’s guest.

Ben Ames, Senior News Editor, DC Velocity   01:29

Thanks, Dave. Companies around the U.S. have seldom had to be more flexible than in recent years to keep their global supply chains running in the face of major disruptions. There’s the pandemic, war in Ukraine, labor strikes at West Coast ports, tariffs and trade wars. An increasingly common reaction to some of these challenges has been to move their production, manufacturing, or procurement operations out of distant countries around the world and closer to American borders. It’s often called nearshoring, and it sounds great on the surface, but our guest this week is here to talk about some of the challenges with nearshoring. He’s Don Hicks, President and CEO of Optilogic. Welcome, Don.

Don Hicks, CEO, Optilogic  02:12

Thanks, Ben. Thanks for having me on the podcast.

Ben Ames, Senior News Editor, DC Velocity   02:16

Glad to have you. And to start us off, could you give our listeners a quick reminder of what Optilogic does and the company’s place in this conversation?

Don Hicks, CEO, Optilogic  02:25

Sure thing. Optilogic is a fairly new company. We’ve been around for around four years, although much of the team has worked together over the last 20, and we’re the world leading provider of supply chain design software. Think of supply chain design like a CAD program for modeling and designing and redesigning global supply chains. It’s useful for anybody who’s got a complex logistics network, but it’s especially useful for complex supply chains that are global and that are massive and big in scale. Companies looking at reshoring need modeling and tools to be able to help them figure out how to do it, and that’s what we provide: software and expertise. We’re the design guys.

Ben Ames, Senior News Editor, DC Velocity   03:16

Got it. Sounds like a great match for this. So, speaking about, you know, massive and global networks, China has been what — people often call it the world’s factory or the world’s manufacturer, for last couple of decades. But in the last few years, we’ve seen a jump in the number of factories and assembly plants in Mexico and Canada. Is that what you’ve been seeing too?

Don Hicks, CEO, Optilogic  03:40

For sure, but I’ve been around long enough that I’ve seen some of this stuff before. I’ve been, prior to Optilogic, I founded and grew a company called Llamasoft that was the previous leader in supply chain design, and I remember in the late ’90s, in the aftermath of NAFTA, you remember the great sucking-sound metaphor that all the factories were going to go to Mexico, and companies did start moving there. And as China then started to open up as an even lower-cost option in the early 2000s, you saw everyone was looking at offshoring as the strategy.

So, now, when we say “reshoring,” we never know what the long term is going to be. One thing I can tell you is, it’s unpredictable, forecasting is very difficult, especially when it’s about the future. What I can forecast is continued change. So, some of the assumptions that drove offshoring, these companies are now revisiting those. They think that their assumptions around the stability of global trade, free trade and global barriers being dropped, some of those are actually being rolled back, and it’s causing companies to rethink their actual structure and their design. That’s a process that never ends.

So, right now it’s reshoring, or partial reshoring, and companies are grappling with this. We certainly see a massive demand and an opportunity as well, to take a look at the global supply chain and redesign it based on what we think is going to happen going forward.

Ben Ames, Senior News Editor, DC Velocity   05:26

Makes a lot of sense. And by the way, I love getting a Ross Perot quote in there. So, this is not just theoretical, as you’re saying. Companies are actually putting nearshoring and reshoring into action. They’re putting their their money where their mouth is, but you know, I know that you say, deciding to nearshore, or reshore, won’t solve all your supply chain issues overnight. Why is that?

Don Hicks, CEO, Optilogic  05:49

Well, designing means making a choice, and making a choice means making tradeoffs and a compromise. When companies chose, and explicitly chose, to offshore, and to locate and base a lot of their manufacturing in China, they knew that China was actually far away. They knew that they were going to have to rely on ocean transportation, and they knew that they were going to be basing their supplies in a country that was rapidly developing, but still an authoritarian regime. And so, you made the tradeoff.

And so, there is no silver bullet. The choice to come back and move some or all of your capacity closer geographically — the reason you went to offshore was because things were cheaper, but they were also reliable enough that it was worth the grab. And now what we’re seeing is, reshoring, those risks of keeping things out there are not outweighed by the cost advantages.

And I want to submit that there’s a model for making design choices that we talk about, and that is, a supply chain’s design is a balancing act of the service that your network provides, the financial performance — what does it cost from capital and expense? — and then, what’s the risk inherent in that network? Those three competing factors — service, financial performance, and risk — you’ve got to balance those, and what’s going on with China is that the risk has gone up, and that cost advantage has actually been shrinking for quite a while. And in some cases, even before the pandemic, companies have been offshoring to Vietnam and Bangladesh and other places that have very low-cost cost advantages over China.

So, you’ve got to model it on out and say, is it worth the change in those dimensions of service, financials, and risk? You deal yourself a new hand when you change the situation and move to a different design.

The last comment I’ll make on this is, you’re never really done. There’s never a finish line, because design and redesign happens in the context of a changing world. So, as things shift, as climate change brings new dimensions, as potentially politically unstable elements continue to go, companies have to continue to redesign and change that balance of service, financials, and risk. And design and design expertise is the technology that lets these companies survive in the long term.

Ben Ames, Senior News Editor, DC Velocity   08:37

That makes a lot of sense. And it’s complex equation here, I mean, that balancing those three variables, I imagine, depends on exactly which country you’re talking about, and also decides on — depends on what your particular, your own company is trying to do. How do you begin to evaluate, you know, between the nearshoring or offshoring nation that you’re looking at, and you know, the specific details or the profile of your company?

Don Hicks, CEO, Optilogic  09:03

You’re quite right to bring that up. It’s an unstable equilibrium, okay? It’s a really difficult thing to trade those three off. What I’ll tell you is, the first thing you have to do is measure it. If you don’t measure it, you don’t know what’s there, and I will fault many organizations I’ve seen that when they were putting things out to China, they only looked at financial performance.

They said, “Well, service is what it’s going to be. If it’s cheaper, then we’re going to do that, and I’m going to assume the risk away.” And that has changed. The mentality of decision makers is risk is always there, and how do I incorporate this into my compromise decision? First, you measure it, and we made a strategic decision last year when we were launching our platform, we built a risk engine to try to quantify and put a score on each and every supply chain that gets evaluated, and we welded it on to our software. So, every time you model out a scenario or evaluate a choice, you get a risk rating on it. And there’s nothing magical about those numbers, but it is trying to put risk on the conversation. Get it in there, so that it’s in mind to try to make this balance. When you ignore it, you assume it away, and the last five years have been an illustration of the terrible dangers of just assuming risk away.

Ben Ames, Senior News Editor, DC Velocity   10:39

That’s an understatement, for sure. This has been a great conversation. We have just a couple of minutes left, here, but can you share any sort of best practices if companies decide that they do want to go down this road?

Don Hicks, CEO, Optilogic  10:51

Oh, yeah, for sure. You know, the best practice number one, this isn’t — you ARE designing and redesigning your supply chain, whether you know it or not. Otherwise, you’re just waiting around to get culled, to get Darwined out of existence. Design needs to be thought of as a discipline, as a field of study and a capability that your company adopts. Most of the time and most of the effort that these companies, these these big, incredibly important companies, most of their resources are spent managing and running the supply chain, as as it should be. But you can’t plan yourself out of a bad supply chain or the wrong supply chain. Design itself is a new basis of competition. Companies that evolve the capability to dynamically design and redesign themselves over the long term will continue to evade and evolve and outstrip natural selection, which is going to kill your competitors off. This is not nice-to-have, it is must-have. If you’re not developing design as a capability, you’re food.

This podcast was originally published by DC Velocity.