Category Archives: Manufacturing

Will You Need to Ship Same Day?

Amazon is renting locker storage in physical storage locations across the country and dramatically broadening its DC footprint so that it can launch a same-day delivery service. Wal-mart Stores and e-Bay are testing same day delivery in multiple locations. And now the cash-strapped USPS is turning to same-day delivery. So are you going to have to ship same-day?

If you’re a retailer that makes money on impulse purchases, most likely (or lose a chunk of your market share). So what about if you’re a manufacturer that supplies a retailer that does same day delivery? Probably not, but it’s quite likely that you are going to have to ship more often and deal with less lead-times.

If a retailer is shipping same day, it is going to need to not only be updating its inventory daily, but it’s inventory turn-over projections daily, and (re)ordering as soon as it detects that waiting longer will risk a stock-out given the minimum lead-time required by the manufacturer. At some point, it’s going to be ordering too often, shipment volumes are going to be too low, and it’s going to need to re-adjust it’s ordering strategy to keep costs down. So it’s going to adjust it’s algorithms to calculate with respect to a specific, regular, order day, and then realize it needs to order early. Then it’s going to realize that inventory levels for some items will need to be relatively high due to long lead times. And it’s going to ask you to reduce your minimum lead times and distribution efficiency so that it can optimize it’s re-order times and respond to unplanned demand surges in the supply chain.

Net effect: you’re probably not going to have to ship same day as a manufacturer, but you’re going to be asked to reduce your lead times and increase your distribution efficiency.

Anyone disagree?

If America is Going to Be Number One Oil Producer By 2020, Will Canada Be Number Two?

According to this recent Economist Article on Energy to Spare, America is on track to produce all the energy it needs at home. Considering that Americans burn three and a half times as much energy as the average Chinese person, and hasn’t been able to meet its energy needs in over half a century, this seems like a tall order. Especially since, demand has more than doubled since America was last able to satisfy its energy needs from domestic sources.

However, the International Energy Agency is forecasting that America could become the world’s largest oil producer by 2020, when it could be churning out 11.1 Million barrels a day, and be energy self-sufficient by 2035. Coupled with the fact that demand is waning due to increased fuel efficiency, the prediction is that rising production and falling demand will equal out in 2035.

It’s an interesting prediction, but so is the prediction about the Athabasca Oil Sands north of the American border. Right now, production is about 1.3M barrels per day, but estimates are that production can get to 5.1M barrels per day. As per this article in the Economist, on The Sands of Grime, Canada’s oil sands contain over 170 Billion Barrels of oil that can be recovered economically with today’s technology. With the third largest proven oil reserves in the world, it’s quite likely that production can ramp up to make Canada at least fourth in oil production by 2020, with third place a strong possibility. Right now, Venezuelan production for 2020 is estimated at 6.5M barrels per day and Saudi Arabia, at close to 10M barrels per day, expects it can get to 11 M barrels per day (Source). With the difference between Canadian production estimates and Venezuelan production estimates for 2020 less than 30%, it would only take a 15% increase in Canadian production and a 15% decrease in Venezuelan production for Canada to edge in third.

Unless Saudi Arabian reserves are less than estimated, or Canadian production ramps up exponentially beyond expectations, we probably won’t make number two, but number three is a strong possibility.

The Real Reason We’re Losing Manufacturing Jobs (in North America)?

Because the Chinese are taking them? No.

Because we’re not subsidizing them? No.

Because, as pointed out by Mitch Free of MFG.com in a great article in Forbes this summer, we’re not exporting.

Instead of using North American know-how to build great products and sell them to other countries and optimizing the value generation chain, we’re optimizing the cost saving supply chain to instead import great products from other countries. Now, in some cases it makes sense when these products can be produced cheaper and in greater quantities than they can be produced in the US, especially when those products are going to be sold around the world, but I’m still not sure it makes sense in all cases. Especially for custom made products or high-end manufacturing or medical devices which are high value and require very high-end expertise that we possess a lot of in this country.

And while some North American companies have figured this out, and are doing a great job of selling product abroad (like Apple and Caterpillar), they are few and far between and all large companies. As Mitch says, the key to (North) American Manufacturing success is for small and mid-size manufacturers to get into the exporting game and sell their products outside of North America. There are less than 460 Million people in North America. That’s less than 6.6% of global population. And with large middle classes emerging in China and India, where 2.585 Million people live, North America is quickly becoming a (very) small portion of the global market for whatever product you are making.

So why aren’t we exporting? Because, as Mitch says, we have been spoiled by our home business market of more than 300 million people who speak the same language, largely embrace the same culture, abide by the same laws, use the same currency and have freedom of movement and disposable income. In the past, our market has been so robust that you did not need to sell abroad in order to have a great business and live a comfortable lifestyle. But this isn’t the case anymore. Now, we have a lot of work and learning to do in order to catch up with our global competitors whose small- and medium-sized businesses are already skilled exporters. They understand and appreciate different cultures, speak multiple languages and are good at adapting to the markets they are selling in. Because, for the most part, they had no choice. For example, Germany only has 81 Million people. It couldn’t build great, now globally recognized, brands if it just tried to build for it’s home market. And the UK and France only have 62 Million and 65 Million respectively.

We’re losing jobs because we aren’t exporting. But there’s no reason we shouldn’t be. We are among the most productive and technologically advanced countries in the world. We can compete with anyone; we just need to learn to export. And it shouldn’t be hard. We’re already masters at importing with some of the most advanced supply chains in the world. We just have to point them the in the other direction now and then.

Should Manufacturing Jobs Be ‘Re-Shored’ to the U.S.?

Yes. No. Maybe.

A recent article over on the Knowledge @ Wharton site that questions if manufacturing jobs should be ‘re-shored’ to the U.S. points out that the Boston Consulting Group forecasts that 2 Million to 3 Million manufacturing jobs will come back to the U.S. because of the fundamental shift in economics between China and the United States. While the projected shift will increase U.S. economic growth by about $100 Billion, let’s not get too excited. First of all, this is less than 1% of current GDP. Secondly, if the right jobs aren’t brought back for the right reasons, they’ll just shift again next decade.

Before we dive into this discussion, let’s summarize some key statistics from the article. Namely:

  • it is projected that the wage differential will drop from the 22X it was in 2000 to 4X in 2015, not adjusted for productivity
  • many global manufacturers have begun to move their outsourcing to even lower cost countries such as Vietnam, Indonesia, and Cambodia
  • outsourcing costs include higher transportation/logistics costs, extra inventory costs, and quality control costs
  • improved lean manufacturing processes can often cut production-times per unit considerably, up to 65% in one instance at GE
  • more than 60% of the cost of manufactured goods can be attributed to goods and services that the average firm buys from its suppliers

When you consider these points, it becomes clear that:

  • if the primary reason for outsourcing to China was labour savings, this is no longer a good reason; in some districts, the wage savings are less than 40%!
  • the wage game requires a constant move, often into unknown, or dangerous territory (as Africa will be next)
  • there are ‘hidden’ costs as transportation costs are rising, inventory carry costs can explode if demand patterns shift, and quality control costs are exponentially higher as the only sure way to ensure quality is to get feet on the ground … regularly
  • innovation and creativity can slash the relative cost of manufacturing at home if productivity is doubled (or tripled)
  • the production costs will probably be less than the procurement costs for the raw materials, components, and services — which means cost reduction is more reliant on Procurement efficiencies and successes than manufacturing, as it should be

This means that:

  • you should never outsource on a wage analysis alone, but it doesn’t necessarily mean you should pull back to the U.S. — sometimes near-sourcing, to Mexico for instance, is the right solution
  • you shouldn’t play the wage game unless you are planning two moves ahead
  • bulky items, items that can experience unpredictable demand spikes, and items that require a lot of quality control are typically not good options for outsourcing
  • you should never underestimate the potential of talent — and what can be accomplished with the right incentive
  • decisions should be made from a true TCO perspective, not just a manufacturing perspective

And when you start looking at the overall picture, the overall product lifecycle, and the strengths and weaknesses of outsourced manufacturing partners, you’ll realize that some manufacturing, even with the disappearing wage differential, should be left in China; some should be brought back home yesterday; and some should be near-sourced. For example, you can’t build a FoxConn in the U.S. China is dominant in many areas of electronic manufacturing now and will stay that way — and considering the density of phones, tablets, and laptops, it makes sense to produce them in China. On the other hand, major appliances and automobiles should be produced at home, where efficiencies in production and greatly reduced transportation costs more than make up for the labour differential. And major appliance and automotive sub-assemblies should probably be produced in Mexico, where they have idle factories, and from where shipping costs are relatively minimal.

Will Factories in a Box Revolutionize Sustainability Initiatives?

Gizmodo just ran a very interesting, and vey insightful article on how “The Next Industrial Revolution Starts in this 20-foot Shipping Container” about Re-Char and their “Shop-in-a-Box” that can perform rapid fabrication of steel parts by way of software and a CNC plasma torch. With the Shop-in-a-Box described in the article, Re-Char can produce 600 lids for Climate Kilns. This is a specialized lid-and-chimney integration that adapts a 55-gallon drum to produce the soil amendment biochar. (In Kenya, farmers burn sugarcane debris in an open field and release tons of carbon. A Climate Kiln controls the burn to produce the carbon-rich charcoal biochar that, mixed into soil, reduces the fertilizer requirements for crops by half.) This required the precision cutting of 18-gauge metal, which, in East Africa, leaves you the option of using a guy with an oxy-acetylene torch on the side of the highway or importing a full production run out of China, one full shipping container at a time. But for 30,000, Re-Char was able to produce a Shop-in-a-Box metal cutting and joining setup that could be run by two two people and produce 600 lids as a time, when needed, where needed (as the shop in a box can be moved to a new community when the needs of the current community have been fulfilled).

From a sustainability perspective, this is incredible. It’s lean, green, and completely against the routine. Actually, lean is an understatement. The power requirements are limited to what is needed to produce the lids. The energy required just to light, cool, etc. an average factory typically takes a 600 V feed … or two … or three. It’s green in that it can be powered by sustainable energy, including wind power, water power, or solar power – whatever is available. (Transformers come with the standard kit, along with generators for [natural] gas power for stability. Just add batteries and a UPS and it’s 100% green power most of the time.) And it’s completely against the routine. When the industrial revolution started, you can be that the robber barrons never predicted a moveable factory.

To date, the most (wide-spread) innovative use of containers has been data center modules, with Google a leader in this technology. (But this has been taken to the next level. For example, Green Data Center has designs for completely self-contained data center modules that you can drop anywhere. Just hook-up a power feed and an internet feed, and you’re literally good to go. (And since you can easily put a generator, or two, in a second container, you don’t even need a power feed. Just a natural gas feed, split between a couple of generators if you don’t have a sustainable power feed, for a primary feed.)

But we don’t have to stop at data centers and steel-part fabrication shops. Especially when we are talking about the developing world (which still includes much of Africa, South America, and parts of Asia). Do we really need to refine cane sugar 2,200 kgs at a time, for example? Or how about water purification? If we’re talking about a small community of a couple of hundred people, and the primary focus is clean drinking water, we don’t need to purify 100,000 liters a day! Purifying 1,000 liters would do nicely! Both processes would fit nicely in a container system. (After all, the sugar refinement process is not radically different from micro-brewing in terms of what is needed, and you could fit that nicely in a container too — although we can’t necessarily bring the same humanitarian arguments if we did.)

And when we’ve insured that everyone has the absolute necessities of clean air, clean water, and healthy food — we could ship them clothing factories in a box. It doesn’t make sense to sew shirts in sweat-shops on another continent just to ship them to small communities in Africa, or South America, or Asia, where the living wage is $2 a day or less. Considering the shipping costs alone, you couldn’t set the price at a point where you’d make many sales. Just ship a container to the town, train a few locals on the cloth-cutting production lines and find a few budding seamstresses to do the stiching, and produce the clothing where it will be sold. A zero-mile supply chain that emits zero-carbon and has zero shipping costs. And since you don’t have time-sensitive fashion industries in developing economies, you could even rotate it between a few small communities in the beginning while the consumer base and local economy built up. (Hopefully you’d also move the employees too if they were willing, as you could outfit another container as temporary living quarters without much cost or effort.)

I think the physical manifestation of the Solution-in-a-Box approach has the potential to revolutionize manufacturing, distribution, and sustainability. And it’s not like we have a shortage of containers thanks to the outsourcing craze of the last fifteen years. They’re just sitting there waiting for a good use. And with all the super-panamax ships, and super-panamax capable ports, that we have at our disposal, we can get them from any continent to any other continent with ease, in bulk, and pretty close to where we want them. And then we just need a freightliner to haul them, and there’s no shortage of those.