Category Archives: Manufacturing

The Case for Onshoring … Is A Damn Good One!

Upon a closer look, offshoring is not always the right answer for all products, especially those sold in America. For one thing, labor costs in general are shrinking as a share of the total cost for many items. Moreover, average factory wages in many developing countries are rising, as is the demand for America’s sophisticated just-in-time, cost-saving, logistical systems. When common shipping problems are added into the mix — natural disasters, security threats, political instability, theft and other risks — more manufacturers are concluding that the savings offshoring had promised are just not there.
Guy Morgan, BBK Managing Director
from “The Case for Onshoring” (Industry Week)

You’d almost think he was trying to get in the doctor‘s good book! Truer words could not be spoken and I could not have said it better myself.

And these words are true whether you are talking manufacturing, software development, back-office functions, or call-centre outsourcing. We’ll review some high points of the article and then discuss these other points.

I think the author is right when he quotes Harry Moser, retired chairman emeritus of GF AgieCharmiles, who argued that many companies began moving production to low-cost countries mainly because they thought everyone else was. The worried that a competitor might gain a cost advantage; and, in the process, they put a limit on their thinking by fixating on a component’s sticker price rather than considering its total cost. But this leads to problems, especially since as per a 2009 analysis by Archstone Consulting and Duke University, most manufacturers use “rudimentary total cost models” that ignore 20% of the offshoring’s cost. And when you add to this the fact that the prices for Asian manufactured products have risen 15% to 20% in the past 4 years, there aren’t that many cost advantages.

And then, as the author astutely points out, you need to factor in excess inventory to replace poor-quality products and insure against late shipments, stolen intellectual property, rising fuel costs, environmental impact and more … which all adds up to more cost!

Add it all up, and it’s often cheaper to produce your product in North America. And this is sometimes the case even if you have to produce it in or near a major city that you would normally consider to be a high-cost locale!

It is time for the home-shoring renaissance that the doctor has been predicting since 2007 (which is well before the Boston Consulting Group figured it out, as mentioned in the article, but we’ll forgive them because they’re still ahead of the curve). What everyone is forgetting is that, despite higher labour costs, good ol’ (North) American ingenuity and innovation always leads to much higher rates of productivity and lower component costs in the end that always more than cancel out the labour costs. The proclamation that some U.S. states will become among the most cost-effective locations for manufacturing in the developed world is a correct one and it will happen. The only question is will your organization be one of the few who will lead the way and reap the greatest rewards?

And if you want to get an idea of how big those cost savings associated with onshoring could be and you’re in manufacturing, checkout the FREE TCO Estimator associated with the Reshoring Initiative over on ReshoreNow.org. It’s not perfect, but with 29 cost factors, it’s a good start.

As for the other industries I mentioned, you’ll save money bringing those back as well.

If your software development is outsourced to India, there are big savings to be had. Labour costs are still rising and the average skilled worker now costs (at least) 40% as much as his American counterpart. You might say that he’s still cheaper even after communication, remote management, and reduced productivity costs are factored in, but, if it’s innovative development, he’s not — especially if you reshore to Canada. Up here, we have the Scientific Research & Educational Development tax credit which can refund you up to 75% of approved research and development costs. And if you need money up front, it can always be stacked with the National Research Council’s Industrial Research Assistance Program. And since, up here, a software development resource costs at most twice as much as a resource in India, after these programs are applied, our world-class developers, who speak your language in your time zone and understand your business, cost half as much.

With respect to back-office functions and call-centres, there are a large number of small, rural, towns with low costs of living that would thrive off your operation and staff it at very affordable rates. And while the North American minimum wage might be three or four times as much as a prevailing wage for an English speaking call center or back office resource in Asia, when you consider that many calls will be resolved significantly faster as both parties will understand, and be comfortable, with each other from the first “hello” (as many North Americans aren’t comfortable with Asian call-centre support and have problems understanding their accent), the higher labour cost is negated with higher productivity. Plus, and this is key, no long-distance costs, no remote infrastructure costs, and significantly lower training costs (with much lower turnover). Win, win, win.

Bring the work back home. Unless you’re a Fortune 500 (like Apple) with demand for your product so big that it has to be made in a city (like Foxconn), and in the top 0.01%, it will be more cost effective to do so. And the higher quality and lower risk will make it all worth while.

Could the U.S. Be A Next Generation Manufacturing Economy?

It’s an interesting question, especially when the U.S. doesn’t have the capacity to support global operations like Apple with their manufacturing needs. There’s only 83 U.S. cities with enough population to support a Foxconn-size manufacturing plant, and for the vast majority of these, only if a significant amount of the population could staff the factory. Even in New York, some estimates state that 7% of the working population would have to work in the same factory to support iPhone production. That’s seven percent! Chances are that not even 0.7% of the population would be qualified without extensive training.

Based on this, despite what some articles might suggest, current generation manufacturing can not return to the US. However, that doesn’t mean that next generation manufacturing, focused primarily on producing specialized high-end technology products for the medical and engineering professions, couldn’t be the backbone of the US economy in the decade ahead.

Consider this recent item in Industry Week on “Arrow Gear — A Case Study in How to Improve the U.S. Economy”. According to the article, Arrow Gear increased its workforce by 35% in the face of the worst recession since the Great Depression by creating products used in high-end, high-priced systems that were being exported. A manufacturer of high precision gears for a wide range of commercial and aerospace applications, it accomplished this feat by investing millions of dollars into its state-of-the-art facility.

This would suggest that a focus on specialty products for the aerospace, health, and (green) energy sectors, in particular, could allow manufacturing to return, in at least a limited extent, to the U.
S. But only if the U.S. takes a lead before another country steps up to the challenge.

Any differing thoughts?

Will 2012 Be The Year Manufacturing Returns to Mexico?

Alix Partners recently released their “2011 U.S. Manufacutring-Outsourcing Index” and it had a few surprises. First of all, not only is Mexico now the country with the lowest-landed costs for U.S. customers (which SI has been predicting would be the case for some time now), but the four other major outsourcing destinations analyzed — Romania, Russia, India, and Vietnam — all had lower landed costs than China as well.

Alix Partner’s projected landed costs from China for the next four years based on the three assumptions of:

  • 30% annual increase in wage rates, consistent with Chinese wage inflation over the last several years,
  • 5% annual increase in the strength of the yuan, consistent with the widely accepted estimate of the undervaluation of the yuan by 20% to 25% relative to the US dollar, and
  • 5% annual increase in freight rates, consistent with increasing fuel prices.

If these assumptions hold true, then the landed cost of manufacturing in China will equal the cost of manufacturing in the U.S. by 2015! (And if only one of the predictions come true, the savings from outsourcing for an average organization will only be 10% in the best case!) In other words, at this point very little is needed to erode not only some, but all of China’s cost saving potential in manufacturing outsourcing.

It would seem that for companies looking to outsource manufacturing, the writing is already on the wall: unless you already have a Best-In-Class operation in China, the chances of realizing any value (given the initial start-up costs associated with outsourcing and streamlining such an operation) are quickly approaching zero as time goes on.

Key Takeaways from the UL Product MindSet Study, Part II

A couple of posts ago, we discussed some Interesting Facts and Figures from the UL Product MindSet, a recently released study that quantitatively surveyed 1,195 manufacturers and 1,235 consumers across a range of export and import markets in high-tech, building materials, food, and household chemicals. Then, in our last post, we reviewed four key takeaways from the UL Product MindSet Study. Today we are going to discuss our fifth, and final, takeaway from the study.

MANUFACTURERS NEED TO GET A GRIP ON REALITY!

They need to take off those rose-coloured glasses, put them on the floor, and stomp them to bits. And then they need to take the bits and grind them into dust. The findings illustrate that manufacturers are so far out of touch with reality that it’s downright scary.

First of all, let’s review the standard Gaussian curve. In a standard curve, only 31.8% of the population is one standard deviation from the norm. If we accept that only one standard deviation from the norm is enough to be “ahead of the curve”, then, at most 15.9% of the population can be ahead of the curve (and, similarly, 15.9% of the manufacturers will be behind the curve). However, the report found that an extreme majority of manufacturers believed they were ahead of the curve in safety, reliability, sustainability, and innovation. In short, this means that:

  • 81.1% of manufacturers are out-to-lunch when it comes to product safety
  • 81.1% of manufacturers are day-dreaming when it comes to product reliability
  • 78.1% of manufacturers are high-on-fumes when it comes to sustainability
  • 73.1% of manufacturers don’t-have-a-clue when it comes to innovation

The reality for the majority of manufacturers (68.2%) is that, they are, at best, on the curve. But since the reality is that, if they don’t continue to progress as their supply chains evolve around them, it won’t be long before them are behind the curve, they should just assume they are behind the curve, because 15.9% of them are and 68.2% of them aren’t far from being among that 15.9% without continued improvement efforts. So when they are done grinding those rose-colored, haze-inducing, glasses into dust, they need to get to work!

Furthermore, I see no evidence that the majority of manufacturers understand sustainability. I know it’s hard with all the greenwashing out there, but if one just ignores the hype and uses a little common sense, one can define sustainability as that which sustains operations and the environment at the same time. With this definition, it is easy to see that if an organization is not reducing its environmental footprint and at least maintaining, if not increasing, profitability at the same time, it is not sustainable. So 69% of manufacturers are wrong when they say that environmental products aren’t profitable — because, defined (and designed) right, they are.

And those manufacturers who do understand some of the basics of sustainability obviously don’t understand it’s importance. First of all, it’s not just about sustaining the environment, its about sustaining operations for generations to come. If the resources available are depleted before they can be replenished, there’ll be no materials to make new products. No products, no profit. No profit, no business. It really is that simple. As a result, sustainability should be as important as safety and reliability, not only one-fifth as important. Secondly, with even the majority of consumers in developing countries (such as China where four-fifths of the population would buy a truly green product over a non-green product if proof of claims could be provided), an organization is leaving what is potentially the biggest gold-vein available to it untapped. And finally, if manufacturers as a whole don’t change their understanding and their views, then the lot of them are are being hypocritical! (It is impossible to be ahead of the curve in sustainability, as 94% of manufacturers ridiculously claim to be, while not placing the same importance on sustainability as is placed on safety and reliability.)

Yes this is harsh, but face it, manufacturers are not going to move forward if they continue to believe the all-rainbows-and-roses picture that some other misguided (or is that money-grubbing?) analysts are painting for them. But there is a bright side. Whereas a typical organization would probably pay five, or six, figures for that rainbows-and-roses report, this post is 100% free.
(So, to any manufacturer reading this, stop calling me a downer and get to work! If you do, maybe you’ll be one of the 15.9% that is truly ahead of the curve and reap the rewards that come from earning that status.)

Key Takeaways from the UL Product MindSet Study, Part I

Yesterday’s post conveyed some Interesting Facts and Figures from the UL Product MindSet, a recently released study that quantitatively surveyed 1,195 manufacturers and 1,235 consumers across a range of export and import markets in high-tech, building materials, food, and household chemicals. From these findings we will attempt to interpret where global manufacturing is going — and needs to go.

1. Global Manufacturing is going to continue to rise.

Not only did the top 10 export markets produce approximately 9.489 Trillion in exports in 2010, not only did growth rise an average of 13% in developed economies and 17% in emerging economies, and not only did manufacturing supply chains continue to increase to the point that an average product required 35 different global contract manufacturers, but 50% of manufacturers are still projecting, and endeavouring to increase, sourcing from additional countries. The reality is that many large multinationals, despite the increases in transportation costs brought on by the rising cost of oil, are still finding ways to make global sourcing profitable (and won’t leave the bandwagon until it breaks down to the point that it is irreparable).

2. Global Manufacturing, like Global Trade, is a Two-Way Street.

If one looks at the top exporters and top importers list, 9 of the top ten 10 countries on each list match. If an organization is going to manufacturer and trade globally, then the organization has to walk both sides of the fence and master both the importing and exporting game.

3. Going Global for Healthcare is Making More Sense by the Day

Not only is healthcare often cheaper and better in developing countries like China and India (where they have four times as many geniuses as the US), but when one considers that most of the medical devices and medications are coming from there anyway, and that the rich industrial centres have doctors that have training and equipment that rivals the training and equipment available to leading doctors in North America (and Europe), maybe an individual should go to India and pay out of pocket rather than risking his or her health (as he or she waits for 6 months to get treatment) and his or her financial solvency (as he or she waits to see if his or her co-pay coverage will kick-in or not). And if he has heart issues, the world-class Narayana Hrudayalaya Hospital in India probably beats the hospital down the street.

4. Selling Globally Is Starting To Make More Sense Than Selling At Home

China and India have four times the consumers, and China in particular is spending more on high-tech (and luxury) items than the US. And the general commitment to saving and financial solvency in Asia (as compared to the general commitment to borrowing from tomorrow to enjoy today that is prevalent in North America) means that that they have the money to spend if there is a product they want.

Come back tomorrow where we share our fifth, and final, takeaway from the Interesting Facts and Figures from the UL Product MindSet.