In the past several decades, global competitiveness has driven industries of all types to pursue a labor cost reduction model. The trend in North America alone has resulted in the following path:
- Reduce cost in high cost environment
- Move product to lower cost nation ( Mexico or Eastern Europe )
- Move product to next lower cost nation ( China or Southeast Asia )
We are sure the reader may have participated in such outsourcing events that advertised huge savings to the manufacturer and in some cases, other parts of the supply chain. The company reaped benefits in labor and redundancy costs that hopefully offset inventory and transportation costs. But as we all know, the manufacturing environment is in a constant state of change. The failure to recognize the static nature of the business coupled with the failure of manufacturers to comply with disciplined global production systems has caused the participants to revisit the value of outsourcing and the opportunities associated with reshoring. To be clear, reshoring is the practice of returning outsourced products and assets back to the location (geographic selection) from which they were originally outsourced or removed.
Recently the global economy has demonstrated changes in several areas:
- Increased wages in places like China and Southeast Asia
- Perpetual quality issues on product shipped from these locations resulting in:
- Unforeseen working capital levels sitting in sea-barring containers
- Poor delivery performance resulting in premium transportation cost to the end user and members of the various supply chains.
These and other issues have now begun a trend in manufacturing to bring work content back to an original location. The challenge of course is to not make the same errors in reshoring as occurred in outsourcing.
Our firm began to notice the impact on reshoring globally in 2012. We noticed that firms moving on the strategy were doing so for a number of reasons. The reasons were:
- Customer focus charged them to revaluate the manufacturing locations
- Supply chain capability was sorely lacking.
- Manufacturing capability
The key recognition was that one could obtain a low cost labor force and install it much faster than incorporating customer focused processing based on a recognizable production system in machining, final assembly and supply chain. The reader at this point should not be confused. We are not advocating the huge global move back to a previous location. We are simply asking the reader to contemplate the following questions.
- Are you ready to build in China for China customers?
- Are you ready to utilize higher level capital to offset the higher cost of labor?
- Are you ready to utilize communication systems that enhance products and customers in the respective geographic locations?
- Is your entire organization deeply committed to lean principles, especially:
- Standard work
- Quality at the source
- Material flow
- Error proofing
- Is your entire enterprise cognizant of value stream mapping and the opportunities that come with it?
Let’s discuss the three main reasons noted earlier citing opportunities for the manufacturer.
Customer focus on manufacturing locations
Far too often locations are selected on a very restricted business model. An example is the selection of a low labor location where low labor costs dominate the reasoning for selection and subsequent business model. Flash forward fifteen years. The work force is more expensive. Customer requirements are much more stringent. Pricing strategies have changed. One wakes up to find that the fifteen year old business model is no longer competitive. We think the opportunities lay in the production system both internally and in the supply chain. There is no reason to believe that a blend of a number of strategies cannot enhance the selection process. The focus should always be on what is best for the customer maximizing the initiatives and metrics associated with:
All should be reviewed equally resulting in advantages for the customer in quality and delivery and the manufacturer in cost and profitability.
Supply chain capability
If there has been a forgotten link in this model over the years it is the assumption that the supply chain can move at the same rate of speed and capability as the original equipment producer. Areas often neglected are training, communication, and infrastructure. How many times does the supplier in China completely misunderstand the needs of the OE? Probably more than we collectively want to admit. The supply chain partner must be just that –partner. Not an afterthought in the model. We think the suppliers should participate actively in the early stages of product and process development. We find the capability of the supply chain declines with the tier level of the value chain. It is especially evident in two areas. The first is in preliminary quality metrics. The second is in total launch readiness. Both areas result in delays and lost profits. We find that companies “going and seeing” the supply chain capability, communicating changes in processing and pricing, and openly review critical targets and dates are the most successful.
Many feel with the advent of labor to low cost countries, that companies focused less on manufacturing technology. As a result progress in computer aided design (CAD), computer numerically controlled (CNC) and internet based manufacturing was slowed in many countries. The role of lean manufacturing was present, but too many missed the opportunity to embrace a lean enterprise. In the last several years as the low labor model was reevaluated, the technology based model has grown in favor. Reshoring efforts combining the opportunity of higher level capital with a strong production system are doing well. With the improving economy the biggest challenge has been in capacity capability. We find that companies recognizing that there is validity and confidence in the volume releases and move responsibly in the area of capital appropriation do best.
We think the next several years will continue to provide challenges for reshoring and outsourcing of products and services. Those having a more macro view will do best. Additionally, those recognizing the needs of the global customers will do best, Finally, those having the agility to move quickly with volume and market shifts will do best.
The failure to recognize the static nature of the business coupled with the failure of manufacturers to comply with disciplined global production systems has caused the participants to revisit the value of outsourcing and the opportunities associated with reshoring.