About a year ago, I was visiting a plant that manufactured large die-cutting presses. The CEO told me that most of the presses (although engineered in the U.S.) were manufactured in Taiwan, but he was thinking about bringing the production back to his plant in Cincinnati. Many of the die-cutting presses are custom engineered and there were a lot of problems trying to communicate the requirements to Taiwan, which resulted in quality problems.
He also said the cost of shipping a container to the U.S. had increased by 50 percent, and giving customers accurate delivery dates was problematic. Even though the original quoted cost of manufacturing in Taiwan looked very attractive, all the additional costs and problems had made the costs of offshoring exceed the original quoted benefits.
Many of his customers have particular brand name requirements, like Baldor, Allen Bradley, Vickers, etc., and they are not easily sourced in Asia. Therefore, the company had to send containers of American made components, which added to the costs and supply chain management issues. For these types of presses, many of the customers would not travel to Taiwan for the final customer test which caused additional problems.
My conversation with the CEO got me thinking about the offshoring of American products in general, and I wondered if other manufacturers were experiencing many of the same problems.
A recent study by Archstone Consulting indicates that many manufacturers are contemplating bringing their manufacturing back to the U.S. Nearly 90 percent of manufacturers are considering changing or have already changed their manufacturing and supply strategy. The study cited many reasons, varying from rising fuel costs and increasing Chinese wages to delivery problems and satisfying American customers.
It’s safe to say that simple, high volume consumer products will probably never be manufactured in America again. In addition, companies who built plants to service Asian markets will probably stay in the foreign countries because of the local market. But industrial goods are a different issue and the more complicated or custom the product, the more problems there are.
The following is a discussion of the major problems causing this reversal.
Problem 1 -- Many U.S. manufacturers “Leaped Before They Looked.”
In other words, they didn’t do everything possible to reduce waste and optimize their own systems. They simply went for the low prices.
An example of a manufacturer who did “look before he leaped” is Dave Graham, president of the Epson plant in Hillsboro, Ore. After losing his Epson printer business to China and Indonesia, Graham wanted to find a way to keep the printer cartridge business from being outsourced.
He reasoned that he could offset the low costs of labor in Asia by focusing on automation, throughput, and production efficiency. Epson’s people studied the lean manufacturing methods used in the Toyota Production System, and began to implement their own system of continuous improvement that would reduce defects, lower costs, and improve quality.
Under Graham, the defect rate plunged to 300 per million and the cartridges per employee increased about 40 percent. The Portland operation now manufactures about 50 kinds of cartridges and the production is up 200 percent from 2001 levels.
Another example is Hayward Pool products of Elizabeth, N.J., which makes heaters and pumps for swimming pools. Their offshore journey began when a Chinese manufacturer copied their products and tried to sell them in the U.S. market.
Hayward adopted lean and Six Sigma strategies to optimize their production, as well as a “no layoff” policy. They still had to move some products to China, but were able to keep most of their production in the U.S.
The lesson here is that many companies who leaped at the opportunity for low prices should have taken a harder look at improving their own production processes first.
Problem 2 -- Projected Costs Have Increased Since 2000.
The Archstone Study shows that:
• Ocean freight costs have increased 135 percent
• The Chinese yuan has gained 18 percent in value compared to the dollar
• Chinese manufacturing wages have increased by 44 percent
Desa, LLC of Bowling Green, Ky., decided to outsource its manufacturing of consumer heating units in 2000 when Chinese quoted costs and rebates looked so attractive. In the last few years, China announced that they would reduce rebates, the price per container had risen 50 percent, and labor savings were reduced because of the falling dollar.
The other factor that influenced Desa’s decision to bring back its manufacturing was that they found that manufacturing in the heart of their market was a significant advantage in terms of service delivery, and reaction time.
Problem 3 -- Quality and Safety
A study by AMR Research says, “24 percent of the 113 executives polled cited quality as the greatest sourcing risk they face in China.”
Dr. Fresh in Buena Park, Calif., decided to transfer its production of dental hygiene products back to the United States. The company has not had any product recalls, but CEO Puneet Nanda said he is trying “to reassure customers that their products are safe.”
The same consideration is being considered by other medical device manufacturers because they simply cannot afford to have a quality or safety problem and the risks are too high in China.
Problem 4 -- Hidden Costs
Many manufacturers who decided to outsource have found there are more costs associated with offshoring than just the quoted costs and freight. This is particularly true of complex industrial products.
When the product is a machine or assembly, there is substantially more information involved. The company needs to train the foreign contractor in quality, assembly, welding, and standards. This often means sending people to the foreign plant to work with the foreign manufacturer.
If the initial production has quality issues or delivery problems, the manufacturer may have to carry an extra inventory of parts or assemblies to satisfy customers. When you consider various taxes, tariffs, and logistic fees, these hidden costs can quickly reduce profitability.
The 2008 Archstone/SCMR survey of manufacturers reported that more than 50 percent of the manufacturers surveyed reported that the following issues were top concerns:
• Supply chain flexibility
• Visibility, coordination and control over the supply chain
• Bottlenecks in the logistics network such as ports and transportation
Problem 5 -- Deliveries
Many American companies want just-in-time parts and are not willing to accept the longer deliveries or late deliveries of foreign sourced parts.
Manufacturers who have outsourced parts that need to be delivered to U.S. customers as part of their scheduled production process have found that they cannot always count on delivery promises from Asia. A small engine manufacturer had to stop its production line when the container of parts from China landed on the West Coast and the parts were found to have quality defects.
Ron Davis, CEO of Davis Tool in Hillsboro, Ore., saw the writing on the wall as commodity job shop parts were sourced more and more from Asia. Davis Tool decided to change their strategy to offer quick turnaround on custom or low volume jobs.
Supporting the new strategy required adopting a vertical integration approach. Davis Tool offers machining, fabrication, nickel plating, anodizing, laser cutting tool design, Solid Works, Pro-Engineer, powder coating, painting, and engineering design from one location. This strategy allows them to offer very quick deliveries and gives them control of most processes.
They also invested heavily in the latest and most efficient machine tools, and specialists in one operation are cross-trained into other operations. For instance, a machinist is also trained in laser cutting of sheet metal. That gives the managers the ability to move people around and work in backlogged areas.
As a result of the new strategy, they have reduced their flow time (average time a work order is open) from 40 days two years ago to 17 days today.
Problem 6 -- Changing Demand
It is much easier to handle the changing demand of customers in terms of new product, custom products, quick deliveries and special services if the manufacturing plant is located in the market.
The Archstone Survey said, “While it may be some time before the full implication of these trends are known, it is telling that many manufacturers have come to realize that positioning manufacturing and supply closer to its customer markets can help overcome many of the soft issues associated with offshoring.“
I think that the trend towards bringing back production from foreign countries will continue as U.S. manufacturers take a holistic look at all of the costs and problems associated with outsourcing.
The potential for U.S. manufacturers to regain a lot of the business lost to offshoring is great. The current value of the dollar has been having an affect on where companies choose to source their business. I think the value of the dollar will continue to fall as we grapple with our financial problems and deficits, and I think this could be the dawn of a rebirth of American manufacturing.
If for some reason the dollar crashes on the world market, the prices of imports would skyrocket and America might be overwhelmed with requests for domestic manufacturing.
It would be very hard for industries to find the skilled workers, machine tools and capacity to respond, since so many companies have closed down operations in the last 10 years. Of all of the problems facing American manufacturing, I think not having capacity and being overwhelmed by orders would be nice problems to have.
Michael P. Collins is president of MPC Management, a manufacturing consulting company, and the author of the book, “Saving American Manufacturing.”