How agile ERP solutions can help
high tech manufacturers connect
with suppliers
Outsourcing continues to be a topic of debate among manufacturers, who struggle to find the appropriate balance
between low cost suppliers and escalating customer expectations. For high tech manufacturers, the topic is
particularly important, as electronics and high tech components typically require a large amount of repetitive
hand-work that is outsourced to countries who offer low wages. Sentiments about outsourcingâand the cost
benefits of outsourcingâare starting to change.
A recent survey of major U.S. companies found that half of the manufactures with sales over $10 billion are
actively considering bringing production back to the United Statesâknown as reshoringâas are more than
one-third of companies with sales over $1 billion. This complex task of closing, moving, and establishing new
locations causes numerous logistics and supply chain challenges for manufacturers. In this brief, weâll explore
whatâs driving the reshoring movement, and look at how modern ERP solutions, particularly cloud deployment, can
help make this undertaking easier.
High Tech & Electronics
2Infor High Tech & Electronics Industry Perspectives
Whatâs driving reshoring
initiatives?
During the height of the recession, up to 67% of US
manufacturers outsourced some portion of their
operations to off shore locations, according to
The Economist. During the 2000s, multinational
corporations increased employment overseas by 2.4
million, according to the US Dept of Commerce.
Outsourcing was once considered the only option for
US-based manufacturers trying to cut costs. Thatâs no
longer the case.
According to The Economist, manufacturers are
changing their outsourcing strategies for many
reasons, but the primary one is the narrowing wage
gap between industrial nations and emerging nations.
âWages in China and India have been going up by
10-20% a year for the past decade, whereas
manufacturing pay in America and Europe has barely
budged. Other countries, including Vietnam,
Indonesia and the Philippines, still offer low wages,
but not Chinaâs scale, efficiency and supply chains.
There are still big gaps between wages in different
parts of the world, but other factors such as transport
costs increasingly offset them,â The Economist reports.
The Foreign Policy Group (FP), a US advisory group,
agrees that cost savings that once made outsourcing
attractive have drastically changed. âOver the last 10
years, the idea of cheap Chinese labor and expensive
American labor has become rapidly outdated. Wages
in China have risen 400 percent between 2001 and
2012âŠwhile wages have barely risen in the United
States during the same period. In fact, unit labor costs
have come down 12 percent in the United States since
1995.â
The wage gap between advanced economies and
emerging economies, such as China, India and the
Philippines will shrink significantly by 2030 according
to an analysis published by PwC.
US UK Spain China Mexico India
0
20
40
2011
2020
2030
60
80
100
120
Relative monthly wage levels
Projected average monthly wage levels relative to US index = 100
Source: PwC
3Infor High Tech & Electronics Industry Perspectives
Indiaâs current average monthly wage is around 25
times smaller than that of the UK. By 2030, itâs likely it
be only 7.5 times smaller. Average wages in US are
currently 7.5 times greater than in Mexico, but the gap
could close to a factor of less than 4 times by 2030.
The worker in China, who now earns one tenth of a
US worker, may see income levels reaching closer to
45% on the index chart by 2030.
Michael Rendell, PwC partner and Global Human
Resource Services leader, said, âChange is
continuous and there will be even more movement in
the coming years. Companies planning for this today
will find themselves with significant advantagesâŠ. Itâs
inevitable that the manufacturing and services
industries in countries will transform as the cost base
evolves, and also that there will be winners and
losers. Governments, regulators and business
communities need to be ready for that shift.â
Beyond wage gaps, The Economist identifies another
critical threat of off-shoring, one that high tech
manufacturers take very seriously: risk to intellectual
property. With fewer laws to protect intellectual
property and poor enforcement of existing copyright
and patent laws, industrial nations often find plants in
emerging nation to be high-risk, requiring extra layers
to protect and safeguard innovative concepts.
For decades illegal knock-off and cheap imitations
have threatened brand integrity of many industries,
from videos to designer purses and electronics.
Legal pressure from manufacturers is starting to turn
the tide, but very slowly. Grass roots efforts to curtail
the demand from consumers for bootlegged
products are finding more success. Sentiments against
off shore plants, often seen as job-stealingâare also
causing manufacturers to reconsider outsourcing
strategies in response to public demand for
protecting jobs and ending worker exploitation in
emerging nations.
Even technology giant Apple came under pressure
when news stories emerged of Foxconn, its offshore
manufacturer of iPhones and iPads, installing suicide
nets on the top floors of their factory buildings in China
after 18 workers attempted suicide.
While labor reform is increasing the cost of goods
produced in China, improved productivity is causing
the bottom cost of goods to go down in highly
industrialized countries, like the US, Germany and the
UK. An Industry Week article recently noted that
bottom-line decisions about outsourcing vs. re-shoring
need to focus on the total unit costs, not just labor, and
includes costs such as transportation, intellectual
property risks and inventory carrying costs.
âManufacturers are overestimating potential savings
from overseas operations by 20% to 30%,â Industry
Week suggests.
4Infor High Tech & Electronics Industry Perspectives
Are manufacturers changing
their minds?
Manufacturers are starting to see the whole picture,
according to the Reshoring Initiative, an advocacy
group involved in education and lobbying. Their
research states:
Indeed, well-known companies such as General
ElectricÂź, CaterpillarÂź, and Ford Motor CompanyÂź are
bringing some of their production back to the US. The
Reshoring Initiative counts as many as 200 examples
of US companies over the past 10 years bringing their
production operations back to the United States.
But reshoring is about more than just brining
production back to the US. For many companies, itâs
about choosing a location that puts them near their
consumers. So, companies that are locating in China
arenât necessarily doing so for low labor wages, but
because of the growing middle class in China and
increased consumer spending. âChina is no longer
seen as a cheap manufacturing base but as a huge
new market. Increasingly, the main reason for
multinationals to move production is to be close to
customers in big new markets. This is not offshoring
in the sense the word has been used for the past
three decades; instead, it is being âonshoreâ in new
places,â says The Economist article.
A blog posting in Manufacturing.Net brings up yet
another factor in reshoringâthe availability of
resources. âExcellent, competitive stainless steel
comes from India because India has the ores and
minerals necessary to make it. While China has no
bauxite and is thus not necessarily competitive to
produce aluminum stock, Vietnam has become a major
supplier of aluminum and rubber because it has those
needed natural resources,â the blog states.
How can technology make
reshoring easier?
Clearly, location plays a key role in the bottom line
profitability of a company and its ability to meet
customer demands. As global conditions rapidly
change, the factors influencing sound decisions about
plant locations also rapidly change. These trends will
only continue, making it more important than ever for
manufacturers to carefully chose locations and
consider the impact location has on growth strategy.
One of the ways manufacturers can be ready for these
shifting tides is by adopting highly flexible, modern
ERP solutions.
Technology is the great enabler to the reshoring
initiative. It allows manufacturers, contractors, and
suppliers to take advantage of the shifting economic
conditions and emerging market opportunities, moving
to be closer to customers, raw materials, and favorable
incentivesâsuch as lower taxes, fewer regulations,
cheaper energy, and more skilled workers.
As manufacturers reevaluate their past outsourcing
decisions and consider relocating factories closer to
corporate headquarters, customers, and engineering
teams, they can be assured that agile ERP solutions will
support the move with ease.
â Since 2003, new offshoring is down by
70% to 80%, while new reshoring is up by
1500%.
â New reshoring is now balancing new
offshoring at about 40,000 manufacturing
jobs/year, resulting in the first neutral year
of job loss/gain in the last 20.
â Reshoring has yielded about 120,000+
manufacturing jobs.
5Infor High Tech & Electronics Industry Perspectives
Just because a major fabricator is located in India or
China today, there is no logistical reason why a
manufacturer needs to feel that geographic location
has to be permanentâor that it will take considerable
time and effort to change because of the complex IT
system involved.
Todayâs modern ERP solutions rely on a loosely
coupled architecture, like the Internet, that can be
expanded without causing breaks. This provides
greater agility and allows companies to connect to
new branches, divisions, plants, and suppliers with
speed, keeping the end-to-end visibility needed to
run a multi-site operation. Whether contractors,
partners, or fabricating resources are next-door or
halfway around the world, systems can be reliably
integrated and connected.
With cloud ERP systems, setting up a new location is
faster and easier than ever. Manufacturers donât have
to research, buy, implement, or support hardware and
servers. The cloud ERP vendor handles everything it
takes to get up and running. So, an implementation
that may have taken months on-premise, now takes
only weeks in the cloudâand comes with a lower
total cost of ownership.
Cloud solutions that are purpose-built for high tech
and electronics also eliminate the need for costly and
time-consuming modifications. When the cloud
solution is already built with deep domain
functionality included, the manufacturer can be up
and running in a new location with greater ease and
efficiency. This agility and speed of deployment
makes it possible for manufacturers to react to
changing global conditions and make short-term
commitments to a regional partner, test a new market,
or jump-start a product launch, taking a new
innovation to market sooner than competitors
can respond.
Modern ERP solutions are also making it possible for
manufacturers to use other approaches to remaining
competitive and meet customer demand. Some of
these approaches include:
â Turning to partnerships and suppliers to
manufacture subassemblies, components, or
configurations.
â Postponing completion or assembly until the
consumer actually places an order.
Agile ERP solutions support this customer-centric
approach and allow companies to âpop upâ next to
manufacturing partners who need completion,
assembly, and logistics support for these highly
configured complex products.
Bringing engineers, production, design, and the
consumer closer together has many benefits, including
the ability to foster new ideas. Proximity between
headquarters and operations also mean fewer
globe-crossing trips for key engineers and executives.
When the design engineers are located on the same
continent as the manufacturing operations, on-site
collaboration helps speed the transition from blueprints
and schematics to full scale operations. Modern ERP
solutions support this emerging emphasis on
collaborative manufacturing.
6Infor High Tech & Electronics Industry Perspectives
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Such creative problem solving and out-of-the-box
thinking is the new mindset of manufacturing.
Smaller, more agile factories, fabrication plants, and
distribution centers make it possible for
manufacturers to compete on a global scaleâbut with
localized versions. Smaller plants, with greater agility,
can focus on single products and collaborate with
customers and suppliers on innovative, specialized
solutionsâwithout slowing down the core make-to-
stock operations that provide the bread and butter for
the company and need to operate uninterrupted.
For manufacturers, suppliers, and fabricators, these
shifts in thinking and operational strategies mean new
challenges. Whether it is moving a plant closer to the
consumer to speed delivery or positioning a new
plant near a growing market, agile ERP solutions are
the key to making geographic decisions practical and
cost effective. Modern ERP solutions connect all of
these variables into one view of profitability.
Manufacturing.Net summed up the new mind-set well,
saying, âIn todayâs flattened-world economy, the
concept of made âhereâ or âthereâ makes no sense.
Few end products are completely made in any one
country. American cars contain wire harnesses put
together in Mexico from wire made in Georgia, engine
components machined in Eastern Europe assembled
into finished engines in Michigan, sheet metal
produced in Pennsylvania and fasteners cold-headed
in Taiwan.â
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How Agile ERP Solutions Can Help High Tech Manufacturers Connect with Suppliers
Outsourcing continues to be a topic of debate among manufacturers, who struggle to find a balance between low cost suppliers and escalating customer expectations. Sentiments about outsourcingâand the cost benefits of outsourcingâare starting to change. This paper outlines whatâs driving the reshoring movement, and looks at how modern ERP solutions, particularly cloud deployment, can help make this undertaking easier.