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 outsourcing—and the cost benefits of outsourcing—are starting to change. This paper outlines what’s driving the reshoring movement, and looks at how modern ERP solutions, particularly cloud deployment, can help make this undertaking easier.

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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 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 outsourcing—and the cost benefits of outsourcing—are 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 States—known as reshoring—as 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, we’ll explore what’s 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 What’s 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. That’s 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. “Wages 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 China’s 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,” The Economist reports. The Foreign Policy Group (FP), a US advisory group, agrees that cost savings that once made outsourcing attractive have drastically changed. “Over 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 2012…while 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.” 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 India’s current average monthly wage is around 25 times smaller than that of the UK. By 2030, it’s 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, “Change is continuous and there will be even more movement in the coming years. Companies planning for this today will find themselves with significant advantages…. It’s 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.” 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-stealing—are 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. “Manufacturers are overestimating potential savings from overseas operations by 20% to 30%,” 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 Electric®, Caterpillar®, and Ford Motor Company® 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, it’s about choosing a location that puts them near their consumers. So, companies that are locating in China aren’t necessarily doing so for low labor wages, but because of the growing middle class in China and increased consumer spending. “China 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 ‘onshore’ in new places,” says The Economist article. A blog posting in Manufacturing.Net brings up yet another factor in reshoring—the availability of resources. “Excellent, 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,” 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 incentives—such 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. ■ Since 2003, new offshoring is down by 70% to 80%, while new reshoring is up by 1500%. ■ 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. ■ 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 permanent—or that it will take considerable time and effort to change because of the complex IT system involved. Today’s 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 don’t 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 cloud—and 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: ■ Turning to partnerships and suppliers to manufacture subassemblies, components, or configurations. ■ Postponing completion or assembly until the consumer actually places an order. Agile ERP solutions support this customer-centric approach and allow companies to “pop up” 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 Copyright © 2014 Infor. All rights reserved. The word and design marks set forth herein are trademarks and/or registered trademarks of Infor and/or related affiliates and subsidiaries. All other trademarks listed herein are the property of their respective owners. 641 Avenue of the Americas, New York, NY 10011 INFDTP1451809-en-US-1114-1 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 scale—but with localized versions. Smaller plants, with greater agility, can focus on single products and collaborate with customers and suppliers on innovative, specialized solutions—without 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, “In today’s flattened-world economy, the concept of made ‘here’ or ‘there’ 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.” Share this :