Where Are You Planting Your Seeds to Business Growth?

This month, we cut through all the industry “buzz” and went straight to the source(s) themselves to address the current shift in manufacturing—from all angles. In our first-ever edition devoted exclusively to manufacturing, we provide you with:

  • Direct insights from one supplier on why they brought part of their production back to the U.S.
  • What impact on IT outside of cost structures you must consider before you start to manufacture domestically, such as intellectual property security
  • The conversation from the show floor, with our exclusive reports from the Council of Supply Chain Management Professionals’ (CSCMP) Chicago Roundtable; and Infocast’s Reshoring Summit  
  • One firm’s take on why it works for them to continue to outsource to China
  • All the consideration factors key to decide: ‘Is it time for me to bring production back home or continue to outsource it overseas?’

 

The vote is unanimous this month that 1). Domestic production brings opportunity and 2). Manufacturers must weigh all the factors to decide which practice—reshoring versus offshoring overseas—is right for their business. But there is an integral component to the discussion that plays a key part to one’s final production decision: site selection. Yes, we all know the rule of “location, location, location.” But its scope becomes more complex as more manufacturers today weigh the value of regionalization to better serve the customers within a specific global segment.

“The location is more than just the footprint,” explained Jake Barr, Global Director, Supply Network Operations for Procter & Gamble and Chief Executive Officer and Principal for BlueWorld Supply Chain Consulting LLC, at the CSCMP Chicago Roundtable in mid-March. “You better understand the strategy of what the facility is going to support. ‘What are you in the business to do? For what length of time? For what technology?” he questioned.

Down by the border

“As companies deal more internationally with global suppliers in developing countries—not just the USA—they are being confronted with a lot of new issues that need to be addressed,” explained Dick Gould, ASQ Fellow and supplier management trainer and consultant. “And they need to make those part of their selection process that they use for selecting the suppliers they want to work with.”

One such company that made significant progress in reshoring portions of its supply chain to the U.S. is Mitsubishi Caterpillar Forklift America (MCFA). The forklift manufacturer—under the Cat lift trucks, Mitsubishi forklift trucks and Jungheinrich brands—broke ground this past February in Houston to expand its headquarters manufacturing facilities.

“This factory expansion allows us to reshore production,” said Jay Gusler, Vice President of Operations for MCFA. “We have been really working hard for the past three years to increase the local content in our products, increase U.S. sourcing to shorten our supply chain and bring it closer to Houston, reduce currency risk, reduce transportation spend and increase the stability and visibility into our supply chain.”

With the additional manufacturing space, the growth will support future production of the Jungheinrich ECR 327/336 series of electric end rider pallet trucks. The multi-million-dollar expansion will increase the under-roof production capacity at MCFA’s world-class facility by more than 40 percent.

“We want to support the U.S. economy by sourcing components here, creating more jobs here and producing more here,” Gusler confirmed. “That is our focus.”

The reason behind the manufacturer’s facility expansion decision was two-fold, he explained. The first reason was to create a dedicated electric products production facility, focused on the new Jungheinrich design models that we will built at the Houston site as opposed to buying them from Jungheinrich and having them shipped from Germany. The second reason was to have MCFA become the global source for its forklift business for the production of its seven-ton model and its 10-to-18-ton model, which will be transferred from Japan to the Houston facility at the end of 2013.

Global outlook

In having manufacturing facilities closer to end customers, “you have to think about what makes sense to be held in your manufacturing facilities in different parts of the world,” explained Sean Adkins, Director of Workforce Optimization, West Monroe Partners. “And also understand that it needs to be a truly collaborative environment and view.”

For example, if there is a demand for a particular product in Asia, it would make sense for the production capacity of that product to stay in Asia if it is already there.

“So it’s not necessarily about bringing manufacturing back to the U.S.,” said Marc Tanowitz, Principal for outsourcing advisory firm Pace Harmon. “It’s about bringing it closer to your customer, wherever that customer is. And again, it’s those customers where the transportation costs and carrying costs are so impactful on your overall economics. So companies are realizing that there is product that makes sense to have near your customer.”

On the other side of the spectrum, as manufacturing continues to experience this evident shift, companies must also consider what processes or strategies they can best utilize effectively to assess which global region works best for what specific production segment is at the core of their business model.

“Our perspective has always been that outsourcing doesn’t mean offshoring,” Tanowitz continued. “Offshoring is one particular lever. More than outsourcing, our approach has always been a bit more objective. One of the key types of projects that our clients ask us for is an assessment: ‘Give us a cost model, give us an assessment of where we should do a particular function or activity business process and what that cost model might look like to help us make a decision of where the right place for us to invest our resources should be.’ We’ve always evaluated domestic versus foreign opportunities and tried to fit those within the context of our clients’ particular problems. So while the majority of the work that we do is under this umbrella of outsourcing advisory services, more than half of our clients find their outsourcing agreements take on a domestic component.”

While regionalization continues to take center stage, businesses in the U.S. must also not underestimate their competition. For example, while manufacturing accounts for only 16 percent of India’s Gross Domestic Product (GDP), it contributes 53 percent of exports and receives 79 percent of foreign direct investments into India, according to “The India Manufacturing Opportunity” report from the Boston Consulting Group (BCG), together with CIL. BCG also cited that India could become the fourth largest manufacturing hub by 2020, verified Devesh Nayel, Senior Vice President & Global Head of Manufacturing and Financial Services, BPO business unit, Capgemini.

“India will be a competitor, provided it can solve some of its issues with infrastructure,” said Nayel. “It has not yet passed the test when it comes to ports or building roads—unlike China. Building a road in China is easier. You draw a straight line on a map and you go and build it. In India, you cannot do that—there is a price of democracy.”

“Thailand is developing as a great manufacturing location but it suffers from political issues and instability,” continued Nayel, citing other global regions of manufacturing opportunity. “People are talking about Vietnam, not only for outsourcing but also for manufacturing. But Vietnam suffers from scale—it’s likely the size of one—if not half—of the cities in China. There is also interest in setting up manufacturing in Brazil because of its natural resources and the cost of labor is more expensive—more expensive than India or China. Mexico is still a suspect case. It has structural and corruption issues and transparency is a big problem there, not unlike India or China.”

Out of sight shouldn’t equate to out of mind

Yet, not only is there a move towards regionalization—there is a move toward resiliency in supply chain. And it is more evident than ever for manufacturers and their suppliers to ensure they are both on the same path of success.

While more than 75 percent of suppliers are confident in their ability to meet their customers’ needs in 2013, one third of respondents (33 percent) to the “2013 Manufacturing Outlook” report from ASQ confirmed they anticipate a problem with a supplier next year, resulting in parts- or service- shortage.

“A lot of companies are more concerned about risks now than they ever have been before,” said Gould.

“And how they handle risk management in their supply chain is critical. Nowadays, there are a lot more factors that the manufacturers have to deal with in working with their suppliers. It’s not just the quality, the price or the delivery of things they are buying. There is the whole risk picture, there is business continuity planning, there are social responsibility issues right now with environmental and human resource issues.”

Yet, all hope is not lost. The report further confirmed that of the more than 1,250 manufacturing professionals globally who anticipate a problem with a supplier, 42.1 percent said they continue to work with partners on process improvements to mitigate volume capacity; while more than 60 percent of the survey respondents confirmed that their organization has a formal process in place to address supply chain risk.

“Mitigating risk and resiliency of the supply chain—companies tend to make this too much of a project,” said P&G’s Jake Barr. “One of the best investments you can make is changeover capability—the ability to reduce reaction time from SKU to SKU.”

Regardless of which side of the reshoring versus outsourcing discussion you stand on, it is vital to understand the region you are investing in and your go-to strategies applicable to that consumer segment to gain the most return on investment—in addition to proactively adding to (and securing) its economic footprint.

SIDEBAR: West Monroe Breaks Down the Manufacturing Discussion Further

“Onshored versus offshored employee: It’s not an apples to apples comparison. Offshoring is no longer a “no brainer” for manufacturers. Where once the differential in cost between a U.S. employee and an offshored employee was staggering, the gap closed significantly. What’s more, manufacturing jobs are more complex today and require a different skill set. As such, manufacturers must focus on the productivity, skill set and “total cost of delivery” – which makes reshoring an attractive option. Manufacturers should do an analysis to understand the potential ROI of reshoring to help justify the upfront investment.

Some timely factors manufacturers should be considering include:

  • Wages in China increased 500 percent since 2000 and are expected to continue to rise at a rate of 18 percent per year
  • Higher oil prices are reflected in even higher shipping costs
  • U.S. unions continue to become more flexible to promote domestic job growth

 

Reshore for innovation: the key to manufacturing success in the U.S. is innovation—matching the right talent with the right processes and technology to deliver the superior product. The U.S. continues to be a leader in innovation—reshoring jobs solidifies manufacturers’ ability to design the latest and greatest products. This is what will position manufacturers for true long-term growth (despite the fact that things like wages, oil prices, etc. will continue to fluctuate).”—Sean Adkins is Director of Workforce Optimization for West Monroe Partners

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