North American Based Manufacturing
The Benefits are Real...
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In business the word change is at the core of all strategic planning processes, many companies however make the assumption that reducing their cost in manufacturing is as easy as moving to off-shore alternatives, but is it really the answer?.
The benefits of global integration and speedup in communication technologies and transportation now provide the agile company a strategic benefit versus the company tied to long logistics lines and inherent large inventories which find it difficult to change quickly.
Consider the Following...
A key principle is to manufacture products near their markets. Manufacturing overseas may be the best solution if the products will be sold overseas. But for products to be sold in the U.S., manufacturing closer to home is generally a better solution.
Manufacturers can save a significant amount of labor cost by moving operations overseas. But the cost savings in labor is deceptive: labor is typically not the most significant factor in a product's cost, rarely more than 30% of total cost. Direct costs offset labor savings. Increased direct costs include customs, duties, fees, insurance, inter-modal handling, licenses and transportation. Too often, a manufacturer looks only at the labor + transportation + duty equation. In many cases, that equation will tell the manufacturer that overseas manufacturing is the cheapest solution. But that equation does not tell the full story.
Other key things to consider when manufacturing overseas are some of the intangible cost which are very real. These intangibles take on the form of risk.
Political risk is like a natural disaster, an earthquake, tornado or hurricane; it happens infrequently, but it can be devastating when it occurs. Political risks include radical regime change, anti-U.S. sentiment and even terrorism.
Currency risks can be intangible, in terms of the uncertainty of an exchange-rate change, or they can be real, in case of revaluation. Managers can hedge against currency fluctuations over the short run (months), but long-term investments and the entire product cost structure can be significantly wiped out in a currency revaluation.
Management control is significantly eroded when manufacturing is a long way distant from the market. Management cannot be two places at once; with overseas manufacturing, management is either paying attention to its market, or to its operations, but not both. The trick for successful companies, though, is to manage both at once.
Intellectual property is an intangible asset, but it may be the most valuable asset that many companies have. Protecting intellectual property is virtually impossible in some parts of the world; their cultures do not necessarily respect intellectual property rights, and their governments are reluctant or unable to enforce the laws they have.
Inventory, and all of its costs, is necessarily increased when manufacturing overseas, just due to the difficulties of long logistics lines. Inventory carrying costs are real, but they are generally absorbed in fixed cost categories, so the impact of inventory on operating expenses is hidden. Inventory adds cost but not value, and by definition reduces return on investment. Every Chief Executive knows the dangers of long supply lines, and managers should recognize those same dangers in their logistics decisions. Time-to-market is more important in today's world of global media than it was just two decades ago.
Being first in a market can be a competitive advantage that cannot be overcome; by the time competitors catch up, the market has moved on to other products, and the competitor is stuck with obsolete inventory. Overseas manufacturing virtually always lengthens time-to-market, reduces a company's agility and becomes a competitive disadvantage.
Moving manufacturing operations overseas can be the right solution when markets are also overseas, but it is rarely the right decision when serving domestic markets.
Q: So how can companies keep their manufacturing operations at home and still compete with the price leaders who absorb the overseas risks?
A: They improve their productivity, by leveraging lean manufacturing partners.
A lean manufacturer will absorb higher hourly costs for labor, but will invest fewer labor hours in each product, because of higher productivity. A lean manufacturer will avoid the extra transportation, handling and duties costs. A lean manufacturer will not suffer political, currency or control risks, and will protect intellectual property. A lean manufacturer will keep inventory to a rock-bottom minimum, and will be able to respond to demand in real time.
Many manufacturers find that they can beat lower overseas costs with increased productivity. Explore lean manufacturing alternatives before committing to long-term risks overseas.
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