There has been much speculation and conversation of late about U.S. manufacturers considering “on-shoring” or “re-shoring,” essentially bringing production operations back home.
When I read articles on this subject, I cannot help but think of a quote from A.G. Lafley, the former CEO of Procter & Gamble, which goes to the heart of this issue.
“The only strategy that matters is one that touches the consumer.”
This quote, provided to me by a former P&G exec Ed Burghard, is one that I periodically revisit to remind myself of certain fundamentals that should never be lost on anyone in business, but frequently is. The customer really is boss, and if you don’t provide the product or service expected, watch out.
Certain American manufacturers have learned the hard way that they could not best meet the needs of their customers with production facilities offshore, especially if their customers were here in the United States.
What It Is and What It Isn’t
And that is by definition what off-shoring is all about. It is not about moving production to another country simply to meet customer demand in that particular market. If you are making widgets for a Chinese market, which is a very big and growing market, then it might be a very smart and appropriate move to build a plant in China. But I don’t consider that off-shoring.
Rather, off-shoring is about moving operations offshore only to later import the goods back into the U.S, which still remains the world’s largest market, to fulfill demand.
Mind you, it can work. It has worked, particularly for certain industries such as telecom. But for many U.S. manufacturers, off-shoring has not proved to be the panacea as expected.
Let’s Get Closer
A recent survey conducted by Accenture among 287 manufacturing companies identified that, in order to compete effectively, they needed to rebalance their existing supply footprint to better match with demand location. The majority of 61 percent of the respondents said they are currently considering shifting their manufacturing operations closer to customers to provide better service and to enable accelerated growth.
“Companies are beginning to realize that having off-shored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers’ expectations across a wide spectrum of areas, such as being able to rapidly meet increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs,” the Accenture report said
Managing supply operations that are separated far from where demand occurs has weakened some companies’ overall operational planning, forecasting and general flexibility, while driving up costs, particularly when energy prices are soaring. In short, the off-shoring experiment for many has backfired.
It would probably not be accurate to call off-shoring a fad. Again, it does work for certain companies in certain industries. But it is also clear that there is a lot of me-too-ism in business, a lot of follow the leader because they might know something we don’t know. For many companies, these strategic moves were simply not well thought out.
For example, nearly half (49 percent) of respondents in the Accenture survey reported facing issues with cycle or delivery time, and 46 percent have experienced product quality concerns as a result of off-shored manufacturing and supply operations.
The simple truth is that global competition will always force factory managers to try to replace expensive workers with machines or with low-wage labor overseas. Seeking nirvana through low labor costs has been a prime reason for off-shoring. By the way, it is also been the reason why the U.S.manufacturing is as efficient as it is. Because we cannot compete in terms of labor costs, we have had to develop more efficient, more automated systems for production. The proof is in the numbers.
A recent report by HIS Global Insight said China required 110 million workers to produce approximately the same amount of goods that 11.5 million American workers could produce. You may want to read that again.
In 2009, productivity in U.S. manufacturing increased by 7.7 percent, more than any other country followed by the Bureau of Labor Statistics.
The simple truth is that manufacturers in the U.S. beat sweat-shop wages in developing countries through innovation employed here at home. It is the only way we can hope to compete. It is our only chance.
But clearly it is a chance, a risk worth taking for many manufacturers who have discovered issues of quality control that is not to their (or their customers’) liking and that total costs of manufacturing off-shore turned out to be not as low as expected.
What Happened to Our Cost Savings?
For one, labor costs are rising in Asia, particularly China, where wealth is building and a middle class is being created. And on the energy front, many analysts are predicting $150 a barrel oil before the end year’s end. Any way you cut it, moving a container load of pink flamingos from a far-off plant in Shandong province in China to the U.S. and to eventually find its way into your local Tacky Wacky store (I just made that up) is going to become more expensive. That is just the way it is.
So the seemingly initial cost savings – the reason why many if not most U.S.manufacturers jumped into a off-shore strategy with both feet are no longer so big. In fact, they are diminishing. And then there are your customers, you remember them. They are those pesky, challenging people requiring better service, agility, speed, and quality.
And now it starts to dawn on you that your plant in Shandong province alone may not cut it. Indeed, if you are going to keep these customers as customers, you are going to have to bring at least some production back home.
And that is what is happening, pure and simple.
The Right Strategy
“Getting closer to the customer allows for improved flexibility to respond to uncertain mand and unknown customer requests in an agile way with fast delivery times while maintaining high quality and optimized costs,” the Accenture study said.
It may not always prove to be the lowest cost strategy, but it is the right strategy for keeping customers happy. So a rebalancing act is taking place to better match supply operations with demand locations. BMW, Nissan, Siemens, Electrolux are recent examples of companies investing hundreds of millions of dollars in this country in pursuit of a strategy that A.G. Lafley spoke about.
Yes, indeed, it’s a brand new world out there. Heck, it’s always a brand new world.
Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Red Oak, Texas — www.barberadvisors.com