Moving Production Back to the USA -- The Better Business Strategy for US Manufacturers?

A new book by Tim Hutzel and Dave Lippert titled Bringing Jobs Back to the USA: Rebuilding America’s Manufacturing through Reshoring was published this month. This book continues the theme of their first book, Keeping Your Business in the U.S.A.: Profit Globally While Operating Locally.

As many US businesses have relocated operations to different parts around the world for supposedly cheaper labor costs and materials, I asked Tim and Dave why should a US company now consider reshoring and reestablishing its manufacturing back in the USA? Here is Tim and Dave’s response:

Some reasons may stem from the original motivation to offshore. Was it strictly cost? If so, what costs were considered? In many cases, the labor cost was the driving force. If that is the case, then looking at the current offshore labor costs, as well as the near term labor cost trend, may paint a very different picture from the original. The rapidly rising middle class in China is eliminating that country’s labor cost advantage.

Another cost is transportation. Energy costs have increased markedly from the days when many companies began their offshoring operations. This is another development that may make domestic manufacture appealing.

Travel costs and time spent coordinating with offshored production are trackable and must be included. While travel costs are calculable, the opportunity costs are probably ignored. That is, could executives traveling to offshored locations be using that travel time in much more productive ways? Also, could the staff time spent dealing with offshore production issues, including complicated logistics, be more productively spent on other matters?

There are also hidden costs that burden the offshoring company in ways it fails to recognize. Scrap and rework can be immense and also unpredictable costs. Do batches of product arrive and sometimes need rework? When that happens, are those costs tracked accurately and reflected in the actual cost of the imported product? What about outages – are there times when product is en route, and stock outages occur prior to arrival? What is the cost of an unhappy customer? Are customers driven to competitors’ products? That can be an unacceptable cost. It can also be difficult or even impossible to measure.

Is the cost of stocking large inventories completely and accurately covered? To avoid outages, extra stock may be kept and stored. Is stock sometimes damaged, or even lost, and are those costs captured? Is a heavily stocked product susceptible to obsolescence through design changes?

Perhaps the most difficult costs to identify are those that result from the distance between production and design/engineering. Are product improvement opportunities lost due to the disconnect between these two entities? Are there quality problems that result in substandard product, which can lead to lost market share? How can such subjective or camouflaged costs be measured, even though they are very real? Sadly, we are convinced that costs like these have been left out of the offshoring equation for many companies. 

What do you think of Tim and Dave's points? Do you think that the era of US companies locating their operations offshore because of supposed cheaper costs are drawing to a close?

"Made in the USA" -- Can it Happen Again?

During the past 20 years, US manufacturers have moved their production operations, at a massive rate, to foreign countries that offer cheaper labor costs.The migration of US manufacturing jobs to such locations as China have resulted in cheaper products, but the overall effect on the US economy has been hotly debated. Will manufacturing in the United States ever see a resurgence?

Tim Hutzel and Paul Piechota recently published a very interesting and timely book titled Keeping Your Business in the U.S.A.: Profit Globally While Operating Locally, and they feel that the current adage -- "The US can't compete with offshore labor costs" -- is a mere myth. Both have spent the past three years researching companies that have flourished while manufacturing their products in the US and their book documents just how these organizations achieved this goal.

I recently asked both authors why they believe the US can recover from the out flow of manufacturing, and here is their response:

A burning issue that is certainly in need of a remedy is the mass departure of manufacturing from the US to foreign countries. The results of this exodus are felt every day. As much as you would like to buy US-made products, this has become an impossible task. It is heartbreaking and disturbing that so many products, such as bicycles, clocks, garments, shoes, and computers are not produced domestically anymore.

Manufacturing can return to the US because many companies have been hurt by the rush to outsource. We have heard the tales of many business leaders regretting their outsourcing decisions -– the unplanned costs, poor quality, uncontrolled processes, long delivery times, graft, monstrous order quantities, inventory nightmares, lost and damaged products, oversight trips overseas, confrontations, half-truths, excessive order-to-remittance times, and added debt. In addition, there are social and national implications of outsourcing -– unemployment, increased government jobs, loss of skills, weakened national defense, loss of tax base, and unbridled national debt.

In our book, we clearly illustrate three manufacturing companies that have been able to resist the outsourcing trend and achieve overwhelming success while keeping jobs in the US. We have examined the successes, failures, lessons learned, and methods used by each company to achieve and sustain profitability.

What do you think the future holds for US manufacturing? Will labor costs in China only eventually rise? Will shipping and inventory costs associated with production in foreign countries eventually be important factors in cost?

Lean Implementation Problems: Different Cultures, Same Mistakes?

I was recently perusing an article that appeared in the March 2010 issue of Asian Social Science titled Why Most Chinese Enterprises Fail in Deploying Lean Production authored by Lixia Chen and Bo Meng . In the section that details the problems encountered when deploying lean production, the four main mistakes that Chinese enterprises commit are:

1. Solely paying attention to lean tools.
2. Hoping to achieve quick results.
3. Indiscriminately imitating and copying the practices of others.
4. Mastering the superficial knowledge without understanding the essence of lean production.

I couldn't help but smile just a bit when I read those four obstacles -- Are any of these mistakes really specific to Chinese or any Asian culture? I'd bet that if I asked you to explain the four main causes of lean implementation failures in the USA, you'd construct a list almost exactly like this one. Is it not just basic human nature to try to simplify a complex transformation and merely focus on the immediate results?

Have any readers worked for or consulted with manufacturing organizations located in China? Please share your thoughts.

A New Year Brings "Old" News but New Questions

Shortly before the Christmas holiday, Reuters published an article explaining how U.S. manufacturing companies are discovering and adopting lean methods to compete with plants based in China:

http://www.reuters.com/article/idUSN1817274520091218?type=marketsNews

To many of the long-time proponents and advocates of lean initiatives, this article’s headline most likely elicits a sigh and a “So, what else is new? We’ve known that for years!” response. In addition, most would agree that truly incorporating lean methodology transcends a mere “fix” because it should ultimately result in a cultural transformation.

One aspect of outsourced manufacturing that is hardly addressed is the future sustainability and profitably of these specific plants located in China. U.S. manufacturing companies might be outsourcing work and jobs to China, but are any lean principles being outsourced as well? The benefits of outsourcing currently rest solely on very low labor costs – but how long can this situation last? If low labor costs drive the profitably, are these companies not on the road to evolving into the wasteful mass-production facilities like many U.S. plants of the 20th century?

I always enjoy reading about an organization’s adoption of lean principles and the results gained, but, unfortunately, most of these initiatives in the U.S. are reactive responses to a downturn or crisis. Methods and techniques are implemented and initial results can be compelling, but often these initiatives plateau with measurable decreases in waste and never reach the level of a companywide transformation. In China, it appears these plants are perfect greenfields for lean culture, but will the leaders of these companies take heed? Should they? Please share your perspective.

Finally, I would like to thank my colleague Ralph Bernstein for the outstanding work he’s done writing and steering this blog for more than three years. His entries were not only insightful, but quite thought-provoking and entertaining. I wish him the best in his pursuits.