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About a year ago I was visiting a manufacturing plant that manufactured die-cutting presses. The CEO, Greg Defisher, told me that most of the presses were manufactured in Taiwan, but he was thinking about bringing the production back to his plant in Cincinnati. Many of the die cutting presses are customer engineered and there were a lot of problems trying to communicate the requirements to Taiwan, which resulted in quality problems.
Greg also said the cost of shipping a container to the U.S. had increased by 50 percent and giving U.S. customers accurate delivery dates was problematic. With the drop in the dollar, the price had to increase by 10 percent. Even though the original quoted cost of manufacturing in Taiwan looked very attractive, the additional costs and problems had made the costs of offshoring exceed the original quoted benefits. My conversation with Greg Defisher got me thinking about the offshoring of U.S. products in general, and I wondered if other manufacturers were experiencing many of the same problems.
A recent study by Archstone Consulting of Stamford, CT, shows that many manufacturers are contemplating bringing their manufacturing back to the U.S. The study showed that 90 percent of the companies surveyed are considering the change, or are in the process of bringing manufacturing back to the U.S. The study cited many reasons from rising fuel costs and increasing Chinese wages to delivery problems and satisfying American customers.
It is probably safe to say that simple, high-volume consumer products will probably never be manufactured in the U.S. again. In addition, companies who built plants to service Asian markets will probably stay because of the local market. But industrial goods are a different issue and the more complicated or customized the product the more problems.
Make sure you have improved your manufacturing processes first
Dave Graham of the Epson Portland plant in Hillsboro, OR, had to find a way to keep the printer cartridge business from being outsourced from Asia. He reasoned that he could offset the low costs of labor in Asia by focusing on automation, throughput, and production efficiency. Epson’s people studied the Lean Manufacturing methods used in the Toyota Production System, and began to implement their own system of continuous improvement that would reduce defects, lower costs, and improve quality.
Under Graham, the defect rate plunged to 300 per million. The cartridges per employee increased about 40 percent (slightly better than other plants in the world). The Portland operation now manufactures about 50 kinds of cartridges and the production is up 200 percent from 2001 levels.
Changing costs
Desa LLC of Bowling Green, KY, decided to move its manufacturing of consumer heating units in the year 2000 when Chinese quotes, costs and rebates looked so attractive. In the past few years, China announced that they would reduce rebates and the price per container had risen 50 percent and labor savings were reduced because of the falling dollar. The other factor that influenced Desa’s decision was they found that manufacturing in the heart of their market was a significant advantage in terms of service, delivery, and reaction time.
Capacity problems
No industry was hurt worse by off shoring then the foundry industry. Because of cost, government regulations and other factors, customers began buying their casting from all over the world. But now with the rising costs of foreign castings and many logistical headaches of getting the castings to the customer on time, the situation is beginning to change. Donsco, a foundry on the Susquehanna River in Eastern Pennsylvania, was barely able to keep its doors open when the migration to Asia began after year 2000. Now they are flooded with orders because U.S. foundries can compete head-to-head on cost. But James Turek, CEMCO’S CFO, says: “There aren’t many foundries, welders, machinists, and quality control engineers. What we had 10 years ago is gone.” There is now a capacity problem and it could hit other industries too.
Quality and safety
A study by AMR Research says that “24 percent of the 113 executives polled cited quality as the greatest sourcing risk they face in China.”
An example is Dr. Fresh in Buena Park, CA, which has decided to transfer its production of dental hygiene products back to the U.S. The company has not had any product recalls, but CEO Puneet Nanda said he is trying “to reassure customers that their products are safe.” The same is being considered by other medical device manufacturers because they simply cannot afford to have a quality or safety problem. The risks are too high.
Job dissatisfaction in China – A study of Chinese workers conducted by researchers at DePaul and Teas University found that worker dissatisfaction is leading to high job turnover and quality issues. Many Chinese workers are saying no to poor working conditions, low pay, and long hours. Labor turnover is at 20 percent and can add to the growing number of problems of manufacturing in China.
Hidden costs
There are more costs associated with offshoring than just the quoted costs and freight to the product. This is particularly true of complex industrial products. The manufacturer cannot simply send a CNC program over to make a part. When the product is a machine or assembly there is substantially more information involved. The company needs to train the foreign contractor in quality, assembly, welding, and standards. This often means sending people to the foreign plant to work with the foreign manufacturer. If the initial production has quality issues or delivery problems, then the manufacturer may have to carry an extra inventory of parts or assemblies to satisfy customers. When you also consider various taxes, tariffs, and logistic fees, these hidden costs can quickly reduce profitability
Just-in-Time manufacturing and quick deliveries
Many American companies want just-in-time parts and are not willing to accept the longer deliveries of foreign-sourced parts. Ron Davis, CEO of Davis Tool in Hillsboro, OR, saw the handwriting on the wall as commodity job shop parts were sourced more and more from Asia. Davis Tool decided to change its strategy to offering quick turnaround on custom or low-volume jobs. Davis knew that many of their customers were operating on a just-in-time basis and could not live with the uncertainties of using foreign suppliers.
The new strategy required adopting a vertical integration approach. Davis Tool offers machining, fabrication, nickel plating, anodizing, laser cutting tool design, Solid Works, Pro-Engineer, powder coating, painting, and engineering design from one location. This strategy allows them to offer quick deliveries and control of most processes. The company also invested heavily in the latest and most efficient machine tools. In addition, specialists in one operation were cross-trained into other operations. For example, a machinist is also trained in laser-cutting of sheet metal. That gives the managers the ability to move people around and work in back logged areas. The result is a reduction in flow time (average time a work order is open) from 40 days two years ago to 17 days today.
Automation
Normacorc LLC, a tiny company in Zebulon, NC, makes plastic corks for wine bottles. More than two-thirds of the production is exported to European Wineries, South Africa, and Australia. Nomacorc’s output has increased 40 percent and its costs are obviously a big advantage against the euro and other foreign currencies. It accomplished this by automating the plant and lowering labor costs.
Another example is Coating Excellence International of Wrightstown, WI. The company was in jeopardy of losing business from the makers of Sweet ‘N Low. The poly-coated paper that that was used for the sugar packets began moving to South Korea. To reduce the costs, CEI purchased a robotic palletizing system to automate a manual stacking procedure. The new robotic technology lowered costs and along with faster deliveries it was enough for CEI to retain the business.
Improving domestic operational efficiencies
Hayward Pool products of Elizabeth, NJ, makes heaters and pumps for swimming pools. Their offshore journey began when a Chinese manufacturer copied their products and tried to sell them in the U.S. market. Hayward adopted Lean and Six Sigma strategies to optimize their production as well as a no-layoff policy. The company still had to move some products to China but were able to keep most in the U.S.
The trend toward bringing back production from foreign countries will continue as U.S. manufacturers take a holistic look at the costs and problems associated with outsourcing. I am optimistic because the value of the dollar will continue to fall as we grapple with our financial problems and deficits.
If for some reason the dollar crashes on the world market, the prices of imports would skyrocket and the U.S. might be overwhelmed with requests for domestic manufacturing. The problem: It would be very hard for industries to find the skilled workers, machine tools and capacity to respond as so many companies have closed operations in the past 10 years.
Michael Collins is a management consultant, writer and trainer who focuses on small and midsize manufacturers. He is the author of “The Manufacturer’s Guide to Business Marketing” and “Saving American Manufacturing,” available in the MDM Store. He can be reached at mpcmgt.com.
