Globalization and the Changing Face of Manufacturing
When it comes to the state of manufacturing in the US, Mike Newkirk likes to quote hockey great Wayne Gretzky who said, "I skate to where the puck is going to be, not where it has been."
Newkirk, director of Industry and Supply Chain Solutions at SAS, uses Gretzky's pithy saying and his own 30 plus years of experience in manufacturing, to point out some of the problems – and potential solutions – that American manufacturers have wrestled with for decades. And he has a somewhat different perspective on the recent upsurge of interest in the concept of "reshoring" – bringing manufacturing that American companies had moved offshore, usually to take advantage of lower labor rates, back to the US.
He also disagrees with those who hold that we should be evolving into a service economy and let manufacturing dwindle into the background. "Any country's economy needs a strong manufacturing space," Newkirk says. "The US has a particularly rich history in manufacturing; it was the power of American manufacturing that played a major role in winning World War II."
But chasing low labor costs is not the way to build a vibrant manufacturing infrastructure in America. He recalls a situation dating back to the 1980s that is just as valid today. He and a team of industrial and manufacturing engineers were asked to consult with a company that made power tools for Sears in their factory located in Tennessee. The company was rocked on its heels when Sears gave the contract to a Taiwanese competitor. The big retailer told them that the Taiwan factory was making the same tools but at a 30 percent lower cost. If you want our business, said Sears, you have to figure out how to get the cost out of your product.
The company's immediate reaction was to plan to move its manufacturing offshore to get labor costs down – a ploy we can call the Gretzky Effect. "It quickly became apparent that they really didn't understand their total product costs," says Newkirk. "They wanted to reduce their costs by at least 20 percent to be more competitive with the Taiwanese supplier, but labor only accounted for five to seven percent of the costs. Even if they cut their labor costs in half, this was just scratching the surface."
The consultants were able to locate and implement significant savings by streamlining inventory and work in progress. The Tennessee company was able to regain its lost business. If it had followed its initial impulse to offshore to cut labor expense, it could have been a costly mistake – a clear example of skating to where the puck is, not where it's going to be.
Newkirk points out, that in a few years the Taiwanese advantage began to diminish or even disappear as the Asian country began to prosper and a growing middle class demanded higher wages, more goods and services, and an overall standard of living that approached Western levels.
He recalls a more recent example of a US manufacturing company that chased the lower labor cost puck from Japan to Korea, on to Taiwan, and finally China, pulling up stakes every time labor costs rose in the outsourcing country – an expensive and disruptive search for a solution. And today, as Harry Moser, President, Reshoring Initiative, pointed out in a Digital Manufacturing Report story last year, "…the Chinese juggernaut is showing signs of wear and tear brought on by rising costs and appreciating currency…Chinese net unit manufacturing costs are rising about 20 percent/year."
Through the Reshoring Initiative Moser offers free sophisticated total cost of ownership software that helps companies calculate the real impact of offshoring on their bottom line. He commented in the article, "Given the obvious fragility of the global supply chain and the fact that Chinese and other LLCC wages are rising rapidly, oil costs are soaring, and the US dollar is declining, this is the perfect time for US companies to reevaluate their offshoring practices and bring some of the sourcing home."
Newkirk agrees. "As Harry points out they (US manufacturers) are becoming aware of all those hidden costs such as the need to send quality engineers overseas, dealing with shipping costs, or coping with disruptions they didn't foresee such as unexpected production delays or scheduling problems."
However, he cautions that there are those in government and the political arena that take a somewhat simplistic view that US manufacturers should bring all or most of their outsourced work back within the borders of this country to bolster the flagging American job scene. Talk of imposing barriers such as tariffs is counterproductive, Newkirk says. Would we, he asks rhetorically, want a Siemens, a company that employs tens of thousands of people in this country in manufacturing a variety of products, reshore its operations back to Germany?
Globalization has profound implications for the modern manufacturer. In addition to TCO considerations, Newkirk points out that a key question for a manufacturer to ask is, "Where are we selling our stuff."
Globalized companies like Caterpillar, John Deere, and Boeing in this country and Siemens and ADB in Germany reflect the new reality in worldwide manufacturing. For example, Newkirk explains, look at the plants Deere and Caterpillar have announced they are building. They are located in the market the companies are planning to serve such as mining in China and agriculture in India. If nothing else, Newkirk says, "the shipping costs associated with a 350 ton mining truck will kill you." The engines and drive trains may be built in the US, but the heavy frames will be manufactured in China.
Making these kinds of decisions is a complex, highly analytical process. Calculating TCO is just a part of the equation – analyzing what to build where is another. These decisions need to framed within a variety of contexts, such as the intricacies of the enterprise's supply chain. Also, disruptive technologies like additive manufacturing have the potential to transform the product lifecycle.
To illustrate how companies are responding to the new manufacturing imperatives brought about by globalization, Newkirk cites the example of a European apparel manufacturer that has part of its line fabricated in Asia to take advantage of lower labor costs. However, because trends in the fashion business change so rapidly, the company has built small plants in Portugal. Although the European labor costs are five times that of its Asian manufacturers, the company can respond almost overnight to shifts in fashion, allowing them to gain market share over their competitors. Here reshoring is being used as a competitive weapon.
In addition to calculating TCO, other modern manufacturers have shifted from standing costing to activity based costing (ABC). The Accounting Coach has a succinct definition: "Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities."
LG International, the huge Korean high tech company, is a case in point says Newkirk. LG has 15 manufacturing plants in one its divisions, in various European countries and can shift production of its TVs, cameras, audio visual equipment and other high end gear from plant to plant in order to meet demand. However, the company was being stymied by laggard reports on customer activity. Using standard reporting methods, sales reports for one quarter would not show up until the following quarter and windows of opportunities were being missed. LG switched to activity based reporting and was able to track demand in eight days instead of eight weeks. This information has made a huge difference in the company's manufacturing activities and the profits it realized.
The moral of these stories, comments Newkirk, is that today's global manufacturing scene is highly complex; it requires a thorough understand and use of demand-driven forecasting techniques, supply chain optimization and predictive analytics to determine everything from where manufacturing plants should be located to product life cycle management and the allocation of resources and products.
Otherwise you may be skating after the puck and lose sight of it altogether. And, as Wayne Gretzky says, "You miss 100 percent of the shots you don't take.
Mike Newkirk is a Director of Industry and Supply Chain Solutions at SAS. Newkirk has a 30-year background in manufacturing-based companies, primarily in capital equipment for automotive, aerospace and defense, and electronics assembly, and he spent more than 17 years in service chain management. He is responsible for the development of industry-specific marketing initiatives for SAS solutions in manufacturing, life sciences, communications and energy markets. Newkirk has a bachelor's degree in industrial management and an MBA. He has been certified by the Society of Manufacturing Engineers since 1983.