Dr. Watson Says: |
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What Do You Say?
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In Dan Gilmore’s recent article, “Can Western Manufacturing Be Saved? Part 6” he mentioned compelling data suggesting that manufacturing could be returning to the US: costs in China are rising relative to the US, low energy prices in the US, increased automation, and the never-ending desire to be close to customers. Of course, he points out, that stories of manufacturing coming back to the US do not necessarily make it true. (If you want to help with this macro analysis, SCDigest and MIT, through David Simchi Levi, are conducting a survey on global manufacturing.)
Although the macro trends are interesting, every supply chain manager needs to do what is best for his or her company.
The macro trends remind us of the factors that a manager must consider when making a decision where to make products. And, the trends remind us how fast things can change.
Making decisions on where to make products is difficult enough when conditions are not changing. For example, you must balance off the all the easy factors like raw material cost, production costs, total transportation costs, taxes, and duties and tariffs. But, often firms forget about including the extra safety stock (because your lead-time and lead-time variability is longer), extra cycle stock (because you make and ship in larger batches), and extra in-transit inventory (because the product is on the ocean).
On top of the analytical factors, you need to consider speed to market, risk, and intellectual property.
Previous Columns by
Dr. Watson |
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Making the analysis more difficult, you need to account for the macro trends:
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If the cost of labor in China rises fast, it will push you to move production to the US |
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If the cost of natural gas and electricity stays low or goes lower, it will push to you to move production to the US
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If the cost of oil decreases, it will make production in China relatively more desirable
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If the cost of quality of automation continues to improve and the cost continues to decrease, labor becomes less of an issue. |
It is usually impossible to accurately predict these trends. Instead, you have to use your judgment and look for solutions that are robust under a variety of conditions. And, you also need to consider the time-horizon of your decision—the longer it takes to reverse your decision, the more carefully you need to consider the ramifications.
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