I still remain of somewhat mixed minds when it comes to offshoring, outsourcing, domestic manufacturing, etc.
For many this is obviously both a business and an emotional issue, which is why it makes it so tough. From the rants of Lou Dobbs of CNN about “traitor CEOs” and “exporting America” to politicians of all sorts, the anti-Wal-Mart crowd, and many others, this issue isn’t going away any time soon. With the changing political winds now in Washington, it in fact is likely to pick up steam.
Part of the reason I am somewhat mentally divided on the issue is that I just talk to so many companies that just have not achieved the level of expected savings from offshoring initiatives. Is that because the potential savings have just been overestimated, meaning not all the costs of logistics, inventory, overhead, etc. were correctly factored in, or due to a failure in the actual execution. A little of both, it often seems.
Early on in SCDigest, I wrote on how electronics maker Viasystems basically was saved from going under by an aggressive move to Asian manufacturing. More recently, in our popular piece on “Supply Chain 2006 – A Case Study” I also wrote about a consumer durables company that told me they were basically forced to go offshore by the unrelenting price demands of some big box retailers, who were in part using their own private label brands and pricing strategies for offshore knock-offs as part of the bargain. The company claimed at least that despite having gone almost totally “lean” that it just couldn’t meet the price targets domestically.
So it was with interest I read the recent Wall Street Journal series on “Still Made in the USA.” It sequentially featured four separate companies or industries, which I’ll summarize below.
- Example 1 - Zimmer, and the large concentration of other medical device manufacturers in Warsaw, IN: Offshore competition is limited by concerns about liability, and the industry enjoys sky high gross profit margins with domestic production. A supportive ecosystem of suppliers has developed around the area, often for non-commodity goods like clean room style packaging.
- Example 2 – Bobcat: This division of Ingersoll Rand is still the world leader in small loading equipment, operating primarily out of factories in North Dakota and exporting $550 million worth of equipment and parts per year. It thrives in part by supplying repair parts very rapidly, which it believes would be difficult to do given the number of such parts with a long, offshore supply chain. Company executives also believe strongly in the collaborative power of having marketing, engineering and production in close proximity, and all of those in close touch with its customers. Bobcat does have a factory in Eastern Europe for that market, and a developing joint venture with a Chinese manufacturer.
- Example 3 – Viking, producer of high end kitchen ranges and other appliances: It operates out of factories in the Mississippi Delta, and has enjoyed strong growth. It has the advantage of being a premium brand, with high price points, which enable it to absorb comparatively high manufacturing costs (relative to other appliance manufacturers, many of which have move to Mexico and now China). That said, the company also succeeds by a complete make-to-order model, which reduces many supply chain costs, and also allow it to meet very niche or customer specific needs, such as a kitchen range in an unusual color.
- Example 4- Schantz Organ: Probably the least interesting example of the bunch, just because the product – high end organs for churches and other markets – is so unusual, and requires very skilled craftsmanship from its production team members. Nonetheless, the company does some smart things too, such as having production employees responsible for their own QA at each step to reduce costs.
So, are there any real overall insights here, and lessons for the supply chain? The obvious one, of course, is that these examples all represent higher end, higher price product areas. No surprise there, and many of these companies themselves do go offshore for commodity supply items. But I offer a few other thoughts:
- There is a common thread of being in relatively rural locations, but generally still close to major highways and transportation systems. The article notes the challenges of production closer to urban areas, with their high taxes, high energy costs, and generally higher labor costs. It’s no secret that’s also where the Japanese automakers, with great success, have set up factories here. Bobcat, for example, also believes the farm roots of many of its workers contributes to a “get it done,” problem-solving mindset of its employees.
- Relatively collaborative worker relationships: Bobcat, for example, is unionized, but the relationship seems to be a positive one overall. Workers do seem to be valued, and management itself is generally strongly oriented to keeping the work at home. When the decisions are made more remotely, both physically and mentally, it makes the choice to offshore much easier.
- Look to improve internally first before offshoring? Many observers often note that companies looking to outsource say distribution often do it by comparing current costs to outsourced costs, not to what is achievable through improvement internally. I think the same is sometimes true with manufacturing offshoring. Offshoring provides the easier answer than internal improvement.
- The power of brand and channel control: There’s no easy answer to this one, and it can’t work for everyone, but brand building and maintaining some level of channel power makes a huge difference all around.
- Building an ecosystem: For companies or industries with relatively complex products and supply chains, development of a total ecosystem, such as Warsaw, IN has for medical devices, and the Japanese auto plants do here, can overcome some level of production cost disadvantage. How can this notion be better fostered?
- Mass Customization and “Quick Response”: It never really panned out in the apparel industry, until Zara started to make it happen in Europe. But you just can’t do build to order anywhere but here, right?
Customers it appears don’t want “Made in America.” But they do want “Made for me.”
What are your thoughts on this discussion of made in the USA? Are there lessons to be learned from companies that can make it work domestically? Can supply chain excellence make a difference? What about “mass customization?” Let us know your thoughts.