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Feature Article from Our Manufacturing Subject Area - See All

From SCDigest's On-Target E-Magazine

- May 5, 2014 -

Supply Chain News: When it Comes to Reshoring, Detailed Planning and Expectation Setting is Key, Otis Elevators Learns the Hard Way


Ballyhood Move Back to US from Mexico Ran into Very Bumpy Road; Need to Ensure the Skilled Labor Needed is Present in New Factory Area


SCDigest Editorial Staff


Slowly but mostly surely, there is evidence of a move of manufacturing back to US soil, or in other cases at least the the decision not to offshore.

But that doesn't mean that such "reshoring" is easy - just ask the folks at Otis Elevator, a division of United Technologies.

SCDigest Says:


All told, the Otis team "just bit off more than they could chew, and again, shame on us," CFO Hayes said.

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Otis was one of a group of major US manufacturers in the past few years, including also GE, Whirlpool and NCR, which announced they were bringing factories back to the US from China, Mexico or other countries.

Otis, the world's largest maker of elevators and escalators, said it would close down a factory in Nogales, Mexico and move production to Florence, SC - a lower wage, right-to-work state.

Simultaneously, as part of the overall plan, Otis shuttered two other US facilities, in Arizona and Indiana, and transferred some of the workers and the production to the South Carolina plant as well, which opened in 2012.

In addition, new supply chain software was introduced into the operation - always a risky bet. And overall orders rose sharply, as the US building industry was starting to recover at about the same time.

Things did not go well. Output levels were well below planned volumes, and the number of back orders started to swell rapidly. Many orders were eventually cancelled after waits of several months for deliveries. Between the cancelled orders and keeping the Mexican factory open six months longer than expected to try to reduce the backlog, the fiasco cost Otis some $60 million in 2013 and still more so far in 2014, the company says, including costs for unplanned overtime, additional workers and more.

"I think we failed on both the planning and the execution side," Robert McDonough, CEO of the United Technologies unit that includes Otis, told analysts in March, according to the Wall Street Journal.

One factor not analyzed well enough: the challenge of finding sufficient skilled workers and managers in a smaller area such as Florence.

"It's not like you're moving to Chicago or you're moving to Connecticut," Greg Hayes, United Technologies' chief financial officer, said in an interview.

(Manufacturing Article Continued Below)



Otis had made the decision on the move for many of the same reasons other have. US costs were becoming more competitive frankly as manufacturing wages stagnated, and Otis also estimated it would reduce its transportation spend by more than 17%.

Otis also believed it could improve overall productivity by co-locating its engineers with the factory and its workers in the same complex.

Obviously at a cost, Otis has lately been driving the backlog down. Not surprisingly, someone had to pay the price, and recently Otis' head of US operations was let go, replaced by Tom Vining, who had turned around the company's Chinese operations after a fatal accident involving an Otis escalator in Beijing.

All told, the Otis team "just bit off more than they could chew, and again, shame on us," CFO Hayes said. "The process didn't work in this case."

The factory has 380 full-time employees at the 432,000-square foot facility, more than the 360 needed to claim a package of tax incentives from the county and state, as well as an additional 140 temporary workers, the Journal reports.

It appears with all the focus on reducing the backlog that it is unclear whether the planned for efficiencies from co-locating engineers and the plant will materialize, or at what level.

The lessons here for those pursuing reshoring efforts seem mostly obvious:

• Don't try to manage too many changes at once - go in phases

• Ensure you do a thorough analysis in the regions being considered for a new factory in terms of the size and skill level of labor and managers needed to run the operation


• Have a risk mitigation plan in place in case the new factory experiences production issues

• Under promise and over deliver, not the reverse.

One major question of course is whether Otis' move back to the US would have made financial sense in an area with a larger label pool such as Chicago - or would it only work in a lower cost area such as Florence?

In the end, it appears Otis will make the move a success - but not until a couple of years of real pain will be experienced.

What is your reaction to the Otis experience? What else do you have to watch for in a reshoring scenario?Let us know your thoughts at the Feedback section below.

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