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Supply Chain News: Smaller Firms should Look to Production-as-a-Service to Move Manufacturing Closer to Home



New Age Approach to Contract Manufacturing Allows Access to Automation without Investment

Dec. 7, 2022
SCDigest Editorial Staff

Survey after survey continues to find US manufacturing companies are looking for how to reduce their dependence on sourcing from China and/or bring production closer to or back into the US (near-shorting/reshoring).

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Smaller companies, they can reduce the upfront investment manufacturing assets and perhaps innovation. In addition, Huchzermeier notes.

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For example, a recent survey of manufacturers by the Boston Consulting Group found that 44% of respondents consider supply chain risks among their top three concerns, and that as a result manufacturing companies plan to regionalize parts of their production to increasing their resilience.

But China, India. Vietnam and others are called “low-cost countries” for a reason. Moving production to countries with high labor costs challenges profits and competitiveness – which is why for many years there has been a lot more talk about reshoring than action.

Companies simply cannot replicate the labor‐intensive production setups and technologies used in low-cost, mostly Asian countries.

“To be cost-effective reshoring requires investment in automating and digitizing production processes,” says Arnd Huchzermeier, chaired professor of production management at WHU–Otto Beisheim School of Management, recently writing on the pages of the Harvard Business Review on-line.

Larger manufacturers can often make the needed investments in automation and digitation, Huchzermeier  notes.

But many smaller manufacturers simply cannot afford such investments in automation. What are they to do if they want to move closer to home?

One answer, says Huchzermeier is something call Production-as-a-Service, or PaaS – basically a form of contract manufacturing. The fully realized concept has three main aspect, he says.

Flexible production: Most factories are limited in the array of product types that can produce. In the PaaS model, Huchzermeier says, the factory can at minimum produce variants of the same product category.

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Asset sharing: By sharing a factory with other companies, smaller companies can enjoy some of the cost benefits that come from scale, Huchzermeier says. But this comes with some caveats, especially around intellectual property.

“Protection mechanisms are needed, like those commonly found at suppliers serving multiple competing customers,” Huchzermeier writes.

For example, critical products must be protected from sight when customers visit the site and sensitive data must be strictly separated.

Financial transformation: PaaS decouples equipment utilization from ownership, as external investors finance and own the production assets, according to Huchzermeier.

PaaS factories are not yet fully evolved, Huchzermeier notes, but are gaining some momentum.

PaaS offers multiple benefits for all involved parties, Huchzermeier writes.

For smaller companies, they can reduce the upfront investment manufacturing assets and perhaps innovation. In addition, Huchzermeier notes, “small‐scale producers profit from economies of scale through sharing, which enables a factory to operate larger assets. “

For the factories themselves, operating in PaaS model can result in recurring, more predictable cash flow and more customer touchpoints.

For investors, Huchzermeier says, PaaS creates a new asset class, “with the production equipment providing tangible collateral. External investors would get access to investment opportunities in otherwise non‐investable assets and can diversify their portfolios in light of increasing market uncertainty. “

In conclusion, Huchzermeier writes that “PaaS makes reshoring economically feasible by addressing scale challenges through sharing, which efficiently provides high levels of capacity utilization.”

What are your thoughts on the PaaS model? Let us know your thoughts at the Feedback section below.


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