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SCDigest Expert Insight: Supply Chain by Design

About the Author

Dr. Michael Watson, one of the industry’s foremost experts on supply chain network design and advanced analytics, is a columnist and subject matter expert (SME) for Supply Chain Digest.

Dr. Watson, of Northwestern University, was the lead author of the just released book Supply Chain Network Design, co-authored with Sara Lewis, Peter Cacioppi, and Jay Jayaraman, all of IBM. (See Supply Chain Network Design – the Book.)

Prior to his current role at Northwestern, Watson was a key manager in IBM's network optimization group. In addition to his roles at IBM and now at Northwestern, Watson is director of The Optimization and Analytics Group.

By Dr. Michael Watson

July 22, 2014

Can Western Manufacturing Be Saved: What Does it Mean to Your Firm?

Based on the Recent Column SCDigest Editor, Dan Gilmore Wrote about Macro Trends Around Manufacturing in the West, We Further Explore What this Means for your Firm

Dr. Watson Says:

...Every supply chain manager needs to do what is best for his or her company...
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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

The Three Use Cases for Data Scientists

Learn Python, PuLP, Jupyter Notebooks, and Network Design

EOQ Model and the Hidden Costs of Fixed Costs

CSCMP Edge - Nike Quote: "It is All an Art Project Until you Get it on Someone's Feet"

Supply Chain by Design: Why Business Leaders should think of AI as an Umbrella Term


Making the analysis more difficult, you need to account for the macro trends:


If the cost of labor in China rises fast, it will push you to move production to the US

If the cost of natural gas and electricity stays low or goes lower, it will push to you to move production to the US

If the cost of oil decreases, it will make production in China relatively more desirable

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.

Final Thoughts:

Obviously, it network modeling tools can help with this analysis.  But, the complexity also suggests that this is not just a black box answer—you need to create a process that allows you to analyze many different scenarios and get as much feedback as possible.

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