There is a lot of talk these days about bringing off-shored manufacturing operations and jobs back to the United States. The narrative is “We have high unemployment in this country, the cost advantage of manufacturing in China and elsewhere is shrinking, and we can’t afford to become even more dependent on foreign countries for manufactured goods, so let’s bring these operations and jobs back home.”
It’s a good, simple-to-understand narrative, but the decision of where to manufacture is a complex one, dependent on various (often competing) factors. I’ve boiled them down into five high-level categories:
Total Cost: By now, most companies should know that looking solely at labor costs or “unit price” to determine where to manufacture or source goods from is too myopic. Companies realized the impact of transportation costs, for example, when oil prices reached almost $150 per barrel in the summer of 2008. Factors such as currency exchange rates, preferential trade agreements, taxes, inventory carrying costs, and the cost of quality are just some of the many other cost factors that companies need to consider. So, while many companies were shorted sighted when they first moved operations to China and elsewhere strictly based on labor costs, the same is true for companies that are contemplating brining operations back home under the same premise. (For related commentary, see “Does Offshoring Still Make Sense?” by John Ferreira and Len Prokopets).
Supplier Base: You can bring your manufacturing operations back to the US, but if the majority of your raw material or component suppliers are still overseas, then what are you gaining…and what are you losing? Can you develop an ecosystem of local suppliers to support your operations, and how long would that take? This situation reminds me of the Lucent Technologies case study. Back in the mid 90s, Lucent manufactured all of its products in New Jersey, yet 60 percent of its components (by value) were being imported from Asia. The added lead time and costs associated with this “long supply chain” caused Lucent to lose market share to competitors.
Customer Base: If the majority of your future growth will come from outside the United States and North America – from Asia, Africa, the Middle East, Brazil, and so on – does it make sense to manufacture here or to establish (or keep) manufacturing operations where most of your customers are and will be in the years ahead? China, for example, is already the world’s largest consumer market for shoes, bicycles, automobiles, mobile phones, and luxury goods. Back to Lucent, this was another factor that led the company to ultimately establish manufacturing operations in Asia, which had become the fastest-growing region for its products.
Risk: In the past year, the Japan earthquake, the floods in Thailand, the political unrest in the Middle East, and the financial crisis in Europe (among other events) underscored the danger of concentrating manufacturing and sources of supply in a single geographic region or country. There are many other risk factors to consider, but for manufacturers, loss of intellectual property is another top concern.
Talent Supply: If your manufacturing operations are highly specialized and require skilled employees, such as engineers, technicians, scientists, machinists, Lean experts, and so on, then having access to an adequately educated, trained and experienced talent pool is an important consideration.
In the March 2012 edition of Harvard Business Review, Jeffrey Immelt, the CEO of General Electric, discusses why GE is investing more in US manufacturing operations, and why other companies should consider taking similar action. Mr. Immelt writes:
Today at GE we are outsourcing less and producing more in the U.S. We created more than 7,000 American manufacturing jobs in 2010 and 2011. Our success on the factory floor rests on human innovation and technical innovation–the keys to leading an American manufacturing renewal. When we are deciding where to manufacture, we ask, “Will our people and technology in the U.S. provide us with a competitive advantage?” Increasingly, the answer is yes.
In GE’s appliance business, Mr. Immelt outlines several factors that led the company to invest in US manufacturing: increased competition from former suppliers; rising shipping and materials costs; rising wages in China and elsewhere; poor control of the supply chain; and added complexity from foreign currencies. Finally, he adds, “Core competency was an issue. Engineering and manufacturing are hands-on and iterative, and our most innovative appliance-design work is done in the United States. At a time when speed to market is everything, separating design and development from manufacturing didn’t make sense.”
Whirlpool arrived at a similar decision point a couple of years ago, as I highlighted back in September 2010 in “Whirlpool, On-Shore Production, and Employee Talent.” Of the factors I outlined above, employee knowledge and experience was among the most important for Whirlpool when it decided to build a new factory in Tennessee instead of Mexico.
So, should you bring your manufacturing operations back to the United States? Only if it makes sense after you carefully analyze all of the different factors at play. The key takeaway is that if you haven’t already, you should revisit your supply chain strategy and network design. The decisions you made several years ago, perhaps driven by a single factor like low labor costs, are probably outdated and misaligned with today’s economic and competitive business environment.
Do you agree with Mr. Immelt’s position? Is your company considering investing more in US manufacturing operations? Why or why not? What factors do you take into consideration when deciding where to manufacture or source product from? Post a comment and share your viewpoint!
