In this Presidential election, companies that cut their labor costs by engaging in offshoring have come in for heavy criticism. Amway, one of the world’s largest direct selling companies, is a U.S. headquartered global company would be hard to criticize on these grounds. Many of their products that are largely sold overseas, actually leverage “Made in America” as a key selling point.
The company’s biggest market for their nutrition, beauty, and home products is China; and they have strong sales throughout Asia; the U.S. accounts for a mere 10 percent of their business. The company has located a majority of its manufacturing facilities in three cities in the U.S. And Amway has invested $335 million in manufacturing upgrades over the past four years, a majority of which was spent here in the U.S.
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And when they do decide to manufacture some products abroad, labor costs don’t drive the decision. In many of their product categories, 80 to 85 percent of the cost of their finished goods is in raw materials and components. Labor represents just 6 to 10 percent of their total product costs.
Why has Amway invested so much in US manufacturing? It is not altruism. George Calvert, the Chief Supply Chain and R&D Officer at Amway, recently described to me the reasons for the onshore vs. offshore choices they make. Dr. Calvert has a Ph.D. in Chemistry and led the R&D department before also being put in charge of Amway’s supply chain.
To understand the choices, you have to understand the business. He explained that the products developed to be sold for the direct sales model need to be different from any others on the market. “We develop products with specific deliverables that are unique. These products, what they are and how they work, needs to be explained by someone who knows the product. A good product for the store shelf is not necessarily a good direct sale product.”
Their vertically integrated supply chain is one of longest in the industry. In addition to running plants, they own organic farms. They have farms in Brazil, Mexico, and the state of Washington where they grow and harvest key botanical ingredients like echinacea, spinach, alfalfa, watercress, and cherries. They then take those products and manufacture intermediates. Cherries, for example, are processed for Vitamin C. These intermediates they both use in their own products and sell to other companies.
They pick, pack, and ship over 120 million orders out of a global distribution network of more than 100 facilities. And while they are a direct sales organization and do ship directly to their reps, they also have over 300 stores, mostly in China, that they ship goods to.
Six years ago, this U.S. company with global sales felt they needed to look at outsourcing. “We got the outsourcing wrong at first,” Dr. Calvert said. “We got in a room and the team generated 50 viable ideas of what we could take outside. We began by looking at outsourcing our food bars and product labels.”
But then they began to look closely at what could be outsourced; “We got into the analytics of those projects and certain themes emerged.” Both consumer preferences and the economics needed to be examined in making plant location choices. This, Dr. Calvert explained, “dictated a different set of strategies.”
In nutrition, a business line representing nearly half of their sales, safety and trust are key issues. “In Asian countries,” Dr. Calvert explained, ‘Made in the USA’ carries cachet because of the safety and traceability of the U.S. food system.” Clearly offshoring food bar production would be the wrong choice. “Similarly, consumers want beauty products from the U.S., France, Japan, or Korea, not from developing nations.”
What intermediate products are grown versus what is purchased is a product-by-product choice. “We don’t have palm tree farms” for ingredients that will be used in their home care goods. “We only grow what will make a difference to the consumer,” Dr. Calvert explained. “Understanding consumer preferences is critical to supply chain design.”
In addition to customer preference, the other driver of where goods are manufactured is economics. “It costs almost nothing to ship a nutrition item around the world, Dr. Calvert said. Transportation is just 0.1 percent of the landed cost of these products. Liquid home care products, which have high weight, have different economics. For these products, 15 percent of the landed cost is based on transport costs. Further, for these products consumers care most about the price value of the product. It just does not make sense to manufacture these kinds of products in the U.S. and then “pay to ship liquid over water.”
Amway has one the world’s largest market shares for water treatment systems, which are widely purchased in Asian nations. For these products, the reliability of the products is critical. “In a direct sales business, an agent is selling their neighbors.” And for an Asian consumer, these are expensive products, from $600 to $1,000 dollars. “We don’t want our agents to have to explain why these products don’t work – so we do everything we can to make sure they keep working.”
Amway has kept the R&D for these products in the U.S., but manufactures them in Malaysia. Their contract manufacturing partner has proven they can make a quality product. “Contract manufacturing for durables and electronics has become very reliable in Asia.” But there are other supply chain advantages to having the products made in the same region where the products are bought.
“These are volatile demand products,” Dr. Calvert stated. “If something like the Asian flu breaks out, there are huge spikes in demand – 100 to 200 percent spikes.” Further, if made in the U.S., these become long lead time supply chains. To source the circuit boards from Asia, ship them to the U.S. and make them here, and then ship the products back to Asia requires 130 days in lead time. By making the products in Asia, the lead time shrinks to 25 days. This makes Amway more responsive to demand surges and means there are fewer lost sales. There are also tariff savings from making products, and sourcing components, from nations where the products will be purchased.
In making the correct make-versus-buy decisions on ingredients, as well as the decisions of where goods should be made, Dr. Calvert singled out his engineering group and trade groups for praise. “Analytics! One way we win is because of the strength of this function.” Their core engineering group does very detailed analyses with quick turnarounds surrounding these decisions.
“You also need a great trade group. They are worth more than their weight in gold, they are worth their weight in platinum. A fair number of our folks are on the ground in the markets we serve. Global trade compliance is not country-by-country anymore. More and more, the regulatory bodies are talking to each other. If an issue comes up in one nation, it comes up around the world. It is really critical that we extensively document where the components that go into our products come from.”
Early in our conversation, I had mentioned that it was unusual for the chief supply chain officer to also be in charge of R&D. Dr. Calvert addressed this near the end of our interview, “I can’t imagine how difficult it would be to have procurement, manufacturing, the trade group, and R&D in different silos when it comes to developing and sourcing goods. The group I work with dictates everything about the product, how it is built, sourced, and where it is built.”
Clearly this is working at Amway. Dr. Calvert summed things up by saying, “Over the last several years, we have saved hundreds of millions of dollars while keeping quality at previous or better levels, and in a large number of cases reduced our lead times.”