Backshoring: Why Bringing Manufacturing Back to the United States Makes Sense
Many companies are finding that poor quality control and productivity losses at their offshore manufacturing sites outweigh the advantages gain through lower labor costs.
This quote, provided to me by a former P&G exec Ed Burghard, is one that I periodically revisit to remind myself of certain fundamentals that should never be lost on anyone in business - but frequently are. The customer really is boss, and if you don't provide the product or service expected, watch out.
What It Is and What It Isn't
Certain American manufacturers have learned the hard way that they could not best meet the needs of their U.S. customers with production facilities offshore, especially if their customers were here in the United States. And that is, by definition, what offshoring is all about. It is not about moving production to another country simply to meet customer demand in that particular market. If you are making widgets for the Chinese market, which is a very big and growing market, then it might be a very smart and appropriate move to build a plant in China. But I don't consider that offshoring.
Rather, offshoring is about moving operations offshore only to later import the goods back into the U.S., which still remains the world's largest market, to fulfill demand. Mind you, it can work. It has worked, particularly for certain industries such as telecom. But for many U.S. manufacturers, offshoring has not proved to be the panacea as expected.
Let's Get Closer
A recent survey of 287 manufacturing companies conducted by Accenture found that they needed to rebalance their existing supply footprint to better match with demand at various locations in order to compete effectively. The majority of the respondents (61 percent) said they were currently considering shifting their manufacturing operations closer to customers to provide better service and accelerate growth.
"Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations [has] hurt their ability to meet their customers' expectations across a wide spectrum of areas, such as being able to rapidly meet increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs," the Accenture report noted.
Managing supply operations that are located far from where demand occurs has weakened some companies' overall operational planning, forecasting, and general flexibility, while driving up costs, particularly when energy prices are soaring. In short, the offshoring experiment for many has backfired.
It would probably not be accurate to call offshoring a fad. Again, it does work for certain companies in certain industries. But it is also clear that there is a lot of "me-too-ism" in business, a lot of follow the leader because he might know something we don't know. For many companies, these strategic moves are simply not well thought out. For example, nearly half (49 percent) of the respondents to the Accenture survey reported facing issues with cycle or delivery time, and 46 percent have experienced product quality concerns as a result of offshored manufacturing and supply operations.
The simple truth is that global competition will always force factory managers to try to replace expensive workers with machines or with low-wage overseas labor. Seeking nirvana through low labor costs has been a prime reason for offshoring. Coincidentally, it has also resulted in increased U.S. manufacturing efficiency; i.e., since U.S. manufacturers cannot compete in terms of labor costs, they have had to develop more efficient, more automated systems for production.
The proof is in the numbers: A recent report by IHS Global Insight said China required 110 million workers to produce approximately the same amount of goods that 11.5 million American workers could produce. You may want to read that again! In 2009, U.S. manufacturing productivity increased by 7.7 percent, more than any other country followed by the Bureau of Labor Statistics. The simple truth is that U.S. manufacturers beat sweatshop wages in developing countries through innovation employed here at home. It is the only way they can hope to compete. It is their only chance.
But, clearly, it is a chance, a risk that may not be worth taking for many manufacturers who have discovered issues of quality control not to their - or their customers' - liking. Consequently, total costs of manufacturing offshore turned out to be not as low as expected.
What Happened to Our Cost Savings?
In addition, labor costs are rising in Asia, particularly China, where wealth is building and a middle class is being created. And on the energy front, many analysts are predicting $150 a barrel oil before the year's end. Anyway you cut it, moving a container load of novelty pink flamingos from a far-off plant in China's Shandong province to a local "Tacky Wacky" store in the U.S. is going to become more expensive. That is just the way it is.
So the seemingly initial cost savings - the reason why many, if not most, U.S. manufacturers jumped into an offshore strategy with both feet - are no longer that great. In fact, they are diminishing. And then there are those U.S. customers - remember them? They are those pesky, challenging people requiring better service, agility, speed, and quality.
Now it starts to dawn on the manufacturer that his plant in Shandong province alone may not cut it. Indeed, if he's going to keep those U.S. customers as customers, he is going to have to bring at least some production back home. And that is what is happening, pure and simple.
The Right Strategy
"Getting closer to the customer allows for improved flexibility to respond to uncertain demand and unknown customer requests in an agile way with fast delivery times, while maintaining high quality and optimized costs," according to the Accenture study. It may not always prove to be the lowest-cost strategy, but it is the right strategy for keeping customers happy. So a rebalancing act is taking place to better match supply operations with demand locations. BMW, Nissan, Siemens, Electrolux are recent examples of companies investing hundreds of millions of dollars in this country in pursuit of a strategy that A.G. Lafley spoke about.
Yes, indeed, it's a brand new world out there. Heck, it's always a brand new world.
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