In an article (paywall) in Crain’s Cleveland Business, Harry Moser from the Reshoring Initiative discusses what what one company’s surprising reshoring success experience indicates for others in the manufacturing industry. Rising labor costs in China and higher energy costs are causing many to reconsider their sourcing decisions. With the advantages of shorter supply chains, minimizing disruption, and the benefits design and engineering being proximate to the manufacturing process, many companies are choosing to manufacture their products in the U.S.
Moser states “There’s nothing much simpler to make than a Frisbee and there’s no place in the U.S. more expensive than California or Michigan, so if you can bring Frisbees back from China to California and Michigan, you can bring anything back to Kansas.”
Also, discussed in the article is the multiplier effect that reshored jobs can have. Because manufacturing firms are ubiquitous in the supply chain, a company that makes the decision to reshore can set off a chain reaction to add jobs at shops both up- and down-stream in the production process.
The Insourcing Boom details the emerging reshoring trend. It draws from the GE CEO Jeff Immelt’s commitment to reshoring and the revitalization of it’s Louisville, KY Appliance Park. Included also are other industry examples and trends that are reshoring manufacturing.
The article lists several of the global changes that affect a company’s sourcing decision:
At Appliance Park, this model of production—designed at home, produced abroad—had been standard for years. For the GeoSpring, it seemed both a victory and a vulnerability. The GeoSpring is an innovative product in a mature category—and offshore production, from the start, appeared to provide substantial cost savings. But making it in China also meant risking that it might be knocked off. And so in 2009, even as they were rolling it out, the folks at Appliance Park were doing the math on bringing it home.
Even then, changes in the global economy were coming into focus that made this more than just an exercise—changes that have continued to this day.
- Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
- The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
- In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
- American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
- U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.
These are but a few costs companies that choose to outsource are facing. Another benefit, illustrated in the article is the affect reshoring has on innovation and cost control:
The GeoSpring suffered from an advanced-technology version of “IKEA Syndrome.” It was so hard to assemble that no one in the big room wanted to make it. Instead they redesigned it. The team eliminated 1 out of every 5 parts. It cut the cost of the materials by 25 percent. It eliminated the tangle of tubing that couldn’t be easily welded. By considering the workers who would have to put the water heater together—in fact, by having those workers right at the table, looking at the design as it was drawn—the team cut the work hours necessary to assemble the water heater from 10 hours in China to two hours in Louisville.
In the end … not one part was the same.
So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up.
GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.
Manufacturing cost savings are not the only recognized benefits from reshoring. With shorter product life cycles and greater market and forecasting uncertainty, a shorter supply chain can have a dramatic impact on the bottom line.
Time-to-market has also improved, greatly. It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers—four weeks on the boat from China and one week dockside to clear customs. Today, the water heaters—and the dishwashers and refrigerators—move straight from the manufacturing buildings to Appliance Park’s warehouse out back, from which they can be delivered to Lowe’s and Home Depot. Total time from factory to warehouse: 30 minutes.
Outsourcing has soft cost implications hidden as well:
But many of those hidden costs come later. In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation. And it’s easy to assume that globally distributed production will hum along more smoothly than it often does in practice: however strong the planning, some of those shipping containers will be opened to reveal damaged or substandard goods, and some of them won’t have the number or variety of goods a company needs at that very moment. “All you need is to have to hire one or two 747s a couple times to get product here in a hurry,” says Shook, “and you lose those savings.”
Fortunately, there are resources and organizations that are actively working to help businesses bring operations back to the US.
Harry Moser, an MIT-trained engineer, spent decades running a business that made machine tools. After retiring, he started an organization called the Reshoring Initiative in 2010, to help companies assess where to make their products. “The way we see it,” says Moser, “about 60 percent of the companies that offshored manufacturing didn’t really do the math. They looked only at the labor rate—they didn’t look at the hidden costs.” Moser believes that about a quarter of what’s made outside the U.S. could be more profitably made at home.
The Reshoring Intiative has a Total Cost of Ownership Estimator tool to help companies with the aforementioned math.
The University of Maryland experts in planning and economic development got a $500,000 U.S. Department of Commerce grant to create a new, sophisticated, 3-D analytical tool that ‘maps’ innovation and entrepreneurial networks in the State, and helps spot opportunities for new business collaborations. Their model is very close to the KOIN model and the co-princiapl investigator is none other than the latest KOIN advisory board member, Scott Dempwolf!!
Congratulations to UMD for the grant.
To see the complete press release about the grant, click on the link below.
UMD To ‘Map’ Innovation Opportunities, Aid Baltimore Redevelopment :: University Communications Newsdesk, University of Maryland.
Businesses exist and survive by reducing transaction costs, don’t believe me check out Ronald Coase he got a Noble prize for saying it. Even if it is not the sole intent, it is reasonable to point out that successful businesses work to streamline transactions in terms of both speed and cost. It is not only massive value oriented brands like Wall-mart that benefit from improved logistic systems, information systems and communications, we all enjoy the lower costs and fast delivery time of modern logistics. We can track the progress of our new laptop from the production in Asia to your doorstep. Your local supermarket can place an order to restock a shelf in the time you’re walking from self checkout to the parking lot.
The drive for transactional efficiencies not only occurs at the retail level but also between businesses and within business supply chains. Recently, the streamlining of supply chains is being seen as a place where economic development agents at many levels can help struggling manufacturers and nacent startups.
These programs focus on supplier selection and verifying various compliance requirements. While this information is a useful where markets and requirements are easily predictable or change little over time, it is decidedly less useful for the dynamic and disruptive industries that lead to real economic growth.
You might point out that social media, rewards cards and credit card tracking have created volumes of customer data. The problem is that no amount of buying pattern data can alone lead to repeatable innovation. We have yet to develop an algorithm that can glean the next disruptive products from the records in a database.
So is there a down side to faster and smoother transactions or is it just nostalgic pangs for a simpler time? By using RFID, bar codes and containerized shipping do we lose some of the parts information required to innovate, and what can be done to replace it.
By systematically driving out the rich multi-variant and personal transactions that created tacit knowledge about what customers value we loose a major source for organic innovation. Tacit knowledge about markets and customers are the enabling factors that permit inventors and entrepreneurs to develop innovations. The Thomas Edison model of the inventor as rogue R&D explorer is rare compared scores of entrepreneurs that take a known technology and mix in a unique customer insight to create advantage in the market and a disruptive business.
The double bind of rapid but vapid communication.
When it comes to what people want, what does it mean when we know so much less about so much more.
I stumbled on an article from a couple of years old about micro-manufacturing. I find micro-manufacturing such an interesting and prescient concept. (For clarity, by micro-manufacturing, I’m speaking of the manufacturing of normal sized things in tiny factories, not the more common use of the phrase the large-scale manufacturing of small things.) Right now, I suspect it will be a wash for rural manufacturers on the whole, as there will always be a need for a certain amount of large-scale / large size manufacturing ideal for rural manufactures.
On the other hand even micro scaled manufacturing needs infrastructure. For example, Local Motors, a company that manufactures automobiles one-by-one, figures they need a 5 million population catchment just to get the customer, volunteer and management volume to be profitable.
They are an interesting example to add into the current thinking about clusters. The manufacturing and design of automobiles was centered around Detroit and the Great Lakes region originally for some hard-nosed resource based reasons like proximity to steel, ore, and power. The region grew into the powerful cluster by attracting talent and labor. The region continues to hold what import it has due to some combination of inertia, infrastructure and technical know-how of the people and companies in the region.
Local Motors showed that the technical know how can be place independent, as the majority of the development of the Local Motors automobile was designed virtually on the internet. They have turned the idea of clusters from commonality and interrelation of technology to commonality and interaction of and with the customer .
It’s not very often I find myself disagreeing with Sir Dyson.. As an industrial designer he inspires and like many folks that speak about design and business, the market leadership story of the Dyson vac has filled more than few slides as I present on the value of prototyping and differentiation. But I have to question his thinking (reported in a recent interview the Mirror and Times) or at least the applicability to American universities.
Dyson claims foreign students, specifically from China, are stealing secrets and taking them with them when they return home, even leaving computer bugs to that might allow them to continue to spy at a later date. There is no particular reason to doubt the accounts in the story or the motivation of the students, but there is a reason to rethink the relationship our universities have with foreign students.
We also have to ask what are we doing to encourage these visiting students and graduates to identify with their American communities and contribute to our economy. Most of the foreign students I have known have been loyal to their homelands but also wisely opportunistic. The fact is now many of the opportunities are spread throughout the world.
One solution as Richard Florida and many others suggest is to effectively hand out an H1B visa with every advanced degree, thereby allowing the brightest students to stay and start new businesses.
Many clearly acknowledge the value of the smart student that stays, but what of the smart students that leave?
When students leave (whether local a student leaving to the city or a foreign student returning home) do they know what they are leaving? do they know how to find out what is available? When students return to their home countries they often take leadership roles. We should be equipping these students with a professional network of relevant people and businesses to make it easy to link back in.
Sir James Dyson says British inventions at risk from Chinese spies at some universities – mirror.co.uk.
To balance yesterday’s post about the personal safety net and creating an environment for start-up success, Today in the HBR Scott Anthony point’s out the need to make sure start ups-can fail. Beyond the typical good money after bad argument, Anthony encourages us to consider the additional opportunity costs incurred when a bright and motivated entrepreneur sinks even more time, energy and capital into a languishing effort.
HBR.org
via In Singapore, a Failure to Fail.
To support efforts to advance Kansas prosperity, the Kansas Department of Commerce (KDOC) intends to help Kansas companies develop a 21st century supply chain network for the state. The aim is to increase connectedness of the Kansas companies and assist them in maintaining and/or improving their global competitiveness. Helping Kansas companies network with one another and develop a statewide supply chain will help cut costs for companies while increasing productivity for the state manufacturers.
Kansas manufacturers will benefit from collaboration with other Kansas manufacturers as suppliers and/or customers based on the capacity, capability, location and equipment of the company. The manufacturers will also have the opportunity to share knowledge of additional capacity or scarcity. Most importantly, Kansas companies will have a powerful tool to pursue new opportunities in collaboration with each other. Increasingly opportunities demand more resources than any one company can muster. The system will focus on manufacturing industries, to provide manufacturers with a resource targeted to the technical and business specifics of manufacturing and developing products.
The project aims to design a tool to fill this networking need and draws heavily on the experience from AMI’s Wind Supply Chain Development Project. AMI is presently in partnership with the Great Lakes WIND Network (GLWN) to assist KDOC in identifying active and prospective wind industry supply chain manufacturers. Based on insights gained to date from its wind supply chain development efforts, AMI proposes to prototype a business profiling and networking system that will enable Kansas manufacturers to more efficiently identify viable Kansas partners. This is a prototype project that will be piloted in a fourteen county region of South Central Kansas.
Project Goal
Pilot a Business to Business (B2B) network among Kansas manufacturers to readily connect potential customers, suppliers, or collaboration partners within the state.
Project Objectives
- Facilitate denser and stronger networks between Kansas companies, resulting in effective collaborative ties between companies and an increased global competitiveness throughout the state.
- Develop a manufacturing business profiling process that characterizes Kansas manufacturing companies in terms of, but not limited to, markets, product, services, design/engineering, manufacturing processes and capacities, workforce, work culture, expansion capacity, financial stability and transferable competencies.
- Create a system schematic of a repository for the business profiles in form of a database with easy accessibility available to all Kansas companies to search for collaborators and request to edit/update their own information.
- Generate a business finding concept that improves mutual awareness among Kansas companies and makes competencies and capabilities more visible to encourage companies to find matching customers, suppliers, and collaboration partners.
- Design a prototype system with search and filtering capabilities that can help manufacturing companies in the state network based on their capabilities and capacity.
Innovation is key to sustainable regional growth and development and requires strong participation in open and collaborative networks. Successful innovation networks often consist of a critical mass of spontaneously-forming collaborative teams potentially located in different places, but working together and interacting frequently. Rural regions that may lack this spontaneous critical mass needed to proactively weave inter-linked networks of entrepreneurs, universities, government agencies, banks and other support institutions.
The North Central Regional Planning Commission (NCRPC) intends to identify, strengthen and utilize existing/underlying formal and informal networks to foster innovation in the region. The project aim is to help the NCRPC strengthen the region by assisting businesses as they connect and build regional networks that enhance competitiveness and capabilities. The current project work will be build on a previous pilot project work and use the knowledge base gained to advance innovation networking in the region. Previously, we explored traditional cluster and industry analysis in rural regions. While the previous work was intended to expose nascent traded clusters or key industries as well as underlying networks and regional attitudes; traditional cluster strategies miss the opportunities and overlook the complexities in rural areas. To overcome the limitations of cluster-based economic development yet benefit from its advantages, we propose to develop a new tool for categorizing businesses based on their capabilities and needs and pilot forming innovation networks based on such a profiling process.
Need-based clustering can overcome the traditional barriers caused by working in a rural region with only a specific industry(ies) that is(are) a part of the region’s key industries by including companies from different industries. Such a tool will cluster companies based on their capabilities, capacity and needs rather than simply the products that ship off the dock. This need-based clustering, in addition to network mapping, will identify sources of opportunity and collaborations. The project will link various companies, universities, regional organizations and other support institutions based on the needs and capabilities.
Project Goal
Increase the number of globally competitive innovative products and services produced in North Central Kansas.
Project Objectives
- To develop and pilot a process to profile businesses in the North Central Kansas based on their needs, capabilities, capacity and innovation readiness as opposed to their industry and product/service.
- To create a database of regional assets, businesses profiled and regional resources in an open system accessible to stakeholders in the region.
- To create a networking process that can help search for opportunities for collaboration among companies, regional educational institutions and regional organizations.
- To leverage lessons learned and insights gained in previous AMI/NCRPC regional pilot project and continue to develop and build a regional technology-based economic development strategy.
Business differentiation and growth occur when opportunity intersects with ideas and the capacity to respond with innovative products and services. Some small rural businesses are able to connect with opportunities from around the world while others fail to make the connections necessary to sustain meaningful growth in global markets. Businesses in distressed or rural regions are especially apt to lack the informal networks necessary to keep up to date on new and disruptive ideas or opportunities. The challenge for many small rural companies and the communities and regions they support is creating an environment that transcends geographic isolation, discovers new markets, innovates openly and fosters global competitiveness to increase the probability of being at the intersection of great ideas and new opportunities.
The Advanced Manufacturing Institute (AMI) at Kansas State University and its state and regional partners in partnership with the US Department of Commerce’s Economic Development Administration (EDA) are building the Kansas Opportunity Innovation Network (KOIN). The KOIN initiative will help businesses and communities build networks to connect to opportunities in order to significantly multiply the capability of Kansas businesses to innovate and grow in rural and isolated areas.The network will act as an opportunity catalyst, boundary spanner, and connector for rural and/or distressed Kansas companies, communities, and regions wishing to compete in regional, national, and global markets with innovative technology-based goods and services. The network will specifically focus on:
- Profiling the innovation competencies, assets, capabilities, and needs of regions, communities, and their local companies,
- Developing the ability to scout out new opportunities, especially global opportunities, outside existing markets where center clients may have little to no connection access,
- Creating an actively woven network of technology providers, expertise, capital, etc and potential business partners that possess complimentary competencies who can enable center clients to respond in a competitive manner, and
- Facilitating the ability to readily connect and combine opportunities, companies, communities, and regions in innovative ways so that the response is greater than the sum of its respective parts.
The proposed network will employ innovative concepts/elements such as needs-based profiling/clustering, innovation assessments, opportunity scouting, boundary spanning, open innovation, design thinking, incubation, regional competitiveness, social networking, innovation network development, IT-based strategies, and innovative information visualization approaches.
Goal: Increase the number of globally competitive innovative products and services produced in rural and/or distressed Kansas communities and regions
Targeted to: Individual companies, rural communities/regions, and distressed communities/regions
Objectives: The proposed network will accomplish the following objectives:
- Enable clients to look beyond their immediate market/region to collaborate with partners in other markets/regions, and thus promote unique, boundary-spanning innovation opportunities.
- Provide the advantages of urban clusters (opportunity volume, resource density, diversity of interactions, and proximity to markets) to rural and distressed areas where clusters do not exist
- Identify and profile companies, communities, and regions with capability and desire to create new markets/product/services based on their competency/innovation profiles
- Develop a dynamic system to scout for and document new opportunities in targeted markets (markets not being limited by geography), based on previous mentioned profiles
- Connect profiled network clients with identified capabilities to the right opportunities – provide business development services as required
- Leverage a collaborative IT support system that will be a mix of database systems, interfaces, and visualization tools to assist in capability assessment, opportunity recognition, and partnership creation among businesses and/or regions and communities.
- Leverage AMI’s experience and previous EDA investments in early-stage technology development, supply chain development, innovation-based economic development, and regional innovation systems
- Create networks of innovation that link state universities to rural and distressed regions of Kansas
Why KOIN: Traditionally, opportunity and innovation are considered spontaneous and elusive phenomena. Nevertheless, to develop a sustaining competitive advantage, established companies and emerging entrepreneurs must develop networks that consistently funnel new opportunities into their ventures. Additionally they must access external resources to rapidly add value and then successfully launch the resultant innovative products and services into markets, regardless of where in the world the opportunities, resources, and markets reside. Sustaining such a competitive strategy requires companies and entrepreneurs to have wide social networks. Unfortunately, many existing companies and entrepreneurs build relationships with organizations/individuals that are a part of the same social or industry network they frequently interact with rather than exposing themselves to the opportunities in broader networks. In many cases, entrepreneurs are disconnected from opportunities by gaps, or structural holes, in their network. This issue is often complicated in rural or distressed Kansas regions due to insufficient interaction volume and density because of geographic isolation and sparse population. AMI’s proposed Kansas Opportunity Innovation Network aims to fill in the structural holes for rural and distressed Kansas companies, communities, and regions.
Deliverables: The proposed network will provide the following services/tools to rural and distressed companies, communities, and regions:
- Business and Innovation Profiling – Characterize companies by who they are, how they do things, and their needs instead of their end products, profile communities and regions based on their assets and innovation readiness
- Opportunity Scouting – A dynamic scouting process and repository of available opportunities
- Networking – Connect or link entities to each other based on the best match of capabilities and opportunities
- Business Development Assistance – Services to attract new customers and penetrate new markets
- Planning Assistance – Provide services to assist with technology cluster strategy, regional TBED strategy and manufacturing Incubation
- Mapping & Analysis Service and Tools– Mapping regional assets, social networks, and regional innovation readiness assessments; developing innovative tools to share with other economic development agents
Initial Core Projects: KOIN network will link companies, community, and regions to opportunities, based on capabilities, by undertaking the following core projects in different regions hence adapting the learning by doing approach. Initial center partner projects range broadly across the scope of work, geography served, industry served, and regional characteristics. Additional projects are expected.
- South West Kansas: Regional Asset Mapping Project
- Rural Region: North Central Kansas – Regional Business Profiling and Innovation Networking Project
- Distressed Urban Area: Greater Wichita Area – Wind Supply Chain Prospecting and Pre-Profiling Assessment
- Military Base Closure: Parsons Army Ammunition Plant – Business Redevelopment Support
- Manufacturing Park/Incubator: South Central Kansas – Rural Multi-County Regional TBED Strategy and Business Development Support
- Statewide: KDOC – Business Profiling/Supply Chain Network Development Prototype
- Statewide: KTEC – Clean-Tech Cluster Strategy Development – Social Network Development Support
Partners:
- Kansas State University
- Kansas Department of Commerce
- Kansas Technology Enterprise Corporation
- Kansas Association of Regional Development Organizations
- Great Plains Development Authority
- South-central Kansas Economic Development District Inc.
- North Central Regional Planning Commission
- Southeast Kansas Regional Planning Commission
- Great Plains Development Inc.
- Rural Policy Research Institute
- Local Workforce Investment Boards (Area I and Area IV
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