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.
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 .
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.
Pilot a Business to Business (B2B) network among Kansas manufacturers to readily connect potential customers, suppliers, or collaboration partners within the state.
- 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.