I’ve spent a very busy few days in Downtown Dallas attending the WTG Supply Chain Logistics Summit. We had many interesting discussions with people who dropped by the booth. One of the themes we heard time after time is that companies are struggling to manage change in their supply chain. Changes in demand, changes in supply, capacity issues, are all difficult to assess and respond to using traditional ERP solutions. As a result, companies are turning to Excel to try to evaluate the impacts of these day to day events, with all the problems and risks associated with using Excel to make key decisions. Between demo sessions at the booth, I found a few minutes to attend an excellent presentation by Ron Tarter, Senior Vice President and General Manager, Operations. I’m sure if you do any electronics manufacturing, you’ve heard of Flextronics; They are a 24 billion dollar supply chain solution provider with 90 factories in 30 countries around the world, including 19 factories in the US. Which brings us to the meat of Tom’s keynote… Flextronics is going through a process of evaluating what Tom calls “right shoring” – the idea of looking at the entire cost structure of manufacturing in China and comparing those costs to manufacturing costs closer to where the products are actually consumed. Tom raised a number of reasons why Flextronics has been doing this review;
- Cost of manufacturing – China’s minimum wage is going to be increasing by 13% annually over the next few years. Further, China’s factory workforce is expected to reduce by 40 million as those who traditionally would have sought manufacturing jobs gain employment in other areas. Further, the price of oil continues to rise, driving up the cost of shipping products back and forth. Tom talked about a study where they looked at a specific product and compared the costs of producing it in the US vs in China. He was surprised to find that when ALL the costs (lead time, communication costs, travel costs, etc) associated with producing product in China is compared with the costs of producing the same product in the US, the difference is around 2%. (note that this is for a specific product – your mileage may vary.)
- Companies are suffering from “Offshore fatigue” – They are struggling with the inherent difficulties of launching and maintaining products on the other side of the world; late night conference calls, language and culture differences, risks to intellectual property, long lead times, are all factors that wear, especially as the margins associated with manufacturing in China start to erode.
- US consumers are saying they are looking for made in the USA products and large companies like Walmart are looking to source from the US as well… However, it has not been proven or tested that customers would be willing to actually pay more for equivalent products sourced in the US.
If the US is to be successful bringing manufacturing back to the US, the challenge companies are going to face is scaling production to the capabilities available in China. US companies have not made significant investments in local manufacturing in the last few decades. This, however, could be an opportunity for US companies to leapfrog other regions with state of the art manufacturing technologies offering more flexible, greener manufacturing capabilities. The other challenge will be to get suppliers to move manufacturing to the US. A lot of the savings associated with local manufacturing will evaporate if components and raw materials need to be shipped in from China. As I sit in the airport waiting for my flight home, I can’t help but think we could be on the cusp of a manufacturing renaissance. Manufacturers are starting to understand that traditional ERP solutions simply don’t allow you to understand change and respond quickly to it. At the same time, companies are coming approaching a sourcing tipping point – the point in time where the hidden costs of manufacturing everything in China, outstrip the labor savings, altering the off-shoring equation. What are your thoughts? Comment back and let us know.