We conduct research for clients across multiple verticals (consumer packaged goods, manufacturing, logistics, supply chain, fashion, restaurants, healthcare, etc…) and as a result of that broad base of clients we are able to gain perspectives on the economy, industries, and social and market trends.
One topic that is in the news often is outsourcing labor-intensive jobs and manufacturing particularly to countries in the Asia-Pacific region. With the recent news of buildings collapsing and workers tragically losing their lives or being injured or trapped due to lack of building safety standards, or any loss of life is a call for consideration. As a result Wal-Mart and some other large companies have implemented their own safety standards and continued outsourcing.
Recently a businessman from Florida was held captive for 6 days because Chinese employees feared losing their jobs and did not feel they were adequately compensated. These workers did something extreme to have their voice heard. The question to ask not only on a cost basis but on an ethical basis: Is it worth it? Perhaps, there is an ethical argument for bringing jobs back to the United States in addition to the cost argument about to be presented.
The risk analysis for manufacturing in the United States is far more straight forward than using an offshore source. At one extreme, having your company name associated with tragedy may lead to catastrophe & national infamy, but at a minimum uncertain raw materials, process stability, and quality standards will exact unknown (and unexpected) costs, not to mention sleepless nights. The expanse of US regulations from watchdog organizations, industry designed and self-promoted, and government based, provide for many layers of product protection stripped away from manufacturing that is taken offshore.
Mindspot Research has a long-term manufacturing client who has been in business for 25 years. ASH Industries, based in Lafayette, Louisiana, offers a range of engineering services and manufacturing processes. ASH addresses client needs from rapid prototyping to final assembly & custom packaging. Among ASH’s customers that cover the gamut of US Industry, from defense to medical and electronics to industrial, there is considerable pressure to outsource manufacturing work to places like Mexico and China.
Over recent years, Hartie Spence CEO of ASH Industries tells us that “While competing with China on a piece part basis is not possible, more and more observant customers do appreciate the impact that a knowledgeable US based manufacturer can have on reducing total product cost, increasing reliability, and shortening the timeline between concept to completion.”
Mr. Spence acknowledges that the argument for getting products from China because “it is so much cheaper” may, in fact, be limited to a range of products for which unit cost consideration far exceeds quality, manufacturing consistency, and communication needs. However, if the total landed cost is calculated along with manufacturing difficulties and inconsistencies, then the argument for “offshore” does start to disintegrate.
Additionally, consider that the number of defects per million parts will vary by the type of manufacturing. For example, if soldering parts is involved that is typically what causes the majority of the defects. If no soldering is involved it will be something else (i.e. pick and pack). Using a Six Sigma process improvement methodology the acceptable defects per million (DPMO) is 3.4. It is widely commented on that other countries have a higher defect per million number than the United States. Recent examples include solar panels manufactured in China with defect rates ranging from 5%-22% according to the New York Times. Perhaps that doesn’t seem like a lot. However, if we apply this to something that we are all used to like medical prescriptions; consider that 99% quality (3.8 sigma) and 99.9997% quality (6 sigma) is the difference between 200,000 wrong drug prescriptions a year and 68 wrong drug prescriptions a year.
Here are 15 potential hard cost benefits associated with “reshoring,” which is bringing manufacturing back to the USA from another country:
• Shorter delivery times/Faster
• Lower transportation costs
• Fewer defects
• Shipments not held at customs
• Reduces exchange rate risks
• Political stability
• Economic stability
• Established worker safety compliance (building, working conditions, # of hours worked)
• Established materials safety compliance (contamination)
• Stamp it “Made in the USA”
• Supports the U.S. economy by employing U.S. workers
• Reduces risk of being associated with negative events/PR
• U.S. plants are more established/higher number of years in business
• More world-class manufacturers in the United States
• Customer Service
At the end of the day, whether it’s the 4th of July or another day, it’s the total landed cost that matters to the bottom line.