Returning Manufacturing to America?

byMichele Nash-Hoff

President, ElectroFab SalesA manufacturers rep agency

• American manufacturing became synonymous with quality and ingenuity.

Manufacturing is foundation of the American economy & rise of the middle class.

In the 1970’s, over 26% of American workers were in manufacturing.

• Decreased to 9.25 % by March 2009.

04/12/2023 2

Manufacturing accounted for about 28 % of U. S. Gross Domestic Product in 1965

Dropped to less than 11.7% by 2011 up from a low of 11.0% in 2009

04/12/2023 4

04/12/2023 5

19501955

19601965

19701975

19801985

19901995

20002003

20062007

20082009

2010

0

5

10

15

20

25

30

Manufacturing Percent of GDP

Percent of GDPYear

Pe

rce

nta

ge

Offshoring has been major cause of: Slow economic growth Great Recession U.S and state budget deficits Unemployment Weakened middle-class Declining innovation Lower sales levels in weakened

home market

Offshoring Impacts Innovation

“an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”

Professors Gary Pisano and Willy Shih

Source: Restoring American Competitiveness, Harvard Business Review, July-August 2009

Offshoring: partially herd behavior

A ‘herd’ mentality to participate in the ‘Chinese miracle’ developed among global giant corporations --{Peter Nolan; University of Cambridge; - 9/03)

People tell their bosses what they want to hear—(going to China) gives a boost to the stock valuation, but you really have to do the analysis on a case by case basis.” (Technology Forecasters 10/03 )

Source: Stone & Associates

How Can We Return More Manufacturing to U. S.?

Design for Manufacturing & Assembly

(DFMATM) – Boothroyd Dewhurst, Inc. Lean Manufacturing Understanding Total Cost of

Ownership

What is Total Cost of Ownership (TCO)

Estimate of direct and indirect costs and

Most companies don’t look beyond quoted unit price to make decision of which vendor to select.

A company needs to understand concept of Total Cost of Ownership benefits related to purchase of parts

Gartner Group originated TCO analysis and there are different methodologies & software for different industries.

60% of manufacturers: Apply “rudimentary” total cost

models Ignore 20% or more of the total cost

of offshored products*

51% of companies found no financial benefit in offshoring**

Source:* Archstone Consulting survey, American Machinist Mag., 7/16/09

TCO includes much more than purchase price of goods. For manufactured goods, it should include: Geographical location Transportation alternatives Inventory costs and control Quality controls Reserve capacity Responsiveness Technological depth

Survey by SAP and IW Customer Research published in June 2008 Industry Week showed top objectives of conducting business overseas were: Increase overall market share Increase profitability Reduce costs Provide a superior customer

experience Increase overall revenueCompanies with >$1 billion revenue met

58-74% of objectives & companies with <$1 billion met only 37-47% of objectives

Decision to outsource offshore is often based on faulty assumptions, such as: Overseas suppliers have same

morals & work ethics Longer lead times won’t affect

costs much Overseas laws will protect IP Can teach suppliers to meet

quality standards

• Communication won’t be a problem

• Travel costs won’t add much to cost calculations

• Increase in delivery and quality costs won’t be significant

• Lean manufacturing tools can be taught to suppliers

Case studies show that these assumptions are far off from reality.

Problems most often encountered are: Variation – each lot takes weeks more

time than anticipated to get to U. S. Methods for producing product have

gotten more complex, not less, raising costs

Company doesn’t know how many or even most of hidden costs that exist

Company loses complete control of quick changes to react to hidden costs

Accountants measure hard costs but they don’t often measure intangible costs - often called hidden factories because they keep everyone busy generating nothing tangible or of measurable value.

Hidden factories indirectly produce many forms of “soft” costs, such as Loss of good will Loss of competitiveness Extended warranty costs Legal costs

Here are some hidden costs: Currency fluctuations Managing offshore contract Design changes Quality problems Legal liabilities Travel expenses Time and effort to make

transition Poor communication Intellectual Property

infringement Cost of inventory

About five years ago, some business started returning

Main problems encountered were: Substitution of materials Inconsistent or poor quality Stretched out deliveries Communication problems Inability to modify designs

easily & rapidly

04/12/2023 20

DJO Cold Therapy Unit

Jerry Wright, Vice President, said, “The cooler cost $2 less than it did to buy if from China, when you factor in the freight, handling, and inventory costs. It’s a nice enhancement to the product line, and we don’t have to go through the horrible supply-chain frustration with China.” pg. 141

Reshoring Initiative The Reshoring Initiative is a way

to return manufacturing jobs to the U. S.

Initiative was founded by Harry Moser, Chairman Emeritus of GF Agie Charmilles in 2010

Contact:Harry Moser847-726-2975

harry.moser@comcast.netwww.reshorenow.org

A non-profit with 21 sponsors, including

Platinum

Gold

Silver

A non-profit with 21 sponsors, including

Other

Bronze

Steel

Iron

Reshoring Initiative’s Objectives

Change the Sourcing Mindset: From: “Offshored is Cheaper” to “Local

Reduces the Total Cost of Ownership.” Train:

OEMs on why to source local and how to use TCO Calculator.

Suppliers (and unions) on how to “sell” local sourcing.

Encourage production near the customer Do the best we can on the unlevel field

now Partial alternative to protectionism.

The Industry-Led Initiative Provides

Free Total Cost of Ownership (TCO) Software for companies & suppliers/unions

Online Library of reshoring articles Media coverage of the trend: WSJ,

USATODAY, IW, CBS, CNBC, etc. Regional Initiatives Motivation for skilled manufacturing

careers Objective tools provided A solution to today’s supply chain

problems

TCO Estimator Benefits Provides a single TCO for each source Flexible: values are 100% user selected. Broad:

29 cost factors. Pull down menus you automatically insert:

Freight rates for 17 countries Duty rates for parts or tools, e.g. molds

Current value and 5 year forecast of TCO. Easy to use:

Explanations and references to help select values.

Instruction Manual. Free

Example: some Assumptions: a Part

Chinese unit price $70

U.S. unit price $100

# units/year 12,000

unit weight, lbs 2

Shipments/year 6

product life, yrs 5

Packaging* 1%

Payment on shipment

Yes

Quality* 2%

* Chinese differential vs. U.S.

Product liability risk* 0.5%

IP risk* 1.9%

Innovation* 0.5%

Trips/yr 2

Prototype cost* $5,000

Country political instability risk* 0.4%

Wage inflation, annual* 8%

Currency appreciation, annual* 5%

TCO Comparison Example: a Moderate Labor Content Part

PRESENT AND FORECAST U.S AND CHINA PRICE AND TCO: PARTS

$50.00$60.00$70.00$80.00$90.00

$100.00$110.00$120.00$130.00

1 2 3 4 5 6

Year

COST

, U.S

. $

U.S. TCO

China TCO

U.S. Price

China Price

Cumulative Cost by Category

CUMULATIVE COST BY CATEGORY, YEAR 0: PARTS

$60

$70

$80

$90

$100

$110

COST CATEGORY

CU

MU

LA

TIV

E C

OS

T, U

.S. $

U.S.

China

Freeman Schwabe Machinery:

hydraulic die cutting presses Moved from Taiwan to Cincinnati, OH Reasons: Ability to Control Own Destiny Warranty Reduced by 90% Improved Speed to Market – at Least 30

days Builds Employee Skills & Morale Restore Long-Term “Made in USA” heritage for Schwabe Presses

Bailey Manufacturing LP

Moved from100,000 ft² in Chennai, India to 60,000 ft.2 in West Knoxville, TN

Reasons: Fast delivery vs. 5 wks

on the water Fewer supply chain

problems No more bad units in

routeSource: Knoxvillebiz.com Ed Marcum 8/7/10

ATMs

Returned from China to 350,000 sq. ft. factory in Columbus, GAHired 900 employeesReasons:

Slow response from contract suppliersChinese wages upHave mfg. near engineering and customers

General Electric GeoSpring hybrid electric water heater

Returned mfg. from China to Appliance Park, Louisville, KY

Redesigned water heater to eliminate 20% of the parts in final assembly

Used "lean" to cut the program cycle time in half

Reduced equipment investment by 30%.

ZeeVee Inc. - digital video products

Steve Metzger, V. P. – “You often have to pay the manufacturer when they ship, and then the product can be tied up on a boat for five or six weeks. As our volume increased, we had to tie up more and more cash up front, and so the paradox is, the more successful you become, the more cash poor you are.”

Moved production from China to Littleton, MAReasons: hidden costs • Travel• Managing quality• Cost of doing business

offshore

Solatube International Set up mfg. of Tubular Daylighting

Devices in EPZ in China in 2008 - cheaper for 20 new plastic molding dies

Moved mfg. back to their plant in Vista, CA at end of 2011

Reasons: Rising direct labor and indirect

overhead costs Rising shipping costs Cost of quality problems More efficient in USA

Other Companies Reshoring

3M moved its Littmann stethoscope from 14 global suppliers to one operation in Columbia, Mo.

Calibur11 moved manufacturing from China to Duluth and Chicago.

Miken Sports moved baseball bats from China to Caledonia, Minn.

AGCOmoved its North American tractor assembly plant from France to Jackson, Minn.

Coleman relocated life-vest production from China to Sauk Rapids, Minn.

Outdoor GreatRoom Co. quit all India supply contracts and some in China & now makes most products in Minnesota.

Datacard moved one product line from Malaysia to Minnetonka, MN

Minnesota-based Paddi Murphy relocated its moisture-wicking pajama line from China to South Carolina and California.

Permac Industries in Burnsville, MN moved contract blade manufacturing from China to Wisconsin after persistent quality problems.

2011 survey of North American manufacturing executives by Accenture found: 61% are considering shifting from

offshore to closer to centers of demand

59% intend to pursue new supply options

67% proximity to customers markets top factor

57% noted increased cost of logistics & transportation costs

“Renaissance in Manufacturing”

“We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015”

“take a hard look at the total costs”

Labor cost 20-30% of unit costs and will be only 30% below U.S. level. 10% savings exceeded by other offshoring costs.

Source: Boston Consulting Group press release 5/5/11

Of Top 10 Supply Chain Predictions 2011

# 5. “In the context of taking a broader view of total cost, supply chain organizations will gain a new appreciation for shortening lead times through profitable proximity sourcing strategies.”

Reasons: ● Improve overall service levels ● Retain key customers ● Focus on the “costs” of long lead times ● More balanced approach to global sourcing

Source: Simon Ellis, Supply Chain Strategies, with IDC Manufacturing Insights 2/2/11

Offshore Supply Chain Dynamics Changing

Component/material prices increasing

Labor rates rising 15-20% year over year in China

Transportation costs rising Political instability - Labor

riots/strikes Exchange rate variables Disruption from natural disasters U.S. $ declining Oil prices soaring

There is a growing realization that when it comes to quality and location, location may be best guarantee of all

It’s hard to outsource quality A growing number of

manufacturers realize “you get what you pay for”

Applying good quality principles takes money, education, and experience, which are in short supply in low-wage countries.

Advantages of Sourcing Domestically

Ease of Communication Flexible Delivery Reliable Transportation Smoother Design Changes Lower Cost of Inventory Higher Quality Lower Travel Expenses No Intellectual Property

Infringement Favorable Purchase Order and

Credit Terms

Sourcing Moving Home Slowly

20% of companies surveyed in 2010 brought sourcing closer in 2009

Of which 59% reshoredSource: Supply Chain Solutions, Grant Thornton, Jan. 2010 survey.

312 responses.

According to Reshoring Initiative by 2012 10% of mfrs. have reshored Creating 50,000 jobs

Reshoring is fastest & most efficient way to strengthen the U.S. economy

● Breaks out of tax/borrow and spend. Eliminates relying solely on currency

changes. ● Assures that the pie grows, to the

advantage of all Americans.  ● Grows the pie by taking back what we

earlier lost.● Focuses on the manufacturing sector

which has suffered so many job losses for decades.

● More efficient than exporting, stimulus programs or tax reductions.

Potential benefits For the U.S.:

Eliminate trade deficit ~ $600B/year Add 3 million manufacturing jobs 9-12M total jobs ► 4% unemployment Budget deficit impacts: more than is

likely from debt limit plan For U.S. companies:

Stronger home market Reduced chance of protectionism

hurting world sales Increased sales as “Made in USA”

products

Winning Manufacturing Attributes for Next 15 Years

Customized products/services to serve customer’s unique, specific needs and priorities

Global locations to balance regional demand with regional supply

Supply chain flexibility to support diverse channel and customer needs

Agility on shop floor and beyond Negotiate and “partner” for scarce

resources

Capabilities Needed to Rebalance Manufacturing

Total Cost analysis of options Comprehensive manufacturing and

supply strategy Skills and knowledge of staff Ability to increase supplier capability

and capactiy Changing internal mindset for longer-

term total cost view Improved understanding of local market

capabilities

Outsourcing will Continue Offshore outsourcing will

continue for next 5-10 years, especially for multinational companies that have products to sell within that country

Growing interest in outsourcing of engineering, software development, marketing, sales, and procurement

Desirable” locations for outsourcing will change over time

Purely financial benefits of lower cost will erode over time

Challenge is to keep as much manufacturing as possible within the United States

Understanding & utilizing the TCO estimator worksheet of the “Reshoring Initiative” will help maintain more manufacturing in U. S. and help return manufacturing to America.

Michele Nash-Hoff is available to speak to professional societies, trade organizations and service groups on this topic, as well as “What can Manufacturers do to Save Themselves” and “Why we Should Save American Manufacturing and What Can I Do” for non-industry groups. Contact: Michele Nash-HoffEmail: michele@savingusmanufacturng.comPhone: 619-265-7607Author of Can American Manufacturing Be Saved? Why we Should and How we Canwww.savingusmanufacturing.com