Last year on May 12, 2010, a special event took place at the Hyatt Regency in Irvine, California. I wish I could say it was an early beach vacation for me, but it was actually a sponsored re-shoring fair held by the National Tooling and Machining Association alongside the Precision Metals Association. The entire agenda covered the topic of re-shoring or bringing back manufacturing to the United States that has been outsourced to foreign countries. Companies originally thought that by off shoring production, they would save exorbitant amounts of money in direct labor and resources, when companies have found out the hard way that it is in fact the other way around. The positive end to all of this is that these organizations have become valid case studies for companies who currently keep their work domesticated.
Shipping and Delivery Issues
While consumers remain focused on price when making a purchasing decision, and not where a product is produced or where their customer service call comes from, we as an entire society have experienced what disruptions across the oceans can mean for production here. In the wake of the tsunamis that devastated Japan earlier this year, many companies, including Toyota had to halt final assembly and production in the United States. International shipping ports in the country were severely damaged, and the breakdown of the transportation infrastructure prevented parts from ever reaching the ports. Toyota temporarily shut down its 13 U.S factories due to parts shortages, which impacted 25,000 workers here. Many companies in the U.S have parts suppliers in Asia, including Japan that suffered the same problems. Natural disaster is certainly one element that can get in the way of international lead times. However, shipping issues aren't always due to natural disasters.
Amfor Electronics is a U.S company that is based out of Oregon. Like many, they outsource the production of their cables and assemblies for OEM distributors to China. When you deal with clients they always want to know when they are going to have the product at their doorstep. This is an area that the company has had trouble with. Additionally, it is hard to gain enough insight to foresee problems in the supply chain after the manufacturing shipment because uncertainty in transport, customs, governing bodies, and freight companies. Moreover, we all know that sometimes in the middle of the project that things need to be changed. Because of the distance and the lack of communication, this has also caused problems for this company. The one thing to conclude from all of this is that time equates to money. For companies who have turned to being lean and have moved towards a JIT or Just-In-Time demand pull system, this model simply does not work. For this very reason, Amfor moved all of their production back to U.S soil. The other obvious trouble is quality control.
I think society as a whole got a good snapshot of what was happening when toys and other products were reaching store shelves with high levels of lead. Manufacturers in China can substitute materials without contract approval, which can be a huge disaster. I think this is where people's value system started to sway a little, and support of re-shoring started to take root. In another article about re-shorting efforts, Gregory Price gave some commentary from the perspective of the alternative energy industry, which is very lucrative these days. Mr. Price is the founder of Oregon Small Wind Energy Association, where works alongside wind system manufacturers. Those manufacturers have tried to cut costs by outsourcing like everyone else, with dismal results. Main assemblies for turbines are damaged or flat out don't meet the specifications for their application. At that point, they've incurred cost for production, shipping, and they've lost time in order to get the turbine parts that they need to send these to the customer. This also means that parts for routine maintenance would likely have to be ordered 6 months out, that way the company would have them on hand. This means maintaining a certain level of safety stock, when a domestic supplier may be able to turn these parts around, at least a small batch of replacement parts in just a few days.
Think About This
Dr. David M. Anderson, an expert in off shoring, Lean manufacturing, and the like, makes some very valid points concerning off shoring. He outlines some of the consequences associated with the practice. For example, in the instances where shipping times have been delayed too much, the only real alternative is to airfreight the products at a high cost, which certainly does not help the profit margin. Additionally, the cost of shipping containers move in step with oil, and we all know where the price of crude has been hovering. As these costs move up, our margins shrink. Keeping production domestic will help curb the volume of expense, at least as far as transportation is concerned. I've already touched on the topic of quality issues, and how that increases the turnover time because of a rework, but in some cases these products will make it to customers. At that point, you have to deal with returns and delays in further delivery. If your operations are focused on having the best customer service, this is going to be a real headache.
An economic recession is a period where many companies experience credit issues or problems with contractors or suppliers, so we can say with confidence that off shoring is no exception to the rule. There were several reports that came out of China during the early recession that stated that many factories were closing. It is very difficult to monitor the stability of a supplier unless you have a person on site to facilitate the relationship and monitor the progress of a project. In times of uncertainly and lower budgets, this becomes harder and harder to accomplish. If I could ever make one point that may sway many away from ever outsourcing, it is that foreign legal battles are hard to fight, and the U.S government can do little to protect firms against these problems and product counterfeiting, which seems to be on the rise. U.S. manufacturers have now experienced many of these problems and are more aware of the hidden costs and risks and are now in a better position to make broad, realistic cost benefit analysis of outsourcing. The trade winds are blowing manufacturing closer to the customer to reduce unanticipated risks. For those firms working in precision CNC machining
and screw machine products for OEM, this could mean more purchase orders from many different industries.
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