For a time, it was fashionable to outsource manufacturing operations. Later, outsourcing to specialized firms wasn’t enough. The outsourcing of manufacturing had to be directed to specialized firms in low-cost countries in order to be compliant with the latest fashion in operations strategy.
As strategic directions are crafted in 2013, four trends in global operations are emerging. These trends make it essential to lead the way in reshoring of American manufacturing for competitive advantage -- not only for sake of patriotism, but for financial sustainability and proper management of operational outcomes. The economic analysis performed a decade ago by manufacturing executives must now be re-examined.
1. Oil versus Natural Gas Costs
Globally, oil has reached exceptionally high prices. All the while, domestic sources of low-cost natural gas have been found within the United States. This allows manufacturers to replace the high cost of transportation with lower domestic manufacturing costs to produce.
2. Labor Costs in Developing Countries
In the last few years, labor costs in China have increased year-over-year by nearly 20%. In Mexico over the same period, labor costs have increased year-over-year by 5%. Meanwhile, in the United States, labor costs have risen year-over-year by only 3%.
3. New Automation Technology
Over the last decade, new automation technology has been developed and matured that can dramatically increase productivity and require fewer but more skilled workers. Inexpensive sensors, fast computing, robotics and other new technologies have led to new user-friendly factory automation that shifts the focus from ensuring low labor costs to finding skilled workers.
4. Changing Risk Profile of Global Supply Chains
The theories of economic advantage by outsourcing and offshoring have been met with the practicality of geographic, intellectual property and currency risks. These risks have shown to outweigh many of the assumptions made a decade ago. The geographically diverse supply chains of major manufacturers have created a multitude of increased risk for each link in the supply chain rather than reduce risk through diversification. Risk of nationalization, intellectual property theft, and geographic threats have caused manufacturers to re-examine their supply chain to increase flexibility and reduce risk. In many cases, much risk can be eliminated by reshoring to the United States.
All too often, operations and business strategies are documented in binders and PowerPoint slides, only to be archived on the shelves of busy executives. Underlying the strategies within these binders are key assumptions of expenses and risks. The risk and expense profile may well have proven to be accurate for much of the last decade. Now is the time to re-examine these assumptions and reconsider where (and by whom) your products should be manufactured. Most importantly, operations executives should realize that outsourcing and offshoring are cycles -- not trends.
Jason Piatt is president of Praestar Technology Corp., a provider of consulting and training services to manufacturers in the Mid-Atlantic region specializing in lean, Six Sigma & strategy formation.