For many companies, the 2008-09 recession was a time to scale back. But for Michael Araten, CEO and president of the toy company K’Nex Industries, it was a time to rethink and regroup.
K’Nex, which makes Tinkertoys and Lincoln Logs as well as its eponymous brightly colored building sets, followed the trend of offshoring in the late 1990s, and by the early 2000s had outsourced most of its toymaking to China.
But by the time Araten arrived at the company in 2005, the long lead time required to ship toys to the United States—coupled with high demand only three months out of the year—was becoming a strain on the business. Catering to the changing tastes of 8-year-olds is a dicey proposition, and product decisions made in January could be yesterday’s news nine months later when the ship pulled into port.
With machines idling at K’Nex’s manufacturing affiliate, Rodon Group, a plastics manufacturer in Pennsylvania, Araten saw an opening to bring the toy production back home. “We were looking to keep our people employed,” he said. (Until 2016, Rodon Group and K'Nex were sister companies; Araten is a principal and on the board of both.)
Today, 90% of K’Nex toys are manufactured in the United States. But that shift didn’t happen overnight. Araten and his team quickly learned that U.S. wood manufacturers weren’t set up to make components as small as Tinkertoys or Lincoln Logs.
Tinkertoys made the switch to plastic fairly quickly; they are now produced at the Rodon facility. But plastic Lincoln Logs didn’t pass muster. “We did some focus groups [on a plastic prototype] and people said, ‘Yeah, it’s kind of a cool toy but it’s not Lincoln Logs because Lincoln Logs have to be wood,’” Araten said.
Thus began a four-year search to find a U.S. manufacturer who could handle the tiny timbers. “We thought it would be a lot easier,” said Araten. “We thought, ‘All right, we’ll go to the furniture makers in North Carolina, and they’ll make Lincoln Logs. How hard could it be? It turns out it was really hard.”
Manufacturers either didn’t have the right equipment or their processes didn’t comply with child safety standards for things like wood stains.
After some dead ends, said Araten, “we danced around and actually my supply chain team said, ‘Hey, we’ve been going to people who make bigger things and trying to make them smaller. What about somebody who makes smaller things trying to make them bigger?”
A search led them to Pride Manufacturing in Maine, maker of golf tees and cigar tip holders. Pride was willing to make some modifications and add another production line to make the logs.
“It was figuring out, how do you do the staining, how do you do the drying,” said Araten. “How do you get the wood dry at the right time and temperature, and the actual amount of automatic saws that you need, and how many was too many to make at once. At first we were running them through so fast that they would be splintering.”
Doing the Math
Bringing manufacturing back to the United States (or offshoring it here, or keeping it here) is anything but simple. It requires a combination of perseverance, creativity, complex mathematical feats and being at the right place at the right time. Sometimes, the timing is bad, or people haven’t connected, or the supply chain just isn’t there—or it’s not cost-effective now but maybe it will be later.
At a panel discussion at KPMG’s Automotive Executive Forum in January, supply chain executives talked about the calculus of deciding whether to make something in the U.S. or elsewhere.
“It isn’t always about wages,” said Ramzi Hermiz, president and CEO of Shiloh Industries, a supplier of lightweighting materials that does the bulk of its manufacturing and research in the U.S. but has a sprinkling of plants in Mexico, Europe and China. In Mexico, “energy is considerably more expensive than it is in the U.S. And actually for some of our products, energy costs more than the labor that goes into it.”
Another complicating factor is trade agreements that don’t even involve the United States. Mexico, for instance, has negotiated upwards of 40 trade agreements with various countries. Sometimes auto companies will locate in Mexico not because they want to make cars cheaply to ship to the United States, but because of the trade agreements that allow them to avoid high export tariffs to Europe or Brazil or Argentina, said Hermiz.
Still, some manufacturers are finding the United States more attractive than it used to be. The Reshoring Initiative’s Harry Moser said that 2013-2014 was a tipping point, with the U.S. going from losing about 140,000 manufacturing jobs per year to gaining 10,000 or more annually. Advancements in workforce training—while still not on par with Europe’s apprenticeship models—have made a difference. “President Obama did do a good job on skilled workforce, so the availability of toolmakers, precision machinists, welders has gotten better,” said Moser. “It takes years to train them properly, but at least companies are confident that they can find the people they need.”
In addition, increased automation reduces the wage advantage for countries like Mexico and China, even if those countries also automate, said Moser. And the jobs that are automated are usually the lowest level, and the ones with the largest inter-country wage difference. “At the simplest, least skilled level, [Mexico’s wages] might be 10% of ours,” said Moser.
Another advantage: Chinese companies, unlike U.S. ones, must pay a 15% value-added tax in addition to their tariffs on capital equipment purchased from Japan or Europe.
At K’Nex, some highly decorated parts and toy motors are still made overseas. “Our view of the world is to do as much as you can here and try to do more here—and if you can’t get to 100%, because some things are in some cases just impossible to find, that’s OK,” said Araten.
With Amazon searches increasing for “Made in the USA,” the label has inherent value for a toy company like K’Nex, where it might not in less consumer-facing sectors. Araten said costs are higher to make products here, but K’Nex can charge 12% to 15% more for toys because of the USA stamp.
National Trade Supply, one of Inc. magazine’s fastest-growing companies for seven years straight, started out as an online retailer, not a manufacturer. Business partners Tyler Dishman and Todd Anthony saw a Grand Canyon-like opening in the market for aftermarket air—and later, water—filters. Markups on $50 or $60 filters from original equipment appliance manufacturers were so high, Dishman and Anthony found that they could sell them for $15 and still make a nice profit. The partners found manufacturers in China, where OEMs also manufacture filters, and began shipping them to the U.S. for distribution from their 81,000 square foot warehouse.
But lead times with their Chinese suppliers were long. They had to order inventory six months in advance, pay in cash up front, and cross their fingers. “You hope everything goes OK, that the boats don’t get sent back, that things don’t get stuck in customs or arrive covered in mold,” said Dishman, noting that all of those things happened.
Dishman, a robotics and computer hardware engineer and Anthony, a finance guy who was a dot-commer in the 1990s, enjoy operating on the fly. Their retail site, DiscountFilters.com, was launched in two weeks, “and we turned it on in the morning and by the afternoon we had our first orders and by the end of the week [Anthony] had quit everything else he was doing just to focus,” says Dishman.
“It was the classic story of ‘We have no idea what we’re doing, but we have to do something now.’ And we just had to sprint to keep our legs under us.’”
The manufacturing idea was similarly spontaneous—aside from the logistics advantages of producing things in-house, the two men just wanted to see if they could pull it off. They had the space. If they did the manufacturing, they didn’t need as much inventory on hand. So they rearranged their facility and found 25,000 square feet for manufacturing space, largely funding the manufacturing expansion from cash saved on inventory.
Although experts they consulted told them getting a manufacturing operation running would take 3 to 5 years, getting the lines going took nine months, and 18 months for full capacity. They doubled their workforce, hiring 40 line operators and supervisors at from $12 to $25 an hour.
“Sometimes, ignorance is your best friend,” said Dishman. “We had no prior expectations. We were like, ‘Why can’t we just do that tomorrow?’” He guesses that part of the reason for the long estimates was that the only plastics manufacturing consultants they could find were in automotive, a more bureaucratic sphere than theirs.
“There weren’t plants [in the U.S.] that made the same types of products that we make,” he said. “We did, however, go tour several injection molding facilities, and we’ve seen air filter manufacturing facilities just from the days when we were buying other people’s products, so we sort of knew what that world looked like.”
Not that there weren’t any bumps along the way. The partners didn’t anticipate the rapid commoditization of their market while they were getting into production. During the course of 18 months, the average purchase cost of their product dropped from $10 to $6. Even so, they still ended up with a good return on investment.
They also had difficulty finding product experts in the U.S. who could design what they needed. “We knew the products we wanted to make were relatively simple, but there were still a lot of unknowns,” Dishman said in an email. “We went through several iterations trying to find the right mix of design and materials. There were several sleepless nights.”
Reshoring Institute data shows that incentives are the No. 1 reason for manufacturers to locate production in the U.S. NTS received incentives, but Dishman said that ultimately, the amount they received wasn’t worth the paperwork hassle.
The Overseas Factor
Much of the growth in U.S. production actually is coming from companies with headquarters overseas, according to a pair of Wharton School studies that surveyed 125 global companies on their site location choices.
The majority of companies that reported they were adding capacity in the U.S. or North America, based on the location of their headquarters, were not U.S. companies.
“Of course, that raises the question, what is the citizenship of a company?” said Morris Cohen, the Panasonic Professor of Manufacturing and Logistics at Wharton and lead author on the study.
Cohen reasons that “if you’re already here as a company, the benefit of adding capacity is probably less than if you are not here. You gain access to a market you’re not directly involved in. You gain access to labor.”
In 2008, Japanese candy company Morinaga, on the hunt for new markets, began distributing their Hi-Chew candy in Asian groceries in the United States. The brand caught on, and gradually gained distribution in bigger and bigger stores, including Wal-Mart.
To make production and distribution more efficient, the company began scouting for a manufacturing location in the United States. Executives ultimately chose Orange County, N.C., because it was located near a major interstate, near a coast but outside the state’s hurricane alley.
A strong workforce readiness program in North Carolina, where the state uses federal workforce funds for community college training programs tailored to company’s specific needs, added to the appeal. Recruiting and candidate screening came as part of the state package, and Durham Technical Community College conducted some of the on-the-job training, along with an on-site Morinaga engineering team from Japan.
“We were surprised to see almost 800 candidates show up at the job fair,” for 90 initial openings, said Toshiaki Fukunaga, president of Morinaga American Foods. The jobs pay above minimum wage and are comparable to other manufacturing jobs in the area, he said, declining to share any specifics on wages.
The company’s most unexpected challenge has probably been the turnover in the workforce. In Japan, said Fukunaga, who spoke through a translator, “the workforce culture is more lifetime employment. We heard about that in advance, but we didn’t really expect to face that situation so much, so that was a learning experience for us, to have more flexibility.”
National Trade Supply pays its production workers wages between $12 an hour for entry level to $25 an hour for a line supervisor. The low unemployment rate has been a bit of a challenge, but relying on word of mouth to find good employees has so far been effective. With the wages they pay, “We’ve seen single parents move from working two or three jobs to a single job, we’ve had young people able to buy their first home, and young kids out of college pay down their student debt,” said Dishman.
Dishman adds that seeing workers improve their lives gives him a sense of purpose “that you’re not going to find on a balance sheet.” He also gets a thrill from the manufacturing process. “We are all of the layers under one roof,” he said. “I don’t know how many people appreciate how rare that is. But for me, it’s a lot of fun.”