Between 2008 and 2010, BMW AG spent $1 billion to beef up its U.S. infrastructure, which included a 1.2 million-square-foot expansion of its Spartanburg, S.C., manufacturing facility.
During that time, BMW also expanded its U.S. headquarters in Woodcliff Lake, N.J., and built two new regional distribution centers in the United States, showing its "deep commitment to the U.S. and its people," in the words of Chairman Norbert Reithofer.
"The U.S. will remain the world's largest premium market for the foreseeable future, and we intend to participate in the expected growth with the expansion of our activities here," Reithofer said in October 2010.
BMW's investment in its U.S. infrastructure is just one example of how manufacturers are moving closer to their customers by locating production and supply where the demand exists, says John Ferreira, senior executive at the managing consulting firm Accenture.
|Accenture's John Ferreira: "A lot of companies may have gone offshore ... for perhaps incorrect reasons." |
A variety of factors are spurring this increased interest in "rebalancing," Ferreira says.
Those factors include more rigorous customer requirements and performance expectations -- customers are asking for smaller, more frequent, more customized orders; rising transportation costs and commodity prices; and exchange-rate pressures.
Regarding the last point, Nissan Motor Co. recently announced that it plans to move production of its Rogue crossover SUV from its factory in Kyushu, Japan, to its assembly plant in Smyrna, Tenn., citing the strength of the Japanese yen relative to the U.S. dollar.
"The strong yen is a serious challenge for all Japanese manufacturers," Carlos Tavares, executive vice president and chairman of the management committee-Americas for Nissan, said in January.
A 'True' Total-Cost Model
Any discussion about optimizing manufacturing location eventually leads to the topic of China, and with good reason. Lured by the siren song of cheap labor, a steady stream of U.S. manufacturers have established operations in China, helping to fuel the stubborn unemployment rate in the United States.
Most manufacturers will tell you that they used a total-cost model to evaluate the decision to offshore their production to China and other so-called low-cost countries such as Mexico, Ferreira says.
However, the Accenture survey found that most companies' total-cost models rely too heavily on direct costs, ignoring other legitimate cost factors such as region-specific costs (local taxes and regulations, for example); supply chain costs (including safety stock and broker fees); quality costs; customer-service costs; and people costs (training, organizational communication and local incentives, for example).
"When you look at the long laundry list of practices that should be in a total-cost model, we found that very few companies were using what we would call a collection of best-practice components," Ferreira tells IndustryWeek.
The bottom line: "A lot of companies may have gone offshore ... for perhaps incorrect reasons," Ferreira says.
Ferreira believes that's beginning to change, however.
Seeking more operational agility and flexibility, manufacturing are beginning to move toward a "much more balanced approach to matching the supply location with the demand location," Ferreira says. That rebalancing was the impetus for a recent Accenture report titled "Manufacturing's Secret Shift: Gaining Competitive Advantage by Getting Closer to the Customer."
"If you have a market in China, and you have a lot of demand coming from China, it makes sense that you co-locate your manufacturing and supply with that demand," Ferreira says. "Likewise, if you have a large market in North America, it makes sense to be close to that.
"That's what's driving onshoring, nearshoring and, in some cases, reshoring."
While the trend toward rebalancing supply with demand is in the beginning stages -- "it's not a flood right now," Ferreira says -- he says the Accenture study shows that manufacturers realize "that the pendulum may have swung too far [regarding the decision to offshore] on the basis of labor arbitrage."
What's emerging, he says, "is a much more refined way to look at where companies operate and why, and the advent of the true total-cost model that include multiple different dimensions and not just the labor arbitrage element."
What might be a thing of the past is moving to China willy-nilly simply "because it has low labor costs."
"SKU proliferation is not going to go away," Ferreira says. "Customers are not only asking for more SKUs, but they're asking for faster turnaround times and they're committing [to smaller orders]. So how I manage that across the global network is enormously difficult. It's much easier to do when I'm right there close to my customer."