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The Latest Global Hotspot: The USA

Sept. 12, 2008
Sometimes the best offshoring decision is to shift production back home.

As global socioeconomics change and as U.S. manufacturers become more efficient through the use of lean methodologies, flowing production back from China to the United States can be a smart business move, says Ken Koenemann, value chain practice leader with TBM Consulting Group Inc. "We always advise manufacturers to look at the total landed cost of products when manufacturing offshore," he points out. "It's not enough simply to consider whether labor is cheaper when manufacturing in a place like China. Manufacturers must also consider the transportation costs and the cost of keeping excess inventory on hand to offset longer lead times that result from the need to transport products over great distances."

As fuel costs rise, many manufacturers are finding that outsourcing margins are eroding, Koenemann adds. "Not only have shipping costs increased dramatically, but in an effort to save fuel, many shipping companies have slowed their ships down," he explains, "which adds even more to lead time and requires manufacturers to have even greater inventory on hand."

Companies with a global footprint can respond to these issues by moving production closer to the customer and reevaluating the production process itself to see if they can come up with a more efficient -- leaner -- way to produce that product once they move it, Koenemann says.

According to Paul Adelberg, retired vice president of lean technology for pool equipment manufacturer, Hayward Pool Products, "When a company goes offshore, that decision needs to be evaluated continuously. Companies should not allow themselves to be boxed into a corner so that they can't pull product back when things change. They must consider currency, exchange rates, freight and the marketplace when going offshore or choosing to come back."

As Adelberg sees it, "If the margins aren't significant, then it isn't a prudent decision to take that product offshore in the first place."

However, adds Koenemann, "Even when the benefits of offshoring products outweighs the risks, things like labor costs, exchange rates and transportation costs change, and even products that once enjoyed high margins might benefit from reevaluation and possible flowback to the United States."

Hayward, which manufactures some of its products overseas, evaluates offshored products all the time and acts accordingly. "Because of our lean initiatives and kaizen methodologies, Hayward is constantly becoming more efficient," says Adelberg. "If we pull a product out of China, you can bet we will bring it back here," he adds. "We're challenging our plants to be competitive with China's prices. Our people want to make the products here and they have to show that they can do so cost-effectively. And in a lot of cases we're closing the gaps."

As China's economy expands and its workforce earns more money, it will become less attractive for U.S. companies to go there, Adelberg notes. What's more, "we are not likely to return a product to production in China after moving it back to the United States. We're getting better all the time, and as long as we continue to make improvements in our efficiency and in doing more with less, there would be no reason not to keep production at home. It's another reason that we have to continue to stay with our kaizen programs and with our lean journey to be the most effective manufacturer in our industry," he says.

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