The Future of American Manufacturing – Part Two What is the future Outlook?

In order to stay competitive in the global economy during the past 20 years, manufacturers have extended manufacturing and supply operations to low-cost sources globally, embraced innovations in automation and cost management, begun transforming themselves into lean enterprises, and served customers in emerging markets.  Now, customer demands are changing.  They want more flexibility, more emphasis on unique, customer-specific products or variations, more rapid delivery/response, proximity to vendors, and consistent high quality.  These changing demands are fostering several major trends that are creating a brighter outlook for American manufacturers.  They include:

Reshoring Initiative

The Reshoring Initiative is a way to return manufacturing jobs to the U. S.  Harry Moser, Chairman Emeritus off Agie Charmilles in 2010, founded initiative.  The Association for Manufacturing Technology, Association for Manufacturing Excellence, National Tooling & Machining Association, Precision Metalforming Association, and the Swiss Machine Tool Society support the Initiative.

In June 2008, a survey by SAP and Industry Week Customer Research published showed that the top objectives of conducting business overseas were:

  • Increase overall market share
  • Increase profitability
  • Reduce Costs
  • Provide a superior customer experience
  • Increase overall revenue

The survey showed that companies with >$1billion revenue met 58-75% of their objectives while companies with <$1 billion revenue only met 37-47% of their objectives

However, a survey of North American manufacturing executives released in early April by Accenture entitled “Manufacturing’s Secret Shift” found:

  • 61% are considering shifting from offshore to closer to centers of demand
  • 59% intend to pursue new supply options
  • 67% proximity to customers markets top factor
  • 57% noted increased cost of logistics & transportation costs

The authors noted that software, electronics and telecom are lagging this trend.  Software doesn’t seem to be rebalancing its supply chain.  India is the most attractive relocation due to large number of highly skilled workers at lower wage rates who speak fluent English.  China is forecast as the hub for the Asian market for the telecom industry.  Electronic equipment will continue to be outsourced to China.  This is compatible with number 5 of the 2011 Top 10 Supply Chain Predictions — “In the context of taking a broader view of total cost, supply chain organizations will gain a new appreciation for shortening lead times through profitable proximity sourcing strategies.”  The reasons are:

  • Improve overall service levels
  • Retain key customers
  • Focus on the “costs” of long lead times
  • More balanced approach to global sourcing

A January 2010 survey by Grant Thornton of Supply Chain Solutions survey showed that sourcing is moving home slowly.  In 2009, 20% of companies brought sourcing closer, of which 59% reshored.

The main reasons for reshoring are:

  • Component/material prices increasing
  • Rising labor rates in China – 15-20% year over year
  • Transportation costs increasing
  • Political instability
  • Exchange rate variables as U. S. dollar continues to drop
  • Disruption from natural disasters

“As energy costs go up, transportation costs rise, and the distance that goods travel begins to matter,” said Paul Bingham, a trade and transportation specialist at Global Insight, a financial analysis firm in Massachusetts.  “For low-value products that take up a lot of space, like furniture, for example, transportation costs can get quite high,” said Bingham. “And if you’re not saving enough money from using low-cost labor, it makes sense to bring your production lines closer to home.”

Thomas Murphy, RSM McGladrey’s executive vice president of manufacturing and distribution said, “Manufacturing will be regionalized and the countries with the raw materials will drive a lot of manufacturing investment. Energy will be a key driver of what is located where.”

While all countries are subject to unexpected natural disasters, the 7.9 magnitude earthquake that struck the Sichuan province of China on May 12, 2008, and the 9.0 earthquake in Japan that occurred on April 7, 2011, generating a devastating tsunami and radiation exposure from damage to the Fukushima nuclear plant have exposed the problem of how vulnerable the global supply chain is to major disruptions.  The Japanese disaster has caused a major disruption in the supply chain, especially for automakers.  “Toyota says its vehicles contain 20,000 to 3,000 parts, coming from about 600 suppliers.  And the chain doesn’t stop there.  The 600 suppliers themselves rely on hundreds of other companies to provide raw materials and components.”

“Inshoring” and “Nearshoring”

“Inshoring” refers to a company from a foreign country setting up a plant in the United States, and “nearshoring” refers to the same type of company setting up a plant in the nearby location of Mexico. For companies from India, the reasons for this “reverse offshoring” trend include the declining exchange rate of the Indian rupee versus the dollar, the decline in H1B visa availability, and the desire to be closer to their U.S. customer base. Other factors are the labor shortage in India for technology professionals and the tremendous upward pressure on wages.

For example, Wipro Technologies, India’s third-largest outsourcing company, set up an “inshore” development center in Atlanta, GA, where it will work with the University of Georgia to educate and train nearly 500 employees. The Bangalore-based firm also established a “nearshore” location in Monterrey, Mexico.33

San Diego’s CONNECT organization has recognized the current trend of bringing operations closer to home to reduce costs and become more flexible, responsive and adaptable in the constantly changing marketplace.  CONNECT calls it “nearsourcing” rather than “nearshoring,”and launched a new industry cluster in December 2010 for technology manufacturers to help them connect with local and regional sources for products and services.  CONNECT is collaborating with the San Diego East County Economic Development Council to utilize the EDC’s well-established www.connectory.com database of manufacturers to facilitate the connections.  CONNECT put on a program May 3, 2011 on “Nearsourcing vs. Offshore:  What it is and What are the Initial Considerations for Technology Companies.”

Lean Manufacturing

The application of lean manufacturing techniques is also helping to bring manufacturing back to the USA.  One is example took place at General Electric’s appliance plant in Kentucky.  While doing a Kaizen event, employees came up with better way to assemble the GeoSpring water heater made in China.  General Electric’s U.S. team changed the design to have a control panel that will swing open like a glove box to connect 17 electric connections instead of having to squeeze fingers through tight spaces behind the control panel as was being done in China.  They also changed the assembly process so that the 20 lb. compressor will be attached while the GeoSpring unit is in horizontal position instead of upright position.  The GeoSpring water heater was brought back to Kentucky plant this year, creating 400 new jobs.

Luke Faulstick, COO of CJO Global, recently told the TechAmerica Operations Roundtable, “Any company on the lean journey should rethink offshoring.  If you are doing the ‘one part pull’ of lean, then you don’t need to offshore.  We have reshored our PCBs to our plant in South Dakota, our textile products to our plant in North Carolina, and our implant parts to our plant in Texas.  We have cut our inventory buffer down from 12 weeks to two weeks.”

A report titled “What’s your plan for 2025?” released by Accenture in October 2010, identified the winning manufacturing attributes for the next 15 years as being:

  • Customized products/services to serve customer’s unique, specific needs and priorities
  • Global locations to balance regional demand with regional supply
  • Supply chain flexibility to support diverse channel and customer needs
  • Agility on shop floor and beyond
  • Negotiate and “partner” for scarce resources

This same report stated that the top challenges for manufacturers would be:

  • Production skills, workforce availability
  • Transportation costs
  • Supply base and supply base access
  • Capital Required
  • Employment related issues
  • Local/government content requirements
  • Government incentives
  • ·         Local taxes

The Accenture report concluded that the following capabilities are needed to rebalance manufacturing within the United States vs. outsourcing offshore:

  • Accurate Total Cost of Ownership analysis of options
  • Comprehensive manufacturing and supply strategy
  • Skills and knowledge of staff
  • Ability to increase supplier capability and capacity
  • Changing internal mindset for longer-term total cost view
  • Improved understanding of local market capabilities

Finally, the future of American manufacturing holds much promise as new technologies provide opportunities.  Just a few of the new technologies to be further developed are:

  • Nanotechnology
  • Biomimicry
  • Bio fuels
  • New processes for PCB industry
  • New trends in rapid prototyping
  • Electro forming

Each month, I see examples of the inventiveness, ingenuity, and entrepreneurial spirit of Americans at the San Diego Inventors Forum.  Our SDIF steering committee is helping these entrepreneurs and inventors find sources for their new products in the United States.  This provides me with the best hope for the revival of American technology-based manufacturing and services for the future.

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