Basic Business Cents
Manufacturing is Coming Home
by Lou Schultz, SCORE counselor
Original publish date 07/2009 (#14)
Dr. Deming once related that in 1910, North America made half of the manufacturing products of the world. Then with mass production techniques, we increased our power and influence with our production capability. But in the last 50 years, with improved transportation and communication technology, many well-intentioned procurement managers decided they could get lower-cost suppliers from foreign sources.
But at what cost to the total operation? We have lost much of our production leadership and know-how. Transportation costs have increased with the cost and uncertainty from the oil industry volatility. Problems with communication, travel to sort out problems, obsolescence, currency exchange, rework, warranty claims, low quality, and less customer satisfaction all add to the total cost.
Added to these problems is the transfer of technology without compensation. Many companies are now finding their products sent overseas for production are being copied, produced, and sold under another name.
The rationale most often given for going "offshore" is lower cost labor. But a close look at the percentage of labor cost compared to total cost is now small and getting smaller. For some industries, like clothing where the labor cost is still high, going offshore for production might be a good decision. But for most industries that is not the case and if a good analysis of the total cost of production and customer satisfaction were made, production would stay at home.
Several years ago a manufacturing company in southern Minnesota had a production plant in Mexico in addition to their home plant. They initiated a vigorous program of quality improvement based on the teachings of W. Edwards Deming. One of his major points was to optimize the total system to accomplish its aim and with the improvement of the work processes at the Minnesota plant, they found they could produce the Mexican parts better and cheaper in Minnesota. Based on the total systems view, they closed the Mexican plant and moved the jobs back to Minnesota.
There is evidence that American industry is getting smarter about looking at total systems cost. Enterprise Minnesota magazine, May/June 2009, cited a study by Archstone Consulting saying that 90 per cent of the manufacturing companies they surveyed are contemplating, or have already begun, moving offshore operations back to the United States. This is very good news for customer service, innovation, job creation, and our economy in general.
Not all see the big picture. As Dr. Deming once said, "Learning is not compulsory. Survival is not compulsory."