Manufacturers Head Home

In previous articles, we have talked about United States manufacturers improving their work processes to the point that it makes more sense to do the production in this country and pull back the jobs from off-shore production.

A good example was Zytec Corporation with headquarters in Eden Prairie MN and production in Redwood Falls MN and Mexico.  After a large-scale effort to improve their processes and systems, they applied for the National Malcolm Baldrige Quality Award and the Minnesota Quality Award in 1990, winning both. As a part of the examination of their processes and systems, they took a close look at the total costs of production systems and found they could do the production with higher quality and lower total costs in Minnesota. They closed the Mexican plant and brought those jobs back home.

The February 8-12 issue of Bloomberg Business Week contained an interesting article titled, “Time to Head Home for Some Manufacturers” with sub-headings of “More countries are assessing the true cost of outsourcing” and “The U.S. is a lot more competitive than people realize”.

They talked about the true cost of ownership including factors such as intellectual-property risk, cost and time of travel to visit distant suppliers, and the negative impact of separating manufacturing from engineering staff back at headquarters. Other additional factors are level of quality, warranty costs, inventory carrying costs, cost of lower-response time, time to implement engineering change notices, management and administrative time consumed in acquisition of a suitable plant or supplier, negotiations, lawsuits in foreign countries, loss of public image over environmental and exploitation of child or other labor violations, etc.  All of these factors distract management from their primary responsibility of improving the performance and sustaining the future of their organization, therefore, providing job security for the workers.

The article further states that over the last several years, firms got caught up in the outsourcing trend without thinking through the total costs. Two factors that are given for outsourcing are cheap fuel and labor. According to the article, in the last ten years, oil has increased from $22.81 per barrel to $87.48 and the average labor cost in China has increased 15%. Labor costs are further negated by technology, which has driven the labor content of production to an insignificant percentage in some industries. The value of the U.S. dollar has also shrunk which has to be considered. The price of natural gas which is a big cost factor in some industries, is much cheaper in the U.S. compared to many of the off-shore countries being considered.

Another key factor that has a large impact on jobs is the tendency of suppliers to locate close to their customers’ manufacturing sites, which is a multiplying factor. So also is the factor that for every manufacturing job there are two to three other support jobs created locally such as in grocery stores, gas stations, local government, entertainment, etc.

The shift to bring manufacturing, and therefore jobs, home to America is not as fast as we might hope. Leadership is not always doing their job of looking at the total system and analyzing all the factors in order to optimize the production system.

It all starts with continual improvement of processes and systems, not just in manufacturing but also in engineering, personnel, finance, marketing, service, repair, sales, distribution, supplier relationship, quality, and last but not least, management. If they are diligent in doing that, they may find they are better off bringing the off-shore jobs back home.

The result is pride in work, success, prosperity, and job security for all.