A decade or so ago, many American and European manufacturers were trying to figure out how to better compete in a global market. Executive boardroom discussions centered on finding ways to cut operational costs. Lean initiatives, a focus on innovation or strategic technology investments might have solved the problem. But, that might have taken years to implement. Instead, focus was placed on outsourcing production processes, believing that would reduce the cost of labor by moving production to low wage emerging economies, like China, India and Eastern Europe.
Motivated by creating shareholder value, the decision to move manufacturing offshore was a management philosophy that has been embraced by virtually all of the largest firms. In hindsight, however, to some it might have only been a short term win.
Manufacturing Is Not a Black Box
It turns out that those making the decision to offshore did not really understand how manufacturing can be the heartbeat of a business. It is where a company’s products are actually made, so it surely can’t be separated from design, engineering or even marketing. The seamless flow of activity and ideas between business lines is the lifeblood of an organization. In order for a company to compete, stay alive and thrive, it must honor this interdependency.
Traditionally, the thought process has been to first get the specifications right and then monitor quality control. What did it matter where it’s made? Well, it turns out that it does, which has led to the realization that manufacturing is not just a “black box.” To start, not all customers are the same, so not all products should be made the same. Local preferences matter. Further, as customer preferences change, products and processes evolve, and new technologies are introduced, manufacturing must respond – and often quite quickly.
Charles Fishman’s recent article in The Atlantic magazine provides the best explanation: “For years, too many companies have treated the actual manufacturing of their products as incidental – a generic, interchangeable, relatively low-value part of their business. If you spec’d the item closely enough – if you created a good design, and your drawings had precision; if you hired a cheap factory and inspected for quality – who cared what language the factory workers spoke? This sounded good in theory. In practice, it was like writing a cookbook without ever cooking.”
“As products change, as technologies evolve, as years pass, as you change factories to chase lower labor costs, the gap between the people imagining the products and the people making them becomes as wide as the Pacific,” Fishman writes.
Changes in Wages, and More
What these offshore pioneers could not predict was the rising transportation costs, the lack of visibility into quality control, and the inevitable wage increase.
The Boston Consulting Group has reported that the average Chinese factory worker’s wage and benefits increased by about 15%- to- 20% per year between 2005 and 2010, which slashed China’s labor-cost advantage.
In addition, a weak dollar has now made U.S. exports are more competitive. Other currency fluctuations have had similar impacts on manufacturers operating in other countries too. And, perhaps more importantly, “the plummeting price of natural gas – which can be used to make a vast number of products, including tires, carpet, antifreeze, lubricants, cloth, and many types of plastic – is now luring key industries to the United States,” a new MIT Technology Review article revealed. “Just five years ago, natural-gas prices were so high that some chemical manufacturers were shutting down U.S. operations. Now the ability to access natural gas trapped in shale rock formations, using technologies such as hydraulic fracturing and horizontal drilling, has lowered American prices to a fraction of those in other countries.”
We are now entering a new manufacturing era that requires a different kind of executive thinking. Location is key, but it is not based on being in low wage countries, rather, being closer to the customer. Technology advancements in robotics, 3D printing, and manufacturing software will be the catalyst for transforming how products are made, and economic shifts will require efficiency and operational agility.
The point is that things change. And, despite consulting with some of the brightest minds, no one can accurately predict the future. Just as a cost or competitive advantage appears one year, it can disappear the next. Change is the only constant, which means that flexibility to change is probably one of the core survival skills necessary to survive and thrive.
How well can your organization adapt to change? Your answer may well determine your survival.