What you don’t know can hurt you. Re-Shoring Data.
The number of articles from so-called experts is dizzying and the large majority focus on the patriotic aspect of this movement.
While it is undoubtedly patriotic to re-shore production and create US jobs, it is clear that companies are not taking an altruistic approach to justify their actions. As always it is all about the Dollars, as it should be. No self-respecting CEO would approach this issue as a Corporate Social Responsibility mandate from their board nor would they justify making such a drastic move without hard data on hand.
It’s all about the data.
When it comes to analyzing financial data linked to a complex supply chain, compounded by uncertain demand and volatile raw material markets, it can be nearly impossible to extract and analyze the relevant data short of having a Nobel Prize Mathematician on staff.
The type of data points relevant to such a study include Make-to-order Cost, Residual Value, Critical Fractile, Minimum Service Level, Fill Rate, Volatility Parameter, to name a few. I can see you scratching your head, and you are not alone… I am one of them.
If you are a large multi-national corporation and this data is available within your organization’s supply chain department, it is still unlikely you will be able to connect the dots with algorithms or any other readily available means.
If you are a small / medium size firm, acquiring this data is likely beyond your reach, yet that does not mean Re-Shoring is not to be considered.
In my opinion, there is no question that, given reasonable financial parameters, anyone can extract sufficient data that will help determine if a move to Re-Shoring is worth exploring. All it takes is common sense and REAL data.
The first critical data point necessary is TOTAL COST. Too often, companies overlook this important factor and compartmentalize the budgets related to their supply chain cycle.
Here are some of the critical data points that collectively contribute to total cost:
- Product design and product development
- With design in the US and product development in China, how many iterations are necessary to get to a production-ready prototype?
- In the last few years, product engineering in China has evolved to the point that some of these functions have nearly disappeared in the US. Is it feasible to move either Design or PE to the US?
- Tooling is often overlooked
- Testing (Safety, functional, quality, etc..) – are those duplicated?
- Is packaging design done in the US then transferred to China for integration? How many changes/adjustments are made?
- Are there various iterations of the product to serve various markets?
- As is often the case, packaging size and shape is an integral part of the marketing effort. It has impact on shipping cost, product design, product cost, etc.. Should that be considered a Marketing cost?
- You are producing in China to take advantage of the low labor cost. Is the total direct labor cost of the product bellow 15%? In which case the impact on total cost is nearly negligible…
- What is the total budget for production monitoring thousands of miles away?
- What is the impact of disruptions to the schedule?
- Are you using an agent? What’s his margin?
- Does cheap tooling cost equate to poor quality, down time and decreased life expectancy of the tooling?
- Are quality issues, requiring re-work or scrapping, properly accounted for and allocated to product cost?
- Your production is thousands of miles away from the nearest customer. Is that sensible given the volatility of cost in the transportation industry?
- Long lead-times and unforeseeable delays are unavoidable when producing far away. What is the associated cost to this utter lack of flexibility?
- What about raw material supplies? How far up the chain do you operate? How much control do you have?
- Is cost related to product changes and alterations properly allocated back into the product cost? (late penalties from customers, additional transportation charges, etc..)
- How secure is your IP?
- Is the tooling usage closely monitored? Factories are notorious for producing extra parts, undetected. Use your imagination as to why they do this…
- Do you truly have control over the quality of raw materials used?
- Is the testing reliable?
- Do you have a plan on how to deal with corrupt practices?
- Is staff travel cost computed into the product cost? What about sourcing activities, are they amortized amongst the departments?
This is not an exhaustive list, but nevertheless it is a good start.
All this to say that, when discussing Total Cost, it is necessary to dig a lot deeper in order to extract and quantify relevant data.
The process of mining for data can be a deterrent in itself, but it is solvable. My experience tells me that one of the biggest factors in determining the viability of altering the Modus Operandi of a company is internal inertia. Nearly two generations of employees have been educated to automatically look to Asia for answers related to Supply Chain, while the industrial tools in the US have atrophied over the years of off-shoring. Throwing the process in reverse can take years but I believe it is inevitable.
Markets are dictating the need to be more flexible, react to trends faster and mitigate the fluctuations affecting planning, all leading to the need to maintain a supply chain that is close by and capable of turning on a dime.
With labor cost in China soon matching that of the US and Low Cost alternatives not being mature enough to capture Chinese manufacturing, it is inevitable that Re-shoring will become a number one priority for any number of US and European based companies. Their ability to properly compute their actual Total Cost will be an absolute necessity for making the right decisions.
In the last few days, I have had the pleasure to meet Hary Moser, founder of the Reshoring Initiative and Suzanne De Treville, Professor of Operations Management at the University of Lausanne who are both intricately involved in the creation of a useful cost calculation tool involving Total Cost and Demand Based variations. I am excited at the prospect of being helpful in this endeavor by assisting in the design of a tool accessible to all.
Bearing in mind that Total Cost concepts are not exclusive to Re-Shoring initiatives but are in fact useful to all Supply Chain executives and companies involved in managing supply chain.
In my next Newsletter, I will discuss alternatives to integral Re-shoring as well as the impact (and solutions) on Hong Kong and Chinese based OEM manufacturers.
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