Process and Manufacturing, Part 3 (Back in the US)
Steve Denning offers interesting analysis in his article on Forbes, “Why Apple and GE Are Bringing Back Manufacturing“, as well as a harsh judgment against out-sourcing, calling it “the most short-sighted business decision in history”.
He recounts that Apple is spending $100 million on bringing a Mac manufacturing line back to the US in 2013, and that GE is spending $800 million to re-establishing appliance manufacturing in the US. He cites additional examples from an Atlantic article: “Fishman reports that Whirlpool is bringing mixer-making back from China to Ohio. Otis is bringing elevator production back from Mexico to South Carolina. And Wham-O is bringing Frisbee-molding back from China to California.”
Amazingly, there are some pricing elements that are rewarding this trend- natural gas prices being much lower in the US than in China, and transportation costs having risen greatly over the last 20 years. Also, “Chinese wages are five times what they were in 2000 and are expected to keep rising rapidly.”
The crazy thing about the perception that you couldn’t manufacture in the US, is that as of last year, the US was still the largest manufacturer in the world (with China rapidly closing ground).
But one of the best reasons to manufacture here, is because design and marketing are happening here:
GE’s water heater as originally designed for manufacture in China had a tangle of copper tubing that was difficult to weld together. In the past, GE had been shipping the design to China and telling them to “make it”. Confronted with making the water heater themselves, they discovered that “in terms of manufacturability, it was terrible.”
So GE’s designers got together with the welders and redesigned the heater so that it was easier and cheaper to make. They eliminated the tangle of tubing that couldn’t be easily welded. By having those workers right at the table with the designers, the work hours necessary to assemble the water heater went from 10 hours in China to two hours in Louisville.
This all comes from the mistake of treating manufacturing as “incidental – a generic, interchangeable, relatively low-value part of their business.” In much the same way that many corporations have come to view labor as generic, interchangeable, relatively low-value part of their business. The depth of this mistake should be apparent. While any one person can be replaced, when taken as a whole, organizational learning is incredibly important to the value of a process, a factory, or a company.
This focus on only the measurable costs – labor, primarily – and ignoring the hidden costs of design optimization and time to market has cost US companies and manufacturers greatly. And bringing manufacturing back is going to be expensive.
Haydn Shaughnessy, of Forbes, asks the question: “Does it Matter That Apple and GE Are Bringing Back Manufacturing?” Good question. Is it too little too late?
The answer seems to be, first of all, that hardware and manufacturing don’t create the jobs they used to create. So, while it might matter that companies are bringing manufacturing back, it won’t stop the decline in manufacturing jobs overall. But does it matter to the companies that are bringing manufacturing back to the US? It does if they can get the kind of benefits cited by Fisher’s Atlantic article.
I was surprised to learn that even apparel manufacturing is looking at the US again. American Giant, for example.
American Giant is an apparel retailer that makes all of its clothes in California. It sells high quality basics for men — sweatshirts, t-shirts and knits. One of its strengths is its compressed supply chain, which allows it to keep prices down.
“There’s a phenomenal disconnect between what the consumer pays and what’s actually going into the product,” says Winthrop. ”Consumers who want to get quality American-made stuff are asked to pay premium for that. We’re focused on closing that gap down.”
Not having your capital locked up on inventory that is slowly crossing the pacific has to be a good thing. Inventory turns are a key metric for apparel retailers, and having shorter supply lines is another way to reduce inventory costs.
As a process guy, I look at the benefits to the product design process:
- Faster feedback loop from the “practical” side of your operation – manufacturing and the factory floor. Both product improvements AND defects can be detected and implemented/fixed faster.
- Faster feedback loop from your customers, who live down the street rather than over the ocean.
- Freeing up capital to invest in other areas of the business rather than in inventory in cargo ships.
- Causing the product design process to consider how something is put together as part of its implicit cost.
Exciting times in manufacturing await: 3D printing, higher transportation costs, combined with lower(?!) energy costs… It will be a very interesting decade ahead.