The Boeing Co.
Headquartered in Chicago, The Boeing Co. employs more than 160,000 people across the United States and in 70 countries. With major operations in the Puget Sound area of Washington State, southern California and St. Louis, it is the world’s largest manufacturer of commercial jetliners and military aircraft combined.
Courtesy Archstone Consulting LLC.

Increasingly, manufacturers are turning away from producing offshore and returning production to the U.S.

Although low offshore production costs once appeared attractive, other long-distance factors have reduced the perceived cost advantages to a fraction of the expected savings. Another problem is that manufacturers that rely on distant suppliers lose control over many factors that hamper their rapid response to customer needs, and their ability to pursue product and service customization strategies. Also, several global economic trends are changing the playing field to diminish the attractiveness of offshore production.

To survive in our global marketplace, manufacturers must determine the most efficient and cost-effective production and supply strategies. This requires an exhaustive and accurate analysis of all the cost drivers affecting a company’s ability to deliver quality products, service customers and pursue business objectives.

Changing cost components
Many manufacturers looked to offshoring production and supply functions as a way to stay competitive with global competitors. However, the same factors that made offshoring an attractive strategy for reducing costs have shifted dramatically, and now are eroding many of those savings. As a result, on-shore and near-shore production is becoming more viable and competitive for a significant number of producers.

In a June 19, 2008 article, Business Week’s Pete Engardio pointed out how the economics of global trade are starting to tilt back in favor of the U.S. Since 2002 the dollar has plunged by 30% against major world currencies and is falling against the yuan. Wages in China are rising 10% to 15% annually. And, spiking oil prices are driving up shipping rates. Since 2000 the cost of sending a 40-ft container from Shanghai to San Diego has soared by 150% to $5,500. If oil hits $200 a barrel, that could reach $10,000, projects Toronto financial-services firm CIBC World Markets.

China can be risky
AMR Research, a research firm focused on the global supply chain and its supporting technologies, recently released a report that found the risk of sourcing and manufacturing in China is increasing rapidly as a result of intellectual property infringement, quality failures and regulatory compliance issues.

“Concerns with China’s product quality and safety record continue to rise from quarter to quarter,” said Noha Tohamy, vice president of research at AMR Research and author of the report. “This will ultimately limit China’s play in high-value, labor-intensive manufacturing outsourcing.” The report showed that companies are continuing to look near-shore for sourcing and manufacturing, with three times as many respondents planning to increase activity versus decrease.

China contributes the most risk in 12 out of the 15 categories of risk identified in the report. Out of the 12 risks, respondents cite China as contributing the most to intellectual property infringement (said 59% of all respondents), product quality failure (55%), and regulatory compliance (34%). Last quarter, China contributed the most risk in 10 out of 15 categories.

Supplier failure topped the list of most significant supply chain risks this quarter. In the current economic situation, 38% of respondents identified it as the top risk, with only 8% expecting the risk to decrease over the next year.

Thirty-six percent of respondents cited commodity-price volatility as the second highest risk, showing that manufacturing executives may be happier with stability over low prices.

The No. 3 risk was internal product quality failures, much of which can be attributed to manufacturing in China.

Lower consumer spending as a concern dropped 8% and a majority of respondents (66%) expect consumer spending risk to stabilize or decrease over the next year.

In another survey — the MFGWatch Survey from MFG.com, a global online marketplace for the manufacturing community — more than 200 manufacturing purchasing professionals and engineers were asked about geographical sourcing preferences. Sixty-four percent preferred to source with North American manufacturers, 19% favored China for their sourcing needs, and 7% conducted their sourcing business in Europe. The remaining 10% were sourcing in South America, Africa and other countries.

The Wake-Up Call
Although equipment from overseas may appear similar to many domestic machines, and at a lower price, the bottom line is: Does buying an import really save money?

When any capital expenditure is viewed as a long-term investment, the answer usually is no. Problems arise for many companies with service and parts availability after the sale of that “inexpensive” import. Should there be a maintenance or repair issue, the margin of cost savings can be offset quickly by increased downtime and lost productivity.

According to Steve Schurman, Director of Sales and Marketing for Pacific Press (www.pacific-press.com), “On price alone, offshore equipment may seem attractive at first glance. But, when you consider the faster field service, parts availability and track record of most domestic suppliers, there’s really no comparison.”

Many offshore suppliers simply don’t have repair personnel readily available. By contrast, most domestic suppliers back their equipment with on-staff employees responsible for needed service and repairs.

Parts availability and shipping is also faster with domestic suppliers. Offshore manufacturers usually rely on their dealers in the United States to carry a very limited selection of parts. Transit time for parts delivery takes longer as well, delaying critical parts replacement or repairs even more. Compared with overseas equipment sources, the result is domestic machine repairs can be completed much more promptly and efficiently. For the majority of companies, this helps to reduce equipment downtime and disruptions on the production line, ultimately enhancing the plant’s productivity.

Recently, Archstone Consulting conducted an in-depth survey of 39 senior executives from U.S. and European- based manufacturers to assess the evolving footprint of global manufacturing and supply networks.

The study reports that companies are contemplating the re-establishment of manufacturing domestically, amid rising costs and other strategic challenges within the offshoring model. As companies reassess their manufacturing and supply chain strategies for today’s global economic environment, the trend may create significant job opportunities in the U.S.

“For years, the concept of offshoring, or moving production and/ or sourcing operations to a foreign country, has been the mantra of any supply chain manager looking to cut costs,” said John Ferreira, Principal and Global Manufacturing Industry Practice Leader at Archstone Consulting. “Now, amid volatile oil prices and an uncertain global economic future, this analysis no longer is a certainty. Furthermore, companies that commit to domestic manufacturing can spur much-needed improvements in customer service, innovation and job creation – especially when servicing the large domestic market.”

According to the Archstone Consulting survey, 40% of manufacturing executives report experiencing an increase of 25% or more in “core” direct costs on offshored supply — materials, components, logistics and transportation — over the last three years. Almost 90% expect further significant, ongoing price increases of 10% or more over the next 12 months (11% of manufacturers report that they expect core offshored costs to increase by over 20%).

While these trends will always have short-term fluctuations, the longer-term trend line, according to many economists, points to two developments:

• The re-emergence of the U.S. and some near-shore manufacturing sources as attractive supply markets.
• The potential for the local U.S. supply base to regain some of the business lost to offshoring in recent years.
As the hard costs of offshoring continue to rise — though ups and downs will occur — the impact of numerous soft costs rarely included in offshoring evaluation models is becoming painfully obvious. For example, consider:
• The lost visibility into long supply chains resulting from offshoring that reduce a manufacturer’s ability to sense and respond to local market and customer demands (a potential offsetting factor is increasing working capital).
• The necessity to manage container loads of goods driving a focus on larger lots and more precise forecasting, rather than on mass customization as a competitive differentiator.
• The reduced ability to use supply chain operations to help drive a competitive advantage by providing customers more customization, increased SKUs and more flexible ordering patterns.
• The cost of resolving product quality issues — including loss of materials and/or costs to ship products back for remanufacture — delivery cycle delays, and relationships with vendors and customers put at risk.
• The need for extra warehousing and related costs to support high inventory levels because the long supply chain does not permit proper responsiveness to market needs.

A realistic cost model
Unfortunately, more than 60% of manufacturers surveyed by Archstone Consulting apply only rudimentary totalcost models, ignoring cost components that contribute up to 20%, or more, to the overall cost of offshored production. Many manufacturers look only at the most easily available cost components and therefore see a distorted picture of the relative costs of different manufacturing or sourcing options.

Awareness of the need for a more sophisticated total-cost model is emerging among manufacturers. Nearly 70% of manufacturing executives surveyed view total cost analysis of options as one of four key capabilities needing development to rebalance their manufacturing and supply networks. They also see as important a comprehensive manufacturing and supply strategy, changing internal mindset to a longer-term, total cost view, and the ability to increase supplier capability and capacity.

Archstone Consulting advises that a best practice, total cost model should be comprised of at least the following key cost elements:

• Supplier price and terms.
• Delivery costs, including logistics, region/country-specific costs, and cost of quality—validation, communications, performance impact, etc.
• Operations and quality costs, including in-plant material inventory and handling; inventory maintained in the supply chain and satellite warehouse operations; and overhead.
• Customer-centric supply capabilities.
• Other costs, including such standard costs as risk and local tax incentives, and situational costs, such as procurement staff, broker fees, infrastructure technology and facilities, exchange rate differentials, and tooling and mold costs.

A total cost analysis conducted for domestic, near-shore and offshore options will result in an understanding of global manufacturing and supply opportunities and trade-offs.

An alternative to solid carbide
The return of offshore production to the U.S. is good news not only for the machine tool industry, but also for the overall U.S. economy. A recent survey of a nationally representative sample of Americans, commissioned by Deloitte LLP, showed that the majority of respondents (71 percent) view manufacturing as a national priority. “Americans clearly still believe that manufacturing remains the backbone of the economy,” said Craig Giffi, Deloitte LLP vice chairman and U.S. Consumer & Industrial Products industry leader.

Heller Machine Tools
Heller Machine Tools built more than 60 large-capacity HMCs in Troy, Mich. last year.
Photo courtesy Heller Machine Tools

Keeping Close to Customers Pays Off
The customers of Heller Machine Tools are realizing the benefits of the company’s increasing focus on using its U.S. operations to manufacture advanced CNC machines. “Our German parent, Gebr. Heller Maschinenfabrik GmbH in Nrtingen, recognized the advantages to building in the North American market, and the decision is paying off for the company,” said Robert Pelachyk, CEO at Heller in Troy, Mich. He pointed out that Heller saw that building in North America helps keep its costs competitive, and reduces shipping cost and shortens delivery times.

“We are a relatively low-cost country, in global terms, right now. And when you consider Michigan’s skilled work force with the euro-dollar relationship, you can see that Heller gains a big cost advantage over its competitors,” pointed out Vince Trampus, Heller Vice President - Sales. “This works directly to the benefit of our customers who get highly regarded German machine tool technology built locally into reliable and maintainable systems designed and serviced by Americans,” he said.

Heller US in 2008 assembled more than 60 of its advanced, large-capacity horizontal machining centers used by automotive suppliers and powertrain manufacturers to produce key components.

To accomplish this major undertaking, Heller developed a network of qualified suppliers in Michigan and Canada to participate in building its turnkey manufacturing systems. Heller is sourcing a substantial portion of the machine components and subsystems in the United States.

In addition to the benefits Heller’s customers realize because the company is headquartered close to their markets, the local Michigan area has benefitted also. One of the effects of Heller’s creation of a supplier network has been the employment of more than 800 Michigan-area skilled personnel through these companies.

“The Detroit area is a rich pool of skilled manufacturing talent that Heller has tapped to its advantage,” said Pelachyk. “Although we are the largest manufacturer of horizontal machining centers for heavy-duty production in the United States, we outsource much of our need for machine components and subsystems to local providers. This includes castings, fabrication and machining, fixtures, tooling, sheet metal and control systems.”

The result of this initiative at Heller is to create employment and value in the United States rather than simply assembling machining centers from elsewhere. Last year, skilled people were added in tool and fixture design, controls design, and assembly in addition to the supplier network.

The company is also getting support from the local county government and Automation Alley, Michigan’s largest technology business association, designed to drive growth and economic development by focusing on workforce and business development initiatives.

“The fact that an American company is building highvalue products here in Oakland County provides a big boost to the local economy when we really need it,” said L. Brooks Patterson, Oakland County Executive, on a visit to the Heller facility. Patterson is also the originator of the Automation Alley concept.

Pelachyk feels that the federal regulations for higher mileage, cleaner vehicles will result in new opportunities for the machine tool industry and will pump new life into the auto industry. Diesel engine manufacturing – Heller’s core customer base – will undergo much innovative redesign to meet emission requirements.