Re-Shoring: Bringing Business Back Home

A recent article in The Economist acknowledges an emerging trend toward re-shoring: “…a growing number of multinationals, especially from rich countries, are starting to see the benefits of keeping more of their operations close to home.” Reasons include simplifying supply chains and minimizing risk, cutting transportation costs, and reducing inventory. Let’s take a look at some terms that are coming up in the news, and examine what they really mean for US operations and supply chain.

What is off-shoring?

Before we define off-shoring, let’s look at the difference between off-shoring and outsourcing, because often these two terms are used interchangeably, though their meanings are quite different. Outsourcing has been around for many years. Any company who uses an outside company to process their payroll, for example, is outsourcing that task. Other common examples are janitorial services, landscapers and off-site laundry services used by restaurants.

Off-shoring occurs when a company moves an operations function, like manufacturing of IT services, to an overseas location. Cost and proximity to the customer are the two biggest reasons for off-shoring.

The US has been off-shoring for a long time. When I was a kid, a lot of products were built in Puerto Rico. At that time, quality standards were low for products made in Asia, and a Japanese-made transistor radio was the epitome of cheap.

Going to China

But around 1990 US companies began shifting production to China. When I paid a visit to a manufacturing facility north of Hong Kong in 1993 it was like going to a third world country complete with armed guards at the airport, no paved roads, and a big factory out in the middle of a rice paddy. Cheap labor was the primary reason for off-shoring to Asia in the 90s, but these days some companies move production to China to be closer to their customers: the expanding Chinese middle class.

Where To Next?

Now we’ve added Mexico, India and Eastern Europe to the off-shoring mix, particularly for metal products in the Czech Republic, Hungary, Romania and other former Soviet states. Chinese labor rates are rising, and production is shifting to other areas, like the Philippines and other Southeast Asian countries. Here are four basic considerations for off-shoring (or re-shoring):

  1. Is off-shoring or re-shoring congruent with your strategy? This has to do with the nature of your product, the location of your customers, whether you are a highly innovative organization, and whether your products are slow or fast clock speed.
  2. What is your demand structure? Is it consistent or highly variable? Highly variable demand is very difficult to manage if you have long lead times, regardless of where production is.
  3. How flexible do you need to be? Operations needs to be so flexible that if you can sell a product, you are able to ship it, with high inventory turns and low cost. Highly flexible suppliers and supply chain make it possible.
  4. Look at total cost of ownership, not just part cost. For more on TCO, check out my article on the topic from last year’s eSide Supply Management. Social and environmental considerations are a part of this.

© Rick Pay, 2011 – All rights reserved

No Sales Forecast? – Make One Up!

Many inventory and production planners rely heavily on a sales forecast as the foundation to their inventory planning and MRP process. In fact, an accurate forecast is one of the three keys to MRP success, the other two being accurate Bills of Materials and accurate inventory balances. The only problem is that accurate forecasts are an oxymoron at best, and at worst, sales doesn’t produce one at all.  So what does the planner do? I say, make one up.

Making a Plan in the Absence of an Accurate Forecast

Wait, do I really mean just make one up out of the blue? Of course not. There are three approaches to developing an accurate plan when a forecast is not available.

1. Go talk to sales.

Now I know that seems to be dangerous ground, but sales really does have the best interest of the customer in mind, and if they can help provide the means to ship on time, it is in their best interest. Go talk to them and see what the market is doing. See if it is possible to get forecasts from key customers, and get at least an estimate as to whether sales levels will be growing this year and by how much.

2. Take a look at the past.

History will tell you a lot about sales flow, whether there are spikes or seasonal demand, and how much growth there has been. A simple stacked line graph of the past 36 months revenue will tell you a lot about sales history.

3. Establish flexibility.

It is your job to ship on time, regardless of the quality of the inputs you have. Therefore, if you don’t have a forecast, you need to develop flexibility in the supply chain so you can respond to the surprises that come your way.  Having short supplier lead times, flexible production or warehouse operations, and the ability to flex your labor using temps and overtime all contribute to flexibility.

For more on managing labor for maximum flexibility, check out my podcast here.

Go With Your Instincts

Finally, you can use a dash of professional gut feel to finalize your plan. You see the day-by-day goings on and your key team members will have input that can help you. If you make up a forecast, I would expect it to be pretty close to what actually happens. That, along with communication with sales, a look at history, and flexible supply chains will result in the plan that can provide a high level of customer service.

© 2011 – Rick Pay – All Rights Reserved