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Fastener Technology International October / November 2011 : Page 26

Reshoring Manufacturing Can Increase Your Competitiveness by: Harry Moser President and Founder Reshoring Initiative 21110 Buffalo Run Kildeer, IL 60047 USA www.ReshoreNow.org and “Dr. Lisa” Lang, President Science of Business www.VelocitySchedulingSystem.com In the first two articles in this series, we largely agreed on the characteristics of the work that has been the most vulner-able to low labor cost country (LLCC) competition: generally high-volume, long product life items. Similarly, we agreed on the work that is most competitively made in the USA (the low hanging fruit)—generally custom items in smaller quantities with frequent design changes and unstable demand. This final article will emphasize the positive and provide a more comprehensive list of the work that is most competitively made in the USA. We will present ideas for keeping here or bringing back the work that has been the most vulnerable by combining the best planning techniques with the advantages of rising LLCC costs and increased customer demand for shorter supply chains and faster response. And finally, we will integrate more fully the lists of work and the concept of total cost of ownership (TCO)1 introduced in the second article. We will also provide ideas for the behaviors and strategies that will help a shop win in either market segment. In all cases, we are focus-ing on parts and products that will be sold or assembled in the USA. The Low-Hanging Fruit Generally, the work that will be most competitively made here will be that which has the largest TCO disadvantages if made offshore and shipped to the USA. Table 1 shows the workpiece characteristics linked to the relevant TCO factors. It makes sense to pursue work with the listed characteristics and point out to your customers and prospects the TCO advan-tages they will obtain by sourcing locally from you. Use the TCO Estimator from the Reshoring Initiative website listed at the end of this article to do these calculations and demonstrate the financial advantages for USA sourcing. And while for the low hanging fruit— custom items in smaller quantities with frequent design changes and unstable de-mand—the case is relatively easy to make, if you use the TCO Estimator even for the high-volume, long product life items, you 26 Fastener Technology International/October 2011 Ideas and strategies for keeping vulnerable work and bringing back projects that have been lost, all integrated with total cost of ownership. will find that the case to bring home even these workpieces can be strongly made. And to make the case even stronger, here are a couple things that can help. How to Pick the Rest of the Fruit—Inventory High-volume, long product life items purchased overseas will have a large amount of inventory associated with them. How can we be so sure? The amount of inventory that we need to carry is directly proportional to the replenishment time of the workpiece. So if the manufacturing lead-time of the workpiece is two weeks and the transportation lead-time is two months, it’s a safe bet that there will be at least 10 weeks worth of inventory of that item. And despite all that inventory, a particular workpiece may Table 1. Workpiece Characteristics Linked to Relevant TCO factors. Workpiece characteristic Cost factor in the TCO Estimator Small quantities/high mix . New part subject to engineering changes/short life cycle Long manufacturing lead times, make long shipping times unacceptable OEM's core competence/IP part Packaging more expensive for ocean freight than for local trucking Customer-supplied, U.S.-sourced raw material JIT with frequent changes in demand Parts for which quality is more predictable via machine automation than via labor. Inventory is hard to justify but delivery is essential, e.g. emergency repair parts Custom high-precision Results improve with experience. Mechanically/environmentally fragile/risky to ship long distances Customer industry has good margins/profitability and does not want the quality or image risk of off-shoring: e.g. medical and aerospace. Regulatory compliance is essential Substantial product liability risk Product requires on-site vendor support, has to be periodically repaired, ideally by the original source Parts machined from custom workpieces, e.g. castings or forgings that are cast or forged in the U.S. Inventory carrying cost, prototype cost, start-up cost, end-of-life inventory cost Opportunity costs IP risk Packaging Freight Carrying cost Process cost low vs. workpiece value and/or freight costs Freight, duty Suited to low labor processes and automation Quality/warranty Price Carrying cost, opportunity cost Prototype, start-up, travel Stability of the supplier Insurance Quality, opportunity Quality, warranty Product liability non-recovery risk Travel Freight, carrying cost

Reshoring Manufacturing Can Increase Your Competitiveness

Harry Moser

Ideas and strategies for keeping vulnerable work and bringing back projects that have been lost, all integrated with total cost of ownership.

In the first two articles in this series, we largely agreed on the characteristics of the work that has been the most vulnerable to low labor cost country (LLCC) competition: generally high-volume, long product life items. Similarly, we agreed on the work that is most competitively made in the USA (the low hanging fruit)—generally custom items in smaller quantities with frequent design changes and unstable demand.

This final article will emphasize the positive and provide a more comprehensive list of the work that is most competitively made in the USA. We will present ideas for keeping here or bringing back the work that has been the most vulnerable by combining the best planning techniques with the advantages of rising LLCC costs and increased customer demand for shorter supply chains and faster response.

And finally, we will integrate more fully the lists of work and the concept of total cost of ownership (TCO)1 introduced in the second article. We will also provide ideas for the behaviors and strategies that will help a shop win in either market segment. In all cases, we are focusing on parts and products that will be sold or assembled in the USA.

The Low-Hanging Fruit

Generally, the work that will be most competitively made here will be that which has the largest TCO disadvantages if made offshore and shipped to the USA. Table 1 shows the workpiece characteristics linked to the relevant TCO factors.

It makes sense to pursue work with the listed characteristics and point out to your customers and prospects the TCO advantages they will obtain by sourcing locally from you. Use the TCO Estimator from the Reshoring Initiative website listed at the end of this article to do these calculations and demonstrate the financial advantages for USA sourcing.

And while for the low hanging fruit— custom items in smaller quantities with frequent design changes and unstable demand— the case is relatively easy to make, if you use the TCO Estimator even for the high-volume, long product life items, you will find that the case to bring home even these workpieces can be strongly made.

And to make the case even stronger, here are a couple things that can help.

How to Pick the Rest of the Fruit—Inventory

High-volume, long product life items purchased overseas will have a large amount of inventory associated with them. How can we be so sure?

The amount of inventory that we need to carry is directly proportional to the replenishment time of the workpiece. So if the manufacturing lead-time of the workpiece is two weeks and the transportation lead-time is two months, it’s a safe bet that there will be at least 10 weeks worth of inventory of that item.

And despite all that inventory, a particular workpiece may stock out while another has a mountain of inventory2. That’s because the further into the future we forecast our needs, the more likely the forecast will be off. So either stock-outs are still being experienced or the inventory level has been increased even more (buffered), further increasing the carrying costs.

This dynamic opens the door for USA manufacturers to reshore work.

First, let’s assume we have the same manufacturing leadtime in the USA of two weeks. Our transportation lead-time is measured in hours or one to five days depending on locations. That reduces the inventory requirements from 10 weeks to less than three weeks depending on the transportation leadtime for that item.

Now we could still run into the forecast issue and need to buffer that three weeks just like the 10 weeks are buffered. The buffering needed should be less since the forecast horizon is shorter. However, if we’re willing to change some of our behaviors and strategies, there’s another opportunity.

If instead of the traditional approach of producing to a forecast or using a minimum/maximum inventory system, we instead replenish based on our customer’s actual needs, then we can reduce inventory AND increase availability. This is possible using the Theory of Constraints replenishment technique3. For this technique you need your customer’s consumption data by Stock Keeping Unit (SKU)4 and any known changes in demand. A known demand change would be an item’s planned retiring or special promotion. Then your stock levels are determined based on the rate of consumption and replenishment time with modifications for those known changes in demand. This means that it’s dynamic.

This is different than minimum/maximum systems which are set quantities. Instead, we seek to hold a replenishment times worth based on consumption. When consumption goes up (or replenishment time increases), the quantity would go up and when consumption decreases (or replenishment time decrease) so does the target for what we want on-hand.

We typically use a green/yellow/red buffer status report to keep tabs on the inventory of each SKU. And, customer “orders” are based on what needs to be replenished, based on replenishment time and current rate of consumption.

This also means that we don’t waste capacity producing something that is not yet needed (or may never be needed) and instead we use our capacity to meet current demands.

It is the reactive, dynamic nature of the system that allows you to simultaneously reduce inventory and increase availability.

Typical results are a 49% mean reduction in inventory levels5 with an increase in availability (reduction in stock-outs). Inventory turns increase in the range of 100% to 500%6.

How to Pick the Rest of the Fruit—Lead Time

Another area for improvement is lead time. If lead time can be reduced from the two weeks to one week or even less, that would have the effect of reducing costs. It would also reduce replenishment time (see above discussion) and further reduce inventory.

How are costs reduced? If you can produce more with the same people/resources, you allocate less cost to each workpiece. Typically, allocated costs include direct labor and other overhead. Other overhead would include the salaries of nondirect employees, so both types of allocated costs would be reduced.

When your production lead time decreases by 50%—and many Velocity Scheduling System7 clients have exceeded this number8—then you have effectively reduced the cost of labor advantage of the LLCCs vying for USA manufacturing business (in the first article in this series we covered some details on how lead times could be reduced, so we won’t duplicate that here).

The challenge with high-volume production is that there may not be that much room for improvement compared to highly custom job shops. But usually there is some and that improvement should be aggressively pursued.

One way to gauge the amount of room for improvement is to calculate your Touch Time(TT)9 relative to your quoted lead time (QLT). The smaller the difference between TT and QLT, the lower the chances to dramatically reduce production lead times and you may only get 7% to 26% improvement. But if your TT is a small portion (<10%) of your quoted lead-times, there are often big opportunities, on the order of 50% plus.

Add to this that domestic manufacturing impacts a broad range of TCO costs: eliminates duty; reduces shipping costs, inventory costs and many risks with quicker response times; it is increasingly difficult for overseas manufacturers to compete on total cost of ownership terms.

Additional Behaviors & Strategies That Will Help You Win

We’ve already talked about two strategies that can help high-volume USA manufacturers to reduce TCO to more effectively compete against LLCCs. But there are many other things that shops can do to obtain maximum benefit from being a local source and thus differentiate themselves from offshore competition.

Essentially the behaviors and strategies are ones that bring value to the customer and that an offshore competitor will have difficulty matching. These ideas (listed in the accompanying boxes) will help no matter what segment of work (high-volume or job-shop) you pursue.

These boxed-in lists aren’t meant to be exhaustive, but just a start to challenge your thinking.

Some of these behaviors and strategies are common sense and fairly easy to implement, but most companies simply don’t do them and they underestimate their impact. Others will take a more concerted effort—and it is those that will really set you apart because they will be very difficult for offshore or domestic competitors to match.

Summary

Combining the best planning and inventory techniques with some of the behaviors and strategies listed above, along with the advantage of rising LLCC costs and customer recognition of total cost of ownership and increased customer demand for shorter supply chains and faster response will help your business and provide a bright future for the national reshoring trend.

To receive additional information about how reshoring manufacturing can increase your competitiveness, visit the websites listed below.
www.ReshoreNow.org
www.VeloctySchedulingSystem.com

References:

1 TCO is the sum of all relevant costs, risks and opportunities that might differ between alternate sources of a component or product. See www.ReshoreNOW.org for more information and access to the Total Cost of Ownership (TCO) Estimator.

2 If stock-outs are not happening with a 10 week level of inventory then usage is probably very predictable and steady. This makes the reshoring case a little more difficult, but not impossible.

3 For more information on the Theory of Constraints Replenishment visit www.ScienceofBusiness.com and search on replenishment.

4 SKU is a Stock Keeping Unit. This is typically not hard to get.The data is in their ERP and it can typically be automatically sent each day.

5 The World of Theory of Constraints by Vickie Mabin and Steven Balderston, Lucie Press 1999.

6 The University of Tennessee – Center for Executive Education, October 2011

7 Velocity Scheduling System (VSS) is based on the Theory of Constraints Drum Buffer Rope but updated for custom manufacturers and job shops. VSS is the name of Dr Lisa’s velocity manufacturing coaching program. You can check it out at www.VelocitySchedulingSystem.com.

8 Note: Velocity Scheduling System clients are highly custom job shops. In this environment the touch time is a fraction of the quoted lead-time (typically much less than 10%), making a significant reduction in production lead-times very feasible.

9 Touch Time is the sum of the actual time you spend working on your product. It also includes cure times. It does not include queue times/wait times.

Really Differentiate Yourself

• Guarantee your ship date at standard competitive lead-times or better. Always say what you’re going to do and do what you said when you said you’d do it. (Velocity Scheduling System can help you to achieve this.)

• Provide faster than standard delivery times for slight premiums when your customers really need it and guarantee the ship date. And be able to offer this shorter lead-time routinely – not just during slow periods – much like FedEx. (Velocity Scheduling System can help you to achieve this.)

• Guarantee that you will control/not outsource any of the job and/or document the integrity of your supply base.

• For higher use repeat items, further reduce your lead-time by making to stock based on your customer’s rate of consumption. If you do this right, you can guarantee the availability of the item in your stock using the Theory of Constraints replenishment technique.

• Provide custom features with close to normal lead times and competitive pricing. (Velocity Scheduling System can help you to achieve this.)

Other

• Minimize labor content through reducing lead-times, training, and strong upfront process planning and programming. (Velocity Scheduling System can help you to achieve this.)

• Take advantage of technology that can significantly reduce your lead-times.

• Guarantee fixed process price (excluding raw material) for as long as is feasible.

• Convince your customer to buy: FOB destination so he /she cannot just buy on price.

• Document your low staff turnover rate. This is an indicator of high quality and consistency.

• Offer any available short-term capacity.

• Take more technical risk, but increase product liability insurance coverage. Ask prospects if they can recover from SE Asian suppliers if they are sued. Quote Patti Waldmeir in 8/1/07 Financial Times: “Made in China, but sued in America.”

• Be sure payment terms are the same. (China often gets 30% on order, etc.)

• Be sole source to customer. Be a 1 stop shop: design, build, test and run

• Specialize in a few product niches and be the world’s best at them!

Read the full article at http://www.bluetoad.com/article/Reshoring+Manufacturing+Can+Increase+Your+Competitiveness/847868/82790/article.html.

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