Tag: backsourcing

OM in the News: American Manufacturing Heads to Mexico

mexicoWith labor costs rising rapidly in China, The New York Times (June 1, 2014) reports that American manufacturers of all sizes are looking south to Mexico with an eagerness not seen since the early years of the NAFTA in the 1990s. From border cities like Tijuana to the central plains where new factories are filling farmland, Mexican workers are increasingly in demand. American trade with Mexico has grown  30% since 2010, to $507 billion, and foreign investment in Mexico last year hit a record $35 billion. Over the past few years, manufactured goods from Mexico have claimed a larger share of the American import market, reaching a high of about 14%, while China’s share has declined.

“When you have the wages in China doubling every few years, it changes the whole calculus,” says Chris Wilson, at the Mexico Institute in D.C. “Mexico has become the most competitive place to manufacture goods for the North American market, for sure, and it’s also become the most cost-competitive place to manufacture some goods for all over the world.”  Wilson calls for a focus on “globally literate workforces in both countries.”

Many American companies are expanding and spending billions in Mexico — including well-known brands like Caterpillar, Chrysler, Stanley Black & Decker and Callaway Golf. Economists say that the U.S. benefits more from outsourcing manufacturing to Mexico than to China because neighbors tend to share more of the production. Roughly 40% of the parts found in Mexican imports originally came from the U.S., compared with only 4% for Chinese imports.

Yet Mexico is still a country of vast differences in efficiency and education, where only a small minority of the population has the training needed to compete with the world. The kinds of companies succeeding now in Mexico are those big enough to manage their own factories and those that did not give up their technical knowledge by outsourcing to China. To draw more companies now, experts say, Mexico and the U.S. will need to be more focused on sharing labor and moving products.

Classroom discussion questions:

1. Why Mexico?

2. Why does Chris Wilson say that “a globally literate workforce” is needed in both the U.S. and Mexico?

OM in the News: Textile Plants Humming Once Again in the Carolinas

The old textile mills in the Carolinas are mostly gone now. Gaffney Manufacturing, National Textiles, Cherokee — clangorous, dusty, productive engines of the Carolinas fabric trade — fell one by one to the forces of globalization. Just as the Carolinas benefited when manufacturing migrated first from England to New England and then to here, where labor was even cheaper, they suffered in the 1990s when the textile industry mostly left the US. It headed to China, India, Mexico — wherever people would spool, spin and sew for a few dollars or less a day.

But remarkably, Parkdale Mills, the country’s largest buyer of raw cotton, has reopened and is thriving–another indication of the resurgence of US manufacturing, reports The New York Times (Sept. 20, 2013) in its cover story. For example, just last year, clothing maker American Giant was buying fabric from a factory in India. Now, it is cheaper to shop in the US, using Parkdale yarn.

American manufacturing has several advantages over outsourcing. Transportation costs are a fraction of what they are overseas. Turnaround time is quicker. Most striking, labor costs aren’t that much higher than overseas because the factories that survived the outsourcing wave have turned to automation and are employing far fewer workers. Further, monitoring worker safety in places like Bangladesh, has become a huge challenge.

In 2012, textile exports were $22.7 billion, up 37% from just 3 years earlier. That the industry is thriving again is indicative of a broader reassessment by companies about manufacturing in the US. A recent M.I.T. survey found that 1/3 of American companies with manufacturing overseas said they were considering backsourcing some production, while 15% said they had already decided to do so. This means jobs–but on nowhere near the scale there was before, because machines have replaced humans at almost every point in the production process. Take Parkdale: The mill produces 2.5 million pounds of yarn a week with about 140 workers. In 1980, that production level would have required more than 2,000 people.

Classroom discussion questions:

1. What are the reasons Parkdale is thriving?

2. What is the role of automation in the return of manufacturing to the US?

OM in the News: How “Total Cost of Ownership” Brings Manufacturers Back to the US

Businessweek‘s (Feb.8,2012) headline reads: “For Some US Manufacturers, Time to Head Home”. It appears that when the total cost of ownership is computed (which  includes intellectual property risk, the cost/time to travel to visit distant suppliers, the negative impact of separating manufacturing from engineering back at HQ, and 28 more factors), the true costs of outsourcing can be assessed.

When measured on price alone, says the Reshoring Initiative, the cost of products and components made in the US vs. China are 108% higher. But when total cost of ownership is included, the US averages only 12% higher. “The US is a lot more competitive than people realize,” says the group’s founder. “Over the last several years, firms got caught up in the outsourcing trend without thinking through the costs.”

Two of the factors that drove firms overseas, cheap fuel and labor, no longer favor far-flung ventures. A barrel of oil has jumped from $23 to $88 in the past decade, so the price of shipping goods has gone up. And wages in China have increased 15% a year in that same time frame. Further, the dollar has declined 23% since 2002, with the result that factory labor here is 11% cheaper in dollar terms over that period.

As companies have also gotten better at reducing inventory and adopting JIT delivery, supply chains that stretch  around the world have started to look like liabilities. Researchers at Gartner predict that by 2014, 20% of the goods made in Asia that are destined for the US will shift to the Americas. And a recent survey by Accenture, called “Manufacturing’s Secret Shift,” reports that 61% of 287 manufacturers are thinking of moving operations closer to customers.

Don’t expect a hiring frenzy if some factories return, though. “It’s a marginal improvement, not a tidal wave,” says Businessweek.

Discussion questions:

1. Why won’t a shift in manufacturing result in millions of new jobs?

2. Why should the total cost of ownership be included in outsourcing decisions?