global manufacturing – Page 2 – The OM Blog by Heizer, Render, & Munson

OM in the News: China’s Fading Factories

Workers walk past notices listing factory space for rent in Dongguan, a once thriving manufacturing hub.

For decades, the Dongguan region of China’s Pearl River Province drove that country’s global ascent in exports, producing furniture, garments, shoes and other goods. But the world’s workshop has been stumbling as cheaper production bases in Asia have gained ground, reports The New York Times (Jan. 20, 2016). Last year, Chinese exports fell for the first time since the recent financial crisis, a situation that is likely to be further eroded by the Trans-Pacific Partnership. The U.S.-led trade agreement deepens American ties with Asian countries like Vietnam and Malaysia, but it excludes China.

Chinese leaders have started to encourage the phasing out of low-end exports in favor of promoting the service sector and high-tech manufacturing. Some traditional manufacturers have responded to the downturn by relocating farther inland or overseas, where costs are generally lower. The shift away from low-end, labor-intensive manufacturing “is an unavoidable part of the structural change that the economy is undergoing,” says a China expert at Oxford.

At their peak, factories in Dongguen accounted for 1 in every 4 pairs of athletic shoes sold globally. Now, while costs are rising, demand from overseas customers has also been declining. So some companies are making a future bet by expanding to a less-developed province, Guizhou, where labor costs are 40% less than those in Dongguan. Other large Dongguan shoe companies have shifted production to Bangladesh.

Other sectors have similarly been struggling, including some electronics manufacturers. In October, Fu Chang Electronic Technology, a supplier to the telecommunications equipment makers Huawei and ZTE, shut its doors unexpectedly. The closing prompted a protest by thousands of workers.

Classroom discussion questions:

How is China following American manufacturing trends?
Is automation a major factor in Chinese production?

OM in the News: The Top 10 Manufacturing Countries in 2020

A new study on future global competitiveness, reported by Industry Week (Dec.9, 2015), predicts that the U.S. will dislodge China as the most competitive manufacturing nation in the world in 2020. “Manufacturing competitiveness, increasingly propelled by advanced technologies, is converging the digital and physical worlds, within and beyond the factory to both customers and suppliers, creating a highly responsive, innovative, and competitive global manufacturing landscape,” says the report. While emerging markets continue to push the leaders, the manufacturing powerhouses of the 20^th century (the U.S., Germany, and Japan), hold 3 of the top 4 positions currently and in the future. The study also suggests that Brazil and Russia seem to have lost their allure as highly competitive manufacturing locations today. Here are the rankings:

# 1 The U.S.: By 2020, the U.S will overtake China to earn the top spot for the most competitive nation in the world, due the country’s investment in research, technology, and innovation.

#2 China: Shenzen is a large manufacturing center that has sprung up quickly (see photo).

#3 Germany: Germany is pushing its leadership in industrial production research and development toward “smart production.”

#4 Japan: The manufacturing sector accounts for 19% of Japan’s GDP.

#5 India: It has a large population of engineers and factory workers, its intellectual property is widely respected, and it is easy to find English-speaking managers there.

#6 Korea: The biopharmaceutical industry is an important manufacturing sector to South Korea.

#7 Mexico: Electronics manufacturing activity in Mexico is widespread. In the last 15 years, $14 billion in investments have been made to make production stronger and more efficient.

#8 Taiwan: Five of the world’s largest producers of TFT-flat screens are Taiwan-based.

#9 Canada: Montreal’s aerospace sector is comprised of more than 210 companies which employ 43,500.

#10 Singapore: More than 30 biomedical sciences companies have established regional headquarters in the country.

Classroom discussion questions:
1. Why not Brazil and Russia?

2. What makes U.S. manufacturing more competitive than 30 years ago?

OM in the News: Levi Strauss Considers Leaving China

Thirty years ago, Levi Strauss & Co. began producing its iconic jeans in China, eager to tap a seemingly endless stream of workers willing to sew for a few dimes an hour. Now that stream is starting to dry up. “Over the coming decades, a labor shortage will force Levi and scores of other Western brands to remake their China operations or pack up and leave,” writes The Wall Street Journal (Nov.24, 2015). The changes will mark a new chapter in the history of globalization, where automation is king, nearness to market is crucial and the lives of workers and consumers around the world are once again scrambled. “Labor is getting more expensive and technology is getting cheaper,” says one of Levi’s major suppliers in China.

Fearing that it will see an exodus of manufacturers, China last year called for “an industrial robot revolution,” and the country has become the world’s largest market for automation. It is an open question whether automation can hold down costs as effectively as Chinese peasant labor did. But consumers should look forward to more choice, faster delivery and, perhaps, less harm to the environment. Some technologists even think that inventions such as 3-D printing will have a big impact by 2050. In such a world, printers could spew out clothing, food, electronics and other goods ordered online from a nearly limitless selection, with far fewer workers involved in production. The end of very cheap labor in China is giving a push to these advances in technology, which will make China less central to global manufacturing.

China’s rise to the world’s No. 2 economy relied on a huge increase in the country’s working-age population, which expanded by 380 million people between 1980 and 2015. In one of history’s greatest migrations, hundreds of millions of rural Chinese headed for cities for manufacturing jobs that were a step up from peasant labor, even though the work paid poorly by global standards.

Classroom discussion questions:

Will more and more companies be leaving China to chase cheaper labor?
Why is automation so important to China? To the U.S.?

OM in the News: Poor Countries and Manufacturing Jobs

Cows on the streets of Ahmedabad, India. India has vowed to build better roads and clear red tape to pull it into the leagues of Asia's industrial powerhouses. — Cows on the streets of Ahmedabad. India has vowed to build better roads and clear red tape to pull it into the leagues of Asia’s industrial powerhouses.

The U.S. and Europe—and East Asia more recently—first got rich because of their factories. Over time, as incomes rose and their economies became more sophisticated, they shifted into modern services like health care and finance. But today, parts of South Asia, Africa and Latin America are failing to create thriving manufacturing sectors even though their wages remain low. Manufacturing employment and output are peaking and declining at vastly lower levels of income and development than they did in the West. When manufacturing peaked as a source of jobs in the U.S. in 1953, it employed 26% of American workers, and overall per capita income was around $17,700 in today’s dollars. By 2010, manufacturing accounted for around 9% of U.S. jobs.

Factory automation and robotics are reducing the need for unskilled workers from the countryside to staff assembly lines. Industrial latecomers now have to compete against China, whose massive, integrated manufacturing machine has made it the world’s factory floor and created a huge barrier to entry. Lower trade barriers and better communication have made it easier for supply chains to be spread over farther-flung locales, bringing more countries into direct competition for factory investment. “The factory-led model of advancement—which, for more than a century, has offered the quickest route out of poverty—is simply no longer available to today’s poorest nations,” writes The Wall Street Journal (Nov. 25, 2015). India must joust more often with other cut-rate producers like Bangladesh or Vietnam for slices of the manufacturing process—a component or an assembly here, some product development there—rather than for “start-to-finish industry.”

More factories also might not translate into as many jobs, at least not for humans. Sales of industrial robots shot up by 29% last year to a record of nearly 230,000 units and are expected to keep climbing, to 400,000 units shipped by 2020, especially in Asia.

Classroom discussion questions:

U.S. ever recoup the manufacturing jobs it lost since 1950? Why?
Why is it harder for India to catch up with China?

OM in the News: Made in Vietnam

The trans-Pacific Partnership would mostly benefit developing nations like Vietnam and Malaysia — The Trans-Pacific Partnership would mostly benefit developing nations like Vietnam

Massive factories have sprung up in Long An to make goods for Western companies such as Nike, taking advantage of Vietnam’s young workforce and wages that are roughly half those in China. This agricultural province, located near Ho Chi Minh City, now has more than a dozen industrial parks, and is playing host to an increasing amount of manufacturing.

“This growth could accelerate if the U.S. and 11 other Pacific Rim nations ratify the Trans-Pacific Partnership agreement, a landmark trade deal concluded earlier this month,” reports The Wall Street Journal (Oct. 19, 2015). The deal would eliminate certain tariffs between members, mostly benefiting developing nations whose growth depends heavily on exports. Skyrocketing wages and a growing labor shortage in China are heightening Vietnam’s appeal. If the trade deal goes through, Vietnam’s economy would be the single largest beneficiary, because it would gain much greater access to large consumer markets. Money pouring into the Southeast Asian economy could make Vietnam one of the world’s two fastest-growing large economies between now and 2050.

The trade agreement would benefit firms like Avery Dennison Corp., one of the world’s biggest makers of clothing labels and tags. The California company just opened a 300,000 square foot facility in Long An. Inside, sewing machines print tags for Japanese clothing brand Uniqlo, while workers pour red ink into giant machines that print the labels sewn into North Face outdoor-sports clothes. “The skills of Vietnamese workers are increasing exponentially every year,” says Avery Dennison’s VP, “and the country is able to accommodate ever more complex production. What took 30 years in China is taking 10 years in Vietnam to happen. That is why more and more companies are making bets on Vietnam.”

Classroom discussion questions:

Why is the trade deal useful to Vietnam? To the U.S.?
How does this impact American garment makers?

OM in the News: The Search for Cheaper Labor Leads to Ethiopia

Women at work in Addis Ababa at the GG Super Garment factory

For more than a decade, Asia has dominated clothing manufacturing, churning out cheap clothes on inexpensive labor that are shipped to malls world-wide. But over the past few years, rising production costs in China and several deadly factory accidents like the collapse of Rana Plaza 2 years ago in Bangladesh, have forced apparel companies to hunt for alternatives from Myanmar to Colombia to Ethiopia. Ethiopia was recently identified as a top sourcing destination by apparel companies.

Africa, reports The Wall Street Journal (July 13, 2015), is the final frontier in the global rag trade—the last untapped continent with cheap and plentiful labor. Ethiopia’s garment sector has no minimum wage, compared with Bangladesh, where workers earn at least $67 a month. Garment workers in Ethiopia start at $21 a month. (Chinese garment workers earn $155- $297 a month.) Most countries in Africa benefit from a free-trade agreement with the U.S. And, unlike other emerging economies such as Vietnam and Cambodia, many African countries can grow their own cotton, which shortens production time.

Big apparel makers are willing to go to great lengths to find new, low-cost sources of production. Consumers have been conditioned to expect a plentiful supply of cheap clothing, which has pressured the margins of companies like Wrangler, Lee, and Calvin Klein. Ethiopia holds the most promise for developing garment production in Africa, factory owners and brands say. “Ethiopia seems to be the best location from a government, labor and power point of view,” says one CEO.

Many African countries lack roads to transport finished clothing, and landlocked Ethiopia doesn’t have a port. The workforce is untrained in sewing clothes. But apparel companies remain interested despite those hurdles. They are drawn to not only the cheap labor, but to the inexpensive power, which is the 2nd-biggest factory cost after workers. The Ethiopian government is building a railway to the port in neighboring Djibouti to help exports leave the country more quickly.

Classroom discussion questions:

1. What are the advantages and disadvantages of locating a new plant in Ethiopia?

2. Will Africa be the next China?

OM in the News: Why China Still Thrives as a Global Manufacturer

A small factory near Shanghai, churning out widgets you never see but probably use, provides a perfect snapshot of the state of global manufacturing today. Some workers at the Integrated Micro-Electronics (IMI) facility affix pieces by hand to circuit boards bound for digital displays on European stoves. Others stand at computers, guiding machines that press together components for cars’ steering systems. But IMI is important less for what it makes than for what it represents. A cog in long supply chains, it produces parts for brand-name consumer goods.

Cheap Chinese labor has been crucial to the building of “Factory Asia”, the name given to the region’s complex of cross-border supply chains, writes The Economist (March 14, 2015 ). Asia first emerged as a manufacturing power in the 1960s, when Japan began exporting electronics and consumer goods. China’s opening up was the gamechanger. The region’s share of the global trade in parts rose from 14% in 2000 to 50% in 2012, 1/2 of which comes from China. By hosting more of the supply chain, China boosts its manufacturing competitiveness and attracts more investment. IMI, for instance, is headquartered in the Philippines and would have preferred to scale up its manufacturing there, where wages and worker turnover are lower.

Yet China’s factories are still far cheaper than western rivals (despite wages rising 12% a year for a decade). Many pay their employees just above the minimum wage, which at $270 a month in China is less than a 1/4 that in the U.S. And they are more efficient than many rivals. With Chinese factories just starting to pour money into automation, there is scope to improve productivity further. China became the biggest market for robots in 2013. Foxconn, which has more than a million employees in China, says that it wants robots to complete 70% of its assembly-line work within 3 years.

Our discussion of the theory of comparative advantage (Chapter 2) says that countries with lots of cheap workers should produce labor-intensive goods; rich countries should focus on those requiring plenty of capital. But as supply chains spread across borders, regional comparative advantage matters even more. With its bounty of both labor and capital, Asia has built up a huge lead in manufacturing.

Classroom discussion questions:

1. Why is China still the global manufacturing leader?

2. Why is it introducing robots at an accelerated pace?

OM in the News: U.S. Furniture Survivor Goes Global

When Ron Wanek started a furniture company in Arcadia, Wisconsin in 1970, his chances of becoming an industry giant looked remote, writes The Wall Street Journal (Mar. 6, 2015). Since then, most of the Carolina and Virginia manufacturers have been crushed by Asian competition. Wanek ’s Ashley Furniture Industries is now by far the biggest U.S.-based maker and retailer of furniture, with $4 billion in sales last year (twice as much as La-Z-Boy and Ethan Allen combined).

Ashley has thrived by churning out low-price furniture, including sofas for as little as $399, at factories in the U.S. and Asia. While American rivals dithered as imports surged starting in the 1980s, Ashley figured out what could most efficiently be made in Asia and what should be kept at home. The company operates what is widely viewed as the industry’s most streamlined delivery system to rush products into its 460 stores. The company now has plants and distribution centers in four states. About 60% of the furniture the company sells in the U.S. is American-made. The rest comes mainly from Vietnam and China. Ashley has 13,000 employees in the U.S., up from 8,000 a decade ago. In the same period, total U.S. furniture-industry employment shrank by 1/3 to 384,000.

Ashley has long focused on the logistics of furniture delivery. The company has its own fleet of 800 trucks, and deliveries to stores arrive in 2-3 days.That saves stores money because they can hold less inventory.

Ashley imports 70,000 shipping containers of Asian furniture a year. Rather than pay to send containers back to Asia empty, it arranges shipments of grain and animal hides. Ashley’s obsession with costs is relentless. Some furniture makers offer customers hundreds of fabric choices for upholstery. Ashley offers 1 to 6, depending on the chair. That slashes inventory and speeds production.

Classroom discussion questions:

1. Why has Ashley survived and prospered?

2. What lessons can be learned from Ashley’s OM function?

OM in the News: India vs. China As the Next Manufacturing Power

With its chronic blackouts, crumbling roads, and other infrastructure woes, India should have no appeal for Abbott Laboratories’ VP John Ginascol, who is responsible for ensuring that the company’s food-products factories run smoothly worldwide. He can’t afford surprises when it comes to electricity, water, and other essentials. “People like me,” he says, “dream of having existing, good, reliable infrastructure.” Yet Abbott has just opened its first plant in India (producing Similac baby formula), and Ginascol has no complaints. The officials “were able to deliver very good, very reliable power, water, natural gas, and roads,” he says. “Fundamentally, the infrastructure was in place.” In an attempt to build its industrial base nationwide, India is pushing the Make in India campaign, easing restrictions on foreign investment in property projects and overhauling the railroad system., reports BusinessWeek (Nov. 6, 2014).

China became an export powerhouse because of its vast pool of low-wage workers, but it’s no longer so cheap to manufacture there. Pinched by double-digit increases in China’s minimum wages, many companies are looking for low-cost alternatives. Southeast Asian countries such as Vietnam and Indonesia are attractive, but they lack the deep supply of workers available in India. The hourly labor cost in India for manufacturing averages 92¢, compared with $3.52 in China. But, says U. of Maryland Prof. Anil Gupta, India hasn’t come close to matching China’s investments in the roads, ports, and power networks that companies want. “Lousy infrastructure essentially eats up any advantage the country may have on the labor front.”

Micromax, for example, is the top local smartphone brand in India. The company takes advantage of its Indian roots to win customers, but when it comes to putting its phones together, it looks to factories in China. To produce locally, a company such as Micromax would need to have lots of its suppliers nearby; that exists in China, not in India. “You need to have cameras, screens, touch panels, chip sets. You need all that to be around you,” says its Chairman. “If you are able to build that ecosystem, then the Make in India story comes true.”

Classroom discussion questions:

1. What factors have kept India behind China in manufacturing thus far?

2. What are the advantages and disadvantages of locating in India vs. Vietnam or Indonesia?

OM in the News: Levi Strauss’s Push for More Ethical Factories

In an attempt to bolster its ethical credentials and meet the demands of increasingly fussy millennial consumers, Levi Strauss is offering a new financial incentive to suppliers as far away as Bangladesh and China to meet environmental, labor and safety standards. The jeans maker is providing lower-cost working capital to those of its 550 suppliers who do best on those measures. The project sprang out of the 2013 Rana Plaza factory collapse in Bangladesh, which left more than 1,100 dead and prompted new scrutiny of international fashion brands’ supply chains.

“The move reflects two important trends in globalization,” writes The Financial Times (Nov. 4, 2014). As consumers fret about the conditions under which their clothes are made, fashion brands are facing greater pressure to ensure their suppliers in places like Bangladesh, Cambodia and Vietnam abide by higher standards. In some cases that issue, together with rising wages and costs in China and other production centers, is leading to brands “reshoring” production closer to home. But the combination of those pressures and the way global supply chains are becoming ever more intricate is also leading multinational companies to build tighter bonds with suppliers and to use new tools to manage them.

Levi Strauss’s VP of sustainability said the company now relies on “fewer, more capable” vendors and that its relationships go back an average of 10 years with top contractors. The firm claims to require its suppliers to abide by some of the strictest labor standards in the garment industry and employs full-time inspectors to visit factories around the world. It also is rare among fashion brands in publishing a full list of the factories and suppliers it uses around the world. It has, however, had dark chapters in its past. In the early 1990s Levi Strauss was accused of using Chinese prison labor to make clothes. It withdrew production from China on human rights grounds for five years, becoming an example of the potential pitfalls of doing business in China.

Classroom discussion questions:

1. Why is Levi Strauss making this move?

2. What are the advantages of having fewer vendors?

OM in the News: Making the Decision to “Reshore”

“Recently, rising energy prices, wage inflation and customer demand for shorter lead times have led many U.S. companies to consider “reshoring” the production of goods bound for domestic markets back to America,” writes Industry Week (Aug.5, 2014). But getting it right can be tricky. A decision to reshore needs to consider the following 7 issues:

1. A focus on total costs instead of unit costs: By focusing on unit costs instead of the total cost of ownership – which includes costs such as transportation, intellectual property risks and inventory carrying costs – manufacturers are overestimating potential savings from overseas operations by 20%- 30%.

2. Invest time to understand domestic labor markets: Supply, quality, and cost of labor are critical to the success of almost all reshoring projects. Plant closures and an aging workforce have depleted the pool of skilled manufacturing workers in some parts of the country.

3. Pursue government incentives to offset costs: local, state, and federal governments have actively supported the resurgence of American manufacturing.

4. Analyze transportation cost differentials: In- and out-bound transportation costs, including the delivery of raw materials and the shipment of finished product, can comprise a major share of the cost of goods sold in the U.S., and can vary widely depending on the location.

5. Carefully assess product demand: Spurred by efforts such as Walmart’s $250 billion “Buy American” campaign, locally produced goods are in high demand. However, miscalculations can lead to lost investment and time.

6. A review of utility services and rates: Reliable, cost-competitive electric power is critical for many manufacturing operations. Power prices can vary from below 4¢ to above 12¢ per KWH.

7. Consider tax climates: State and local tax rates and structures vary greatly across the country. Carefully assess the potential impact of corporate income taxes and taxes on the purchase of production equipment, real estate, machinery, and inventory.

In short, deciding whether and/or where to reshore a manufacturing operation in the U.S. is a complex decision involving many considerations.

Classroom discussion questions:

1. Why has reshoring become an important OM issue?

2. How does reshoring differ from nearshoring?

OM in the News: China’s Latest Export–Manufacturing Jobs

Huajian Shoes’ factory outside Addis Ababa is part of the next wave of China’s investment in Africa. It started with infrastructure, especially the kind that helped the Chinese extract African oil, copper, and other raw materials to fuel China’s industrial complex. Now China is getting too expensive to do the low-tech work it’s known for. African nations such as Ethiopia, Kenya, Lesotho, Rwanda, Senegal, and Tanzania want their share of the 80 million manufacturing jobs that China is expected to export, reports BusinessWeek (July 28-Aug. 3, 2014).

At Huajian’s factory, wages of about $40 a month are less than 10% of what comparable Chinese workers make. But just as companies discovered with China when they began manufacturing there in the 1980s, Ethiopia’s workforce is untrained, its power supply is intermittent, and its roads are so bad that trips can take 6 times as long as they should. “Ethiopia is exactly like China 30 years ago,” says Huajian’s CEO, whose company supplies such well-known brands as Nine West and Guess. Frustrated by “widespread inefficiency” in the local bureaucracy, the company is struggling to raise productivity from a level that is about a 1/3 of China’s. Transportation and logistics that cost 4 times what they do in China are prompting Huajian to set up its own trucking company.

Manufacturers coming here don’t have to worry about finding new workers. The population of 96 million is Africa’s second-largest after Nigeria’s. Cheap labor and electricity and a government striving to draw foreign investment make Ethiopia more attractive than many other African nations. “It could become the China of Africa,” says a Johns Hopkins prof.

Classroom discussion questions:

1. Why is China exporting manufacturing jobs?

2. What are the advantages and disadvantages of locating in Ethiopia?

OM in the News: China, Inc. Moves the Factory Floor to Africa

95% of the 600 employees at Hisense' Cape Town plant are South African — 95% of the 600 employees at Hisense’ Cape Town plant are South African

Each TV motherboard that rolls off the Hisense Co. factory line in Cape Town moves China a tiny step toward a new global manufacturing base. But although the line’s South African technicians are producing at the same clip of 70 seconds per board as their Chinese counterparts, there’s a hitch: Hisense factories in China use half as many workers to make the same product. In South Africa, 1 technician monitors one machine. In China, the company’s technicians monitor 2 machines apiece.

Faced with rising labor costs at home, Chinese companies are setting up new factories on the continent and hiring more Africans, reports The Wall Street Journal (May 15, 2014). The companies’ efforts will test whether the masters of low-cost manufacturing can be as productive in Africa as they are in China. The average monthly wage for a low-skilled Ethiopian factory worker, for example, is about 25% of the pay for a comparable Chinese worker. As the wage gap widens between unskilled Chinese workers and their counterparts elsewhere in Asia and in Africa, as many as 85 million factory jobs could leave China in the coming years.

Africa’s poor infrastructure and uneven distribution of skills do erode its cost advantages. The World Bank estimates that a Chinese worker making shirts can produce about twice as many per shift as an Ethiopian worker. Hisense faces the same skills gap. The home-appliance maker’s challenge was how to hire technicians and engineers in a country—and on a continent—where there aren’t many to go around. “South Africa doesn’t have an unemployment problem. It has an unemployable problem,” says the company’s factory manager.

China’s expanding African footprint has caused friction. A recent survey reported that 46% of Africans have a negative impression of Chinese employment practices, while only 19% are positive. One reason: The common Chinese response to productivity gaps has been to send more Chinese workers. China dispatched 214,534 workers to Africa in 2013.

Classroom discussion questions:
1. What issues must operations managers consider when opening new plants in Africa?

2. What might cause the Africans to have negative views of their Chinese investors and employers?

OM in the News: Offshoring and Reshoring Reach a Balance for U.S.

Generac has reshored manufacturing of a key alternator component

In 2001, Generac Power Systems joined the wave of American companies shifting production to China. The move wiped out 400 jobs in Wisconsin, but few could argue with management’s logic: Chinese companies were offering to make a key component for $100 per unit less than the cost of producing it in the U.S. Now, however, Generac has brought manufacturing of that component back to its Whitewater plant. The move is part of a sea change in American manufacturing, reports the Los Angeles Times (May 13,2014): After three decades of an exodus of production to China and other low-wage countries, companies have sharply curtailed moves abroad. Some, like Generac, have begun to return manufacturing to U.S. shores. The tipping point came when Generac had enough sales to justify investing millions of dollars in new equipment for the Whitewater plant. The company can now produce an alternator with 1 worker in the time it took 4 workers in China.

Harry Moser, of Chicago’s Reshoring Institute, tracks the inflow of jobs and estimates that last year marked the first time since the offshoring trend began that factory jobs returning to the U.S. matched the number lost, at about 40,000 each. “Offshoring and ‘re-shoring’ were roughly in balance — I call that victory,” said Moser.

Several factors lie behind the change: (1) Over the last decade, Chinese labor and transportation costs have jumped while U.S. wages have stagnated; (2) Manufacturing also has become more automated, further reducing labor’s weight in the cost equation; (3) The boom in natural gas production in the U.S., largely driven by fracking, has led to a 25% decrease in gas prices in the U.S., contrasted with a 138% increase in China; and (4) the rise of online commerce has made local control of supply chains more important, especially because many U.S. manufacturers report growing problems with quality control of goods made in China.

Classroom discussion questions:

1. Why are more U.S. firms reshoring?

2. Why did Generac reshore this component?

OM in the News: Otis Finds Reshoring Manufacturing Is Not Easy

Otis demonstrating his "safety lift" in 1854 — Otis demonstrating his “safety lift” in 1854

Otis Elevator has found that bringing manufacturing jobs back to the U.S. can be a lot trickier than it sounds, writes The Wall Street Journal (May 3-4, 2014). The company’s 2012 move to relocate its plant from Mexico to South Carolina was hailed as a sign of a renaissance in American manufacturing. The relocation was supposed to save money and help fill orders faster by putting the people who make new elevators next to the engineers who design them, and their customers. But the reality hasn’t been so smooth. Production delays created a backlog of overdue elevators. Customers canceled their orders. The Nogales plant Otis was leaving behind had to stay open for half a year beyond its planned closing date to deal with the backlog.

The company’s experience shows that with supply chains and skilled labor following American factories overseas in recent decades, coming home can be more complex than just deciding where to site a plant. When the elevator maker opened its new 423,000-square-foot facility in a vacant Maytag factory in Florence, S.C., it was a notable participant in a trend of “reshoring,” where some companies reversed the movement of manufacturing work offshore to places like China.

For Otis, the return to the U.S. was supposed to herald a step up in efficiency. The relocation was to lower the company’s freight and logistics costs by 17%, and would cut costs a further 20% by having all of its white-collar elevator design and production workers on hand at the factory. The company now says it was trying to do too much at once. In addition to moving the plant, Otis also was replacing the computer system that manages supply, manufacturing, shipping and financial information. “The challenge, I think, was moving your supply chain, with your factory and your engineering center all at once,” says the CFO.

Classroom discussion questions:

1. Why did Otis decide to reshore?

2. Will the move ultimately prove to be a success?