The other day I had lunch with two people I’d been pursuing for quite some time; they weren’t able to meet previously because they were crazybusy. We had a nice lunch and a good and wide-ranging discussion about many things, both professionally and personally. One of the things mentioned was my essay on there being other, non-macroeconomic considerations that should be taken into account with the continued flow of jobs and, in particular, manufacturing offshore. I also told them about a group, the Reshoring Initiative, whose mission statement is:
The mission of the Reshoring Initiative is to bring good, well-paying manufacturing jobs back to the United States by assisting companies to more accurately assess their total cost of offshoring, and shift collective thinking from offshoring is cheaper to local reduces the total cost of ownership.
(Aside: The Reshoring Initiative was mentioned in this excellent article: After decades of exodus, companies returning production to the U.S.)
This brought out a low-key but forceful statement by the Engineering Manager at the table, to the effect that he’d love to reshore a lot of his production. I hope I’m not putting words into his mouth, but I think he and I would firmly agree that American workers can fully compete and be the low-cost producers… if the pencils were sharpened, products and processes designed correctly, and the chance given. He opined that if there is a business case for it, it will happen. The issue is creating that business case.
Which brings me to two examples from conversations I’ve had over the years – conversations that have revealed what I saw then, and still see, as significant hidden costs in offshoring. More importantly, they beg the question: why it is that companies have typically not sharpened their pencils in weighing the decision to keep jobs here given some of the factors I will raising below?
Several years ago I had a nice networking conversation* with a Director of Engineering at a Boston-area high-tech company. On his desk was a cut-away section giving an “inside look” into their product. My very first comment, as someone whose Master’s research was in Design for Manufacturing and Assembly – was “Wow, look at all the screws!”
I then observed that it could easily be redesigned to eliminate the vast majority of the screws, producing not only a labor savings but a reduction in part count reducing the number of error possibilities. What he said next floored me. “The Chinese like the screws; it makes it easier to rework.”
This was enlightening. It meant two things:
- That there were so many defects being introduced during the assembly process that ease of rework/repair was a significant concern. This would score very low on a First-Time-Through metric. Rework/repair is a non-value added activity, and adds labor cost unnecessarily.
- That instead of investing in assembly tools, fixtures, and other mechanical systems to eliminate problems, the assembly people didn’t care about prevention of defects, preferring – inferred through their decisions – to throw people at the problem… not in a containment mode, but as a regular part of the production process.
I wonder how much additional labor cost, never mind work in progress and overproduction of all the components, was incurred and how much that added to the true cost of each product being boxed for shipment.
Quality – As In Lack Of
On another interview, one of the concerns cited by the company was that several components were sourced from multiple Chinese vendors. Despite having prints that – theoretically – specified what the component needed to be, not only were the parts from the different vendors not interchangeable, many parts shipped as “good” did not meet the print. Thus the need for an active Quality Engineering project to create a sorting program and contain the multiple quality problems on the receiving dock; in parallel was a project to give feedback to each individual vendor as to where the parts were not meeting the drawing specifications.
How much time, effort, and cost did this waste? What opportunity costs were there in the diversion of so much attention from on-site production issues to fixing things that shouldn’t have needed fixing? And speaking of communications with suppliers…
Language, Iteration Time, Travel, and Culture
From both personal experience and discussions with others – such as the lunch I had mentioned above – there are significant time lags and misunderstandings that come from having suppliers overseas. Translations between languages and countries halfway around the world often mean multiple days of emails back and forth trying to clarify the points being discussed and the necessary actions to be taken. Problems that could be addressed with a concrete action plan developed in a face-to-face meeting at a local supplier, or even a same-native-language discussion on the phone, can take days if not weeks to get everyone on board to understand the issue and needed actions the same way.
(Side note: one former co-worker, who spend significant time in Shanghai, observed – and I’ll take him at his word on this – that Mandarin is a very imprecise language; it became necessary to endure multiple days with multiple translations of iteratively-reworded statements to accurately convey what should have been a simple message. This opinion was supported by the comments of that Engineering Manager at the lunch from his own experiences dealing with Chinese vendors. Again, what are the opportunity costs of this time investment?)
International travel, especially to Asia, is not cheap. When multiple people need to travel multiple times a year, that can add up significantly. And never mind the dollar figures, factor in the loss of productivity as well as wear-and-tear on peoples’ physiques from the time zone changes.
Further, many Asian cultures are “face cultures” where preserving face and reputation in front of peers takes precedence over candor. The Chinese, for example, are infamous for saying “yes” even without knowing the specifics; conversely, the Japanese will often say “no” first. But to act rapidly in the whirlwind of competition, candor and accurate statements of the reality are necessary to make decisions. Score another plus for doing business onshore.
Intellectual Property Worries
While working on a LEGO toy truck we were faced with sourcing the injection molds. LEGO wanted, for cost reasons, to source the tools from China. We advised them that our recommended supplier, a Portugal-based set of toolmakers, was better and more secure. Although somewhat more expensive, one of the advantages was the protection of the product… our opinion was that if the tools were sourced from China, there would be two sets of tools made, and that the knock-off product would likely be hitting the shelves before LEGO had completed their own testing.
IP theft is a huge concern, especially in Communist countries like China or Vietnam where collective ownership, not individual ownership, can form part of the foundation of peoples’ cognitive map in doing business.
Lastly, whether the supplier carries the cost of completed goods unsold until they are delivered and accepted, or the purchaser carries that cost, shipping from overseas – especially across the Pacific – is not a trivial amount of time to have so much inventory on the books. That cost, and the opportunity cost of not having that money to use elsewhere, can be significant.
Easier… More Seductive
In the movie The Empire Strikes Back, the hero Luke Skywalker asks Jedi master Yoda “Is the Dark Side stronger?” Yoda replies that it is not, but it is easier, more seductive. In a similar vein, the lure of low labor rates is likewise easier and seductive.
In my essay about the cost of plastic raw materials vs. the cost of the end part, I noted the prime error in our presentation to the customer’s purchasing agent. Specifically, we placed the two materials’ price per pound first in that presentation. Our customer never got past that to the actual analysis where we showed the more expensive material actually created a cheaper part. Similarly, decision-makers hear the siren call of lower labor rates; they seem to never get past that to the harder-to-quantify costs of sourcing from overseas.
Throwing Down the Gauntlet
In one of my “Top Ten” best and most imaginative science fiction works I’ve ever read, specifically the book The Uplift War – sequel to Startide Rising – Fiben Bolger, a genetically-engineered chimpanzee, awakens after being stunned into unconsciousness. Wracked with thirst, he overcomes his instinctive drive to grasp the pitcher of water on the table and chug from it. Instead, hands shaking, he pours glass after glass of water and drinks that way. Reminding himself to “Take the hard path, the one requiring thought” he elects to subvert his instinctive, emotional reaction to, instead, drink like a sentient being.
Get with your Quality people, your receiving Inspectors, and your manufacturing people. Poll people on the floor; survey the time your organization wastes in weeks-long email exchanges and travel. Then take the hard path: sharpen your pencils, get help from the Reshoring Initiative or other, similar organizations… examine Lean Manufacturing’s potential effects on your costs. And bring manufacturing home.
Have confidence in your fellow Americans that they can – and want to – compete on the global stage. And then… give them the chance.
© 2014, David Hunt, PE
* I hate the term “informational interview”; I know it’s the standard term, but the word interview is such a heavy, loaded word that I like to avoid it to lower the tension level when I’m asking for a meeting.