Rethinking Manufacturing Strategy
Buffeted by years of offshoring, formidable Asian competitors and a global economic downturn, some companies are finding ways to make manufacturing in the U.S. a competitive advantage.
August 21 2009 by Dale Buss
Tweaking competitors and bucking trends, B. Braun Medical CEO Caroll Neubauer has been busy expanding U.S. production over the last few years, raising the domestic manufacturing payroll to about 4,700 now compared with fewer than 3,200 five years ago.
Neubauer has emphasized advanced automation, intense worker training, lean processes and tight integration with product R&D to keep the $1.25- billion unit of Germany-based B. Braun a U.S. leader in intravenous systems and other medical devices.
“Some of our competitors have chosen to go to Mexico and other low-priced markets for manufacturing,” Neubauer says. “But companies like us who’ve decided to work in the U.S. and work with high automation have become the happier and luckier ones.”
Like Neubauer, more CEOs of U.S. manufacturing companies are rethinking how they make things. Not all are doubling down on American production as he has. But, chastened by the global downturn, volatile energy costs, stronger Chinese and Indian competitors, and other factors, some CEOs are recasting manufacturing strategy as they strive for value creation.
“Smart CEOs are waking up and realizing that they’ve got a lot of work to do to restore or maintain manufacturing as a key competitive advantage,” says Conrad Winkler, vice president of the operations practice in the Chicago office of Booz Allen, the consulting giant, and author of Make or Break: How Manufacturers Can Leap from Decline to Revitalization.
Craig Giffi, head of the U.S. consumer industrial products practice for Deloitte LLC, agrees. “The actual process of manufacturing is very important to value creation—for individual companies and for the nation’s competitiveness as a whole— and many CEOs had forgotten that,” he says.
Higher levels of domestic production are a primary result of this rethinking by American manufacturing CEOs. In June, for example, Jeffrey Immelt, CEO of General Electric, committed to “insourcing” more of the company’s capabilities to the U.S., including aviation-component manufacturing.
About 6 percent of Northeastern-U.S. manufacturing firms moved operations that they previously had outsourced back to America in the year ended in mid-2008, according to a survey by the Federal Reserve Bank of Philadelphia—while only 11 percent indicated that they had moved operations abroad last year. That represents a fledgling reversal of previous flows.
And as Procter & Gamble licenses out manufacturing techniques it calls “Reliability Technology” to other companies, more CEOs are trying to “costjustify domestic production that could be beneficial from a total value proposition,” says Mark Peterson, director of external business development for the Cincinnati-based giant.
“They see that offshoring didn’t turn out to be the nirvana they thought it would be,” Peterson says. “They realize that the value of [offshoring] has gone down while their consumers remain in the U.S. More often today, that tips their decisions in favor of putting the next production line in the U.S.”
Such developments are being cheered by those who worry about the deterioration of American manufacturing and the long-term implications of that trend for U.S. economic, social and military security. “The fight for manufacturing is the fight for America’s future,” President Obama has declared.
Among many others, Giffi agrees. “There’s a combination of both a tipping point and a slippery slope, where we move and outsource what appear to be low-value-added activities,” says the Deloitte consultant, “and over time we erode our capabilities, not just within the company or the industry but also within the national infrastructure.”
Indeed, factory output as a percentage of U.S. Gross Domestic Product slid from 15.5 percent in 1996 to just 11.7 percent in 2007. Meanwhile, manufacturing employment fell from about 17.5 million jobs in 1998 to just 13.5 million jobs a decade later. The downturn has accelerated the trend: The nation lost 52,000 manufacturing jobs in July alone.
The picture is even worse if America is compared to its manufacturing rivals. The U.S. now ranks behind every industrial nation except France in the percentage of overall economic activity devoted to manufacturing—13.9 percent, the World Bank reports, down 4 percentage points in a decade.
One of the biggest reasons is that America’s manufacturing CEOs rely on offshoring production to a greater extent than their counterparts. “We run a far higher deficit in goods than any other country,” says Scott Paul, executive director of the Alliance for American Manufacturing.
Because they value domestic production for various economic and social reasons more than Americans, neither Japanese nor German companies have outsourced manufacturing to Chinese producers on a wholesale basis the way that U.S.-based companies have. Only CEOs of British companies, on the whole, have approached the recent willingness of their American counterparts to transfer output to low-cost nations.
Finally, however, some American CEOs are calling for a collective resolve to redress these imbalances. Immelt, for instance—in a June speech to the Detroit Economic Club that has become a rallying point for like thinkers—called for a “national imperative” to revitalize manufacturing and exports, including a goal to “have manufacturing jobs be no less than 20 percent of total employment.”
And there are more calls for an overall U.S. industrial policy that could help restore American manufacturing to its former might—or at least coordinate some greater protection against its further decline—through infrastructure improvements, better training, lower taxes and other policies.
In the meantime, far from relying on Uncle Sam to rescue them, more CEOs are rolling up their sleeves and restrategizing around these three somewhat overlapping approaches for creating maximum value from domestic manufacturing:
- Boosting the innovation and flexibility that make domestic manufacturing more attractive than outsourcing abroad.
- Consolidating the supply chain and enriching supplier relationships close to home.
- Enhancing lean manufacturing and other process techniques to unprecedented levels.
In the Face of Twin Trends
American manufacturing CEOs who decide to repatriate production or keep it in the U.S. are doing so in the face of two trends illustrated in this graphic, which depict the tremendous momentum that outsourcing has acquired. The first chart (left) shows capital expenditures on manufacturing by region: While North America continues to draw them, such investments pale in absolute and relative terms to those being made in Asia. The second chart (right) shows that the cost of labor added to manufacturing in the United States still dwarfs that in China. This is why more CEOs of U.S.-based manufacturers are mounting a defense of domestic production in large part by increasing automation and efficiency levels of their plants.
Home Court Advantage?
American CEOs no longer automatically look to shift manufacturing to low-cost nations in Asia, or even to Mexico. “There was a rush to China—an overexuberance about going there—but it has been difficult finding suppliers and dealing with some of the language and business and cultural issues,” says Lou Longo, partner in charge of global services for Plante & Moran, in Chicago.
One reason the rush has slowed is that investing in new facilities anywhere has become more problematic in this environment. “Companies aren’t interested in spending capital on anything,” Winkler says.
At the same time, the downturn has left lots of domestic capacity unused. “Something [a manufacturer] may have outsourced in a stronger market, for whatever reason, now they’re making different decisions as their internal capacity opens up,” says Tim Emmitt, director of performance improvement for Grant Thornton LLC, in Southfield, Mich.
More CEOs also are re-emphasizing the innovation that can turn domestic siting of production into a strategic advantage rather than a cost handicap. In fact, manufacturing innovation has become “almost as important as the product itself,” says Peter Volanakis, president and chief operating officer of Corning, the world’s largest maker of ceramics and specialty glasses. “So when we think of innovation, we don’t just think of the product—we think of the materials and the process.”
For example, it took great confidence in the company’s engineering and manufacturing prowess for the Corning, N.Y.-based concern to invest millions in a domestic plant for making automotive catalytic converters and diesel-particulate filters in highlabor-cost Erwin, N.Y. Deciding to emphasize the advantages of scalability as well as its technology, Corning began construction of the huge plant on a modular basis in 2002.
“We had to build it way in advance to demonstrate to customers that we were real, and then they ran lots of trials,” Volanakis explains. “Then when new diesel-filter regulations passed [in 2007] and we acquired customers, we could quickly populate the plant with equipment to meet the market need.”
Lately, in the wake of the global collapse in the automotive market, “scale” at Erwin has meant shutting things down—until some market recovery develops. Yet the plant’s modular format, Volanakis says, means it’s particularly cost-efficient to idle parts of it for long periods.
Pelican’s Homegrown Approach
A number of times over the last several years, Lyndon Faulkner has considered outsourcing output, to China and elsewhere, of the protective plastic cases and mobile lighting systems made by Pelican Industries. Several competitors have sent production of their injection-molded products to low-cost Asian countries and now can undercut Pelican on price.
But every time Faulkner thinks about following suit, the CEO of the Torrance, Calif.-based company dismisses the idea—because for the $300-million market leader in practically indestructible cases for military, medical and other high-spec markets, manufacturing everything at home just keeps getting better.
“We have a bunch of arteries that now run through our system and are based on domestic manufacturing,” says the 48-year-old Faulkner. “We’re not tempted to cut any of those.”
One consideration is that highly automated manufacturing has become a core competency of Pelican and must be done close at hand, he says. For instance, Pelican plants have sophisticated “demolding” robots that pluck the case from the machine tool, clean it and even assemble portions of the final product. “You have the one-time costs for these robots but after that you’re not carrying excessive labor as you probably would Asia,” he says.
And last year, Pelican engineers introduced a new technique for changing molds in less than 15 minutes—compared with the previous eight to 12 hours. “No one else is making these sorts of investments in the manufacturing environment,” Faulkner insists, “especially in Asia.”
Faulkner was so confident of the supremacy of Pelican’s approach to manufacturing that the company paid $200 million last year to acquire its largest competitor, Hardigg Industries. Hardigg’s markets were largely complementary, but Pelican found it had to completely overhaul an approach to manufacturing that had left the acquired company a few years behind.
Maintaining the best environment for innovation is another reason Faulkner favors all-U.S. manufacturing. “We need to have a very tight—in proximity—relationship between our manufacturing engineers and the guys designing the cases,” he says.
Producing offshore, he fears, would lead to cases that “bow or aren’t waterproof or air-tight, endangering their integrity.” Competitors do it “and save themselves $10 to $20 on a case, but it may not hold up in harsh environments—and it’s not worth the savings. If you’re a paramedic and need the heart monitor to work when you get to the accident, that savings on the case doesn’t matter.”
Pelican does get some components from offshore, of course, including commodity-like LED readouts for its lighting systems. But moving case assembly, for example, to China and then shipping the final goods to Pelican’s predominantly North American market also would impose nightmarish freight costs. “Our largest cases weigh 40 pounds, and they don’t nest,” Faulkner says. “You’d be paying for a lot of space.”
Another huge factor: U.S.-government entities are some of Pelican’s biggest customers, and they still—despite growing budgetary pressures—prefer things “Made in the U.S.A.”
Faulkner is a Welshman who came to Pelican three years ago after a string of manufacturing-intensive executive positions, the last heading the Microsoft operations group that launched the Xbox gaming console. He has grown Pelican from an $86-million concern, on its way, he says—to a half-billion dollars in annual sales.
And if he keeps having his way, it will all be assembled in America.
Focus on Flexibility
Ford Motor has become one of the highest-profile exemplars of a manufacturing strategy wisely built on flexibility and innovation at home. Ford long has had a global footprint of factories that produce vehicles for local markets ranging from Argentina to Malaysia, as well as other Ford markets, including North America.
But even before Alan Mulally came from the CEO job at Boeing to head the automaker in 2006, Ford’s executive leadership had pinned their hopes on flexible manufacturing. Ford body shops now piece together multiple models at each site, even in mixed or random order, and allow rapid model changeovers. Paint and finalassembly operations are equally flexible. The reduced complexity of model changeovers, in turn, has allowed Ford to boost manufacturing quality and even enhance worker ergonomics.
As the philosophy has taken hold, Ford factories’ flexibility now is beginning to rival that of much-vaunted Toyota plants. “We need it just to maintain our competitiveness,” says Bruce Hettle, Ford’s executive director of manufacturing engineering for global vehicle operations. “It’s also important from a cash-preservation point of view to be able to do it efficiently.”
Now Ford is able to quickly convert its Wayne, Mich., assembly plant—long known simply as “Michigan Truck”—from production of gas-hogging SUVs to output of the in-demand, fuel-efficient Focus subcompact beginning next year. By so doing, Ford will accomplish what domestic automakers so often have failed to do: supply the U.S. marketplace with enough of a hot vehicle.
And Ford is beginning to realize what could end up as the biggest advantage of its success with flexible manufacturing: It can fully exploit its unique status as the only one of the Big Three to avoid the need for a federal bailout. As American consumers extend their goodwill to Ford, the company will be able to capitalize by supplying its dealers with the right mix of vehicles. Already its U.S. market share has been climbing.
Seneca Foods also is increasingly leveraging its high level of vertical integration, even in a commodity business like canned vegetables. The $1.3-billion processor keeps costs down and quality up by making all of its own cans for its Libby’s and other vegetable and fruit brands.
And now, confidence in his company’s own production capabilities could pay off further as CEO Kraig Kayser nears a likely decision to produce an innovative new package in-house. This fall, Libby’s will be making hay with its Jumbo Fruit Cups: a new sixounce plastic container that is larger and sturdier than the segment’s traditional, flimsy four-ounce cups. Seneca is obtaining its new cups initially from a U.S. supplier and the lids separately, from abroad.
“We haven’t made our own plastic containers—yet,” notes Bruce Wolcott, vice president of marketing for the Marion, N.Y.-based company. “But why not do it ourselves? Whenever we can, we feel we have an advantage over the competition—period.”
A Tighter Chain
Even a few years ago, U.S. manufacturing CEOs were content to string their supply chains around the world, chasing the lowest costs of production. They would provide output for local markets in Asia or Eastern Europe to the extent possible, but these operations mainly were aimed to supply the huge and still-growing markets of the West.
Over the last two years, the very pillars of this approach have been shaken. Chinese factories spit out barbed products like lead-painted toys and toxic drywall, and U.S. companies encountered other difficulties in China, ranging from ballooning costs for managerial talent to vexing inconsistencies in application of the country’s Value Added Tax on manufacturing.
Meanwhile, gasoline costs and other energy prices spiraled out of control last year, straining manufacturers’ margins—and highlighting the true costs of relying on far-flung plants, long transit times on the oceans and frustrating delays at clogged American ports.
Then the downturn roiled the global economy, and soured investors and CEOs on the notion that the greenback remained the ultimate safe haven. Add the dollar-deteriorating impact of huge new U.S. federal budget deficits into the indefinite future, and the currency’s weakness is likely to persist for the long term—greatly undermining one of the big advantages of foreign manufacture for U.S. firms.
And now that global environmental police are monitoring corporate carbon footprints everywhere, savvy Western CEOs have to count the offsetting penalties—in “green” taxes and besmirched reputations—of chasing lower production costs in environmentally less strict countries such as China and India.
More often now, manufacturing CEOs around the world are trying to produce locally to serve local Western markets. Consider the recent decision by Volkswagen to establish an assembly plant in the U.S. again, many years after shutting down the assembly plant in Westmoreland, Pa., that produced Rabbit subcompacts. Also chalk up a big part of Fiat’s interest in taking on the fallen Chrysler to CEO Sergio Marchionne’s desire to gain a cost edge for his ambitious attempt to re-establish the Fiat brand in North America.
The idea of shortening supply chains also tends to make Mexico more attractive to U.S. manufacturing CEOs. However, the bloody drug wars between Mexican police and gangs also make some of these executives queasy about the possibility of expanding their supply chains in Mexico.
JM Eagle is the biggest U.S. manufacturer of PVC pipe, a commodity business where “it’s critically more important now than ever before to be close to our customers,” says Walter Wang, CEO of the $1-billion concern. Outsourcing production abroad is discouraged by the fact that PVC pipe is mostly air, so it is difficult and expensive to ship.
But JM Eagle has shortened its supply chain anyway, moving its headquarters to Los Angeles from New Jersey last year to be closer to most of its customers. And Wang has fielded a fleet of trucks that same-day deliver to end customers because distributors have stripped inventories to the bone.
Elkay Manufacturing also is reemphasizing the advantages of a domestic supply chain for production of its sinks and other items, in its bids to American schools, hospitals and other big customers.
“We’ve been investing in our U.S. manufacturing to make it world-class in terms of quality, lead-time capabilities and our cost position,” says Stephen Rogers, president of the several-hundred-million-dollar plumbingproducts division of the Oak Brook, Ill.-based company. “Compare that to long lead times, pricing instability, deliveries that have become iffy and how the Chinese play with the VAT refund—and we can’t afford those risks with our customer base.”
Latex International CEO Kevin Coleman is one of thousands of American business leaders who remain enthusiastic about adoption and dispersal of lean-manufacturing techniques throughout their companies because the business results continue to justify it.
The Shelton, Conn.-based, $75-million manufacturer of latex bedding components relies on lean discipline to make it competitive with a tough domestic rival even though Latex does its manufacturing in high-cost Connecticut.
“It’s our culture of continuous improvement,” Coleman says, noting that Latex International has conducted more than 100 “kaizen events” in its plant over the last three years, resulting in “elimination of 50 to 75 percent of non-value-added activity in each area of operations.” As a result, the plant could produce 800 units a day three years ago—and now is up to about 1,900 units daily with the same fixed assets and 40 percent fewer employees throughout the company.
American Leather CEO and founder Bob Duncan is using the downturn to amplify the advantages of a business model that relies on taut factories for “mass customization” of couches, chairs and other pieces of furniture for retailers ranging from Macy’s to small regional chains. Duncan, a former manufacturing engineer, has applied across-the-board automation, precise just-in-time logistics and the principles behind the iconic Toyota Production System to optimize his plants.
Over 18 years, the Dallas-based company was able to ramp up the number of unique collections it makes to more than 150 from just 10. U.S.-only production allowed American Leather to promise lead times that are just one-fifth to one-third those of its competitors. And last year—despite the fact that the housing crash slashed company sales to about $60 million from $75 million in 2007—American Leather acquired a fabric-upholstery company called John Charles Designs, adding the complexity of manufacturing furniture that can bear more than 280 different cloth patterns.
“We had developed our manufacturing expertise to where we were producing all of [the John Charles] goods in our own factories as of February,” Duncan explains. “That’s much faster than we could have built a fabric-upholstery business organically. And now we’ve opened ourselves up to supplying huge customers like Disney, and the Hyatt and Hilton hotel chains, who largely prefer fabric upholstery over leather.”
Still, there is a sense that American manufacturers have already wrung the maximum benefits out of lean processes and just-in-time methods, as well as Six Sigma, Total Quality Management and other seminal concepts of manufacturing reform. Their now-ubiquitous Manufacturing Execution Systems and other software-based miracle solutions also have stopped generating additional new benefits.
As a result, some manufacturing CEOs are taking the next steps. “Although in its infancy, the next phase is using more predictive modeling and simulation of manufacturing processes before any real money is spent on prototypes and testing, which shortens the whole cycle of getting products to market,” says Michael Newkirk, global marketing manager of manufacturing and supply chains for SAS Institute, the Cary, N.C.-based business-software leader. “That’s something where American companies are already leading,”
And such remains the overall interest in manufacturing renewal that Procter & Gamble faces booming demand for its proprietary Reliability Technology, which focuses on improving the productivity of a wide variety of manufacturing processes by eliminating bottlenecks.
The methodology helped P&G boost the performance of its own factories into one of the primary competitive advantages for its brands. Manufacturing CEOs are interested in P&G’s technique, says the company’s Peterson, “because it gives them the potential to get the most out of their current capital base, and that’s always going to be more efficient than building a new production line—wherever it is.”
In fact, the buzz around Reliability Technology has become such that non-CPG manufacturers are sniffing around it as well. “Now we’re seeing interest in potential applications by auto—and even airline—manufacturers,” says Jeff Weedman, P&G’s vice president of external business development.
None of the three broad strategic prongs outlined here comprise—even in combination—a panacea that will ensure either individual manufacturing CEOs, or all of U.S. industry collectively, can reverse the tide on domestic production. But at least they give American corporations the tools to give it a good shot.
At GE, for example, Immelt announced in his Detroit speech that the company recently had decided to augment capabilities in its plant in Louisville so that it can build an energy-efficient new water heater, adding 420 jobs.
“We could have made this product in China,” Immelt said. “But our Louisville team has committed to quality and productivity standards that make them competitive. We can serve our customers with speed and quality. We can make the same profit by manufacturing in the U.S. and our team deserves their chance to compete.”