Companies seeking to further improve their supply chain efficiency will have to continue fighting their old foe – variability – albeit in a set of new clothes.
One emerging way to combat demand variability is to locate (some) manufacturing closer to the customer. By reducing lead times due to shorter delivery routes, inventory and waste in the system can be reduced without sacrificing service levels. Much of the recently observed reshoring efforts fall into this category.
Highly flexible manufacturing goes a step further by moving from a Built-to-Stock to a Built-to-Order system for the most erratic demand pattern. Amazon’s printing and binding some of its demand at centers close to their customers while serving base demands from stock is one example of this approach.
When Chinese officials recently announced plans to support investment in robots in China’s manufacturing industries, the reaction in some US circles was one of astonishment, if not incredulity. Much of China’s attraction as a manufacturing powerhouse, after all, has been low labour costs, so turning towards robots would seem like relinquishing a key competitive advantage. In fact, several key drivers explain why this is a very intentional and strategic move.
One key factor is that while China’s labour costs still lag behind those in other key economies, Chinese labour has become relatively expensive compared to nations such as Vietnam and Indonesia. Moreover, Chinese labour costs are increasing at a much faster rate than in the US and, while the gap is still considerable, it is narrowing at a relentless pace. China also faces a labour scarcity in its economic boom centres.
In the last decade, we’ve lost millions of manufacturing jobs to outsourcing. According to U.S. News and World Report, there are now 5.1 million fewer American manufacturing jobs than in 2001. The lure of low wages, tax advantages, and other cost savings has made for a seemingly straightforward calculus, and manufacturer after manufacturer, supported by intricate spreadsheets, has abandoned ship, until offshoring has become the emerging mantra of the new millennium. U.S. companies that still manufactured locally have slowly become outliers.
Interestingly, this dynamic now seems to be changing, as we’re beginning to see more manufacturing in the U.S. Total output from American manufacturing relative to gross domestic product is back to pre-recession levels, with more than half a million new jobs. According to the Reshoring Initiative, 15% of this job growth results from reshoring alone. There are many reasons for this shift back to the U.S.
In the last 20 years, we’ve seen a massive wave of manufacturing jobs move to low-labour-cost countries. Now, many companies are beginning to question whether the cost differential offered by distant suppliers compensates for the cost of working with an extended supply chain. These companies find themselves with massive inventories, yet in spite of those inventories they frequently are not able to meet all demand.
It has been difficult for managers to analyse the cost differential mismatch trade-off because mismatch costs are difficult to quantify. The intuition is that the mismatch costs are high, but the managers I discuss with have difficulty believing that overstocks and stockout costs are high enough to wipe out the cost advantage enjoyed by their offshore supplier. Without solid numbers, it’s difficult for managers to incorporate these costs into decision-making.
As a manufacturing expert, I help factories become more productive by refining the way they operate. Small improvements over time can lead to big changes in the long term.
But it wasn’t until I arrived home late and exhausted from a trip that I realized I needed to use these same principles at home. Opening the closet to hang up my coat, I found the closet crowded with kids’ sporting equipment and old school projects. Similarly, evenings at home seemed shorter as our after-dinner hours became crammed with homework and activities.
Where had all our time gone? And how did the space in our cabinets and closets disappear? Why had the job of doing the dishes slipped from right after dinner to right before bed? And why was I finding myself more frequently being drawn into a game of “Dish Tetris,” struggling to fit all the dishes into the dishwasher when they used to fit in just fine?