Manufacturing Management Strategies for the Small Business Competing in an Offshoring Economy

A walk through any department store will show that the mass production of consumer goods in the US is gone forever. Wal-Mart alone purchases $15 billion per year in goods from China [1]. And while it is unfair to target one country, one estimate has China taking half of the US market in textiles within just the next two years. Its hard for US manufacturing to compete with foreign workers whose monthly income is a mere $33.

To ensure that your organization succeeds, you must understand your customers, your own capabilities, and your competitors. While all three are important, in this article we will focus primarily on the offshore competitors - both their strengths and their tactical weaknesses.

Every football coach knows that to win the game you must study, understand, and exploit your opponent's weaknesses. Its the same in manufacturing. Outsourcing to an offshore company is not a silver bullet, and there are several practical problems with this approach to reducing costs that can be exploited by the small domestic manufacturer. The manager of a small business needs to find strategic ways to turn these weaknesses into his strengths. Like the coach of a successful football team, study offshoring's strengths and exploit its weaknesses for success.

Offshoring's Advantages

The cost of doing business in the US has always been high, and continues to steadily rise. These domestic non-production costs are much higher than our overseas competitors, and include the costs of litigation, energy, unionized labor, executive salaries, environmental regulations, taxes, fuel, health care, and health care insurance. Because many of these costs are lumped together under factory overhead, they are often invisible. Yet they can have a significant impact on product cost. Offshoring can take advantage of the US's high costs by leveraging the lower costs of off-shore manufacturing.

Offshored products have several common characteristics. In general they are high volume products whose demand is long-term and predictable. Because the products are high volume, they can utilize mass production techniques to minimize costs by leveraging economies-of-scale. Because their demand is long term and predictable, frequent interactions between design, manufacturing, and the customer are usually not required.

Offshoring's principle advantages therefore are lower production and non-production costs when compared with the US. Companies can typically reduce their costs by 20-70% by moving manufacturing to lower wage countries. Because of this, understand that high volume, long term products are areas where you will be unable to compete. By shifting business focus 180 degrees, one will find a niche: small volume, dynamic, unpredictable, and fast.

As already mentioned, offshoring is no silver bullet, and its disadvantages make it undesirable in some circumstances. The disadvantages of offshoring include longer supply chains, lower supplier reliability, greater financial risk, variable quality, slower delivery, the instability of some foreign governments, and locally, public and employee backlash from the loss of American jobs.

Further uncertainty lies in the increasing cost of fuel, the changing cost of goods due to the fluctuation in the US dollar, transportation strikes, and more difficult communication. Furthermore, shipping products on a slow-boat from the other side of the world can hamstring market timing, resulting in lost market share and lost competitiveness. Any one of these can make offshoring decidedly unattractive, and some companies have given up offshoring for these reasons.

In the final analysis, US industry has yet to assess the overall benefits of offshoring, and in some cases have found the benefits do not meet expectations on the bottom line.

So, how is a small manufacturer to compete with their foreign competition in an offshoring economy? Some of the answers can be found at two companies that have in-sourced (i.e., moved factories from overseas into the US) and others lie in the inherent advantages domestic manufacturers have over their foreign competition.

Two Japanese companies have moved large manufacturing facilities from Asia to the US: Honda and Toyota. There are many reasons for their respective moves, but one was the need to reduce the length of their supply chain.

A short supply chain improves market timing, lowers transportation costs, and facilitates Just In Time (JIT) inventory systems. Being close to the customer also helps the manufacturer sense and respond to market changes, helping them gain market share. Other advantages are those projects where close collaboration with designers, engineers, and the customer is necessary for success. Any manufacturing manager that ever experienced production problems understands the benefits here.

Honda's short supply chain to its customers, and their suppliers' short supply chain to Honda, are a good strategic example for the small domestic manufacturer. The benefits of a short supply chain are directly transferable to the small manufacturing business, and are a strong domestic advantage.

Both engineers and managers need strong hands-on skills. You need to be able, with your own hands, to make your product. You can't design or manage what you don't understand.

Toyota knows and applies this principle to every new executive manager. Even experienced managers are expected to spend several months on the factory floor working hands-on with labor to find better ways to manufacture product. The tasks vary, but may include investigating machine failures by direct observation, improving machine-man interfaces, or building cardboard prototypes of a new tool.

Regardless of the task, the principles are the same: know hands-on how the product is made, know how to improve processes, and learn to act as an enabler to production personnel. This last element facilitates respect by the worker, since the new executive is helping improve the worker's environment.

This is just common sense. Who ever heard of a football coach who never played the game? You can't lead if you can't even speak the language. Famous Civil War General William Tecumseh Sherman said, "The true way to be popular with troops is... to make them believe you know more than they do." Hands-on knowledge and skills are vital if you are to gain confidence and credibility with labor. You need the street smarts to critically evaluate ideas and recommendations, and make the right decisions.

Many of the great industrial leaders, including Henry Ford ( who was an excellent machinist, having been apprenticed at the age of 16) understood this principle and applied it. Get your managers and engineers on the factory floor, spending time with the people really doing the work.

Offshore outsourcing leverages the economies-of-scale that come with mass production. These savings are not available with small volume manufacturing, primarily because fixed costs must be amortized over fewer products. But how small is small?

Figure 5 shows a typical plot of product cost vs. production volume. The plot is for a weldment, but it applies equally well to other processes such as machining.

At low quantities the dominant costs are one-time costs, including design, planning, prototyping, testing, and fabrication set-up. At high build quantities the predominant costs shift to materials and direct labor. Since one-time costs are amortized over many units, their contribution to the total cost declines with increasing volume.

Products with high build quantities may be economically offshored. Conversely, products with small production volumes are not economical to offshore due to the high fixed cost of transportation, packaging, and logistics. These high mix, small volume products are prime opportunities for domestic manufacturers. To exploit this opportunity, be willing to take the smaller jobs that are uneconomical to offshore.

Speed is a significant advantage for the domestic manufacturer. With product life cycles decreasing at light speed, it is increasingly becoming important to be fast. Use speed to your advantage, because it is one of the greatest disadvantages of offshoring.

US manufacturers are closer to their customers and can deliver goods faster than their foreign competition. As mentioned previously, shipping products on a container ship from the other side of the world can hamstring market timing, resulting in lost market share and competitiveness. Your customers know this, and you can use it to your advantage. Remember; when everything else is equal, (and sometimes when they are not) the fastest company wins.

Direct labor rates are irrelevant if your product is manufactured with no human contact. Therefore design your products and manufacturing systems for zero contact when appropriate. This should always start with rigorous process simplification and continuous improvement. Non-contact manufacturing isn't feasible or desirable in all circumstances, but it should always be considered when designing a new manufacturing system.

When driving for zero contact manufacturing, always look at automation salesman with suspicion, because automation can be viciously expensive. Be sure to look at the whole picture, not just promised reductions in labor costs. When implementing automation, focus on flexible systems (to be discussed later) and minimize dedicated (inflexible, also called hard automation) capital equipment. Make sure that the cost of any automation can be amortized over many product types, so that one product does not need to absorb all its cost. Remember that buying new equipment is easy, but keeping it busy so it is making you money is much more difficult.

Zero contact systems will require the addition of highly skilled (and more expensive) machine programmers, but can be worth it in the long haul, because these workers can also help find smart ways to reduce costs (as discussed below) by improving processes. Zero contact manufacturing can help you compete with low-cost foreign labor.

A highly skilled, motivated workforce is required to eliminate labor costs, improve productivity, and stay competitive. This requires the employment of highly educated and enthusiastic workers. Foreign competition has raised the bar, and the days of the "average" factory worker are over. A high-skill workforce can also apply new technologies and find innovative ways to reduce costs. The Japanese call this Kaizen; the continuous improvement of the process and product being manufactured. Hire the brightest and most enthusiastic workers you can find.

Manufacturing a product offshore is, by its nature, inflexible. Offshoring works fine when 100,000 identical products are needed, but not when each of those products is slightly different. The small manufacturer can exploit this weakness by minimizing hard automation, and instead implementing flexible manufacturing systems whenever possible. Customer needs change, sometimes weekly, so use those changes to your advantage. Don't let automation lock you into a product or prevent you from adapting to a rapidly changing market.

When I ran a precision injection molding business I owned one machine that was extraordinarily versatile. That machine, combined with quick-change tooling, could make an enormous variety of products. Its configuration could be changed from fully manual operation (for insert molding) to fully automatic operation in only a few minutes. It could run from semi-automatic up to speeds of six cycles per minute. It allowed a change in market focus as fast as you could change the mold (a few minutes). Like that injection molding machine, try to buy the most versatile capital equipment available.

Manufacturing flexibility can also mean more than selecting the right type of manufacturing equipment. Technical flexibility is also important, and is the ability of your shop to work on projects in diverse technical fields. For example, many custom products require a combination of mechanical, electronic, and computer equipment. You may need to manufacture a product that uses stepper motors to control a custom fixture mounted to a precision stage, electronic drivers to control the stepper motors, and a PC to interface to the operator. You must machine the fixture, fabricate the electronic assembly, interface it to the computer, and install it in a custom cabinet. Many small manufacturers specialize in one of these technical areas, but few excel in all three.

Configure your business so you have some level of technical expertise in multiple disciplines so you can take on these tough, cross-discipline jobs. If you don't have sufficient in-house skills, network with other local manufacturers to leverage their expertise.

Being inherently flexible, both in equipment and technology, allows you to react (or be proactive) to rapidly changing customer needs. Being flexible gives you a competitive advantage.

Classified work for the department of defense (DOD) and department of energy (DOE) cannot be offshored and represents a valuable opportunity for the small domestic manufacturer.

Unmanned Aerial Vehicles (UAVs) accounted for $860 million in the 2004 defense budget, and the Department of Defense plans to spend $1.9 billion on UAVs in 2007 [3]. Northrop Grumman won defense contracts totaling at least $1.6 billion to develop the Global Hawk UAVs that were used in Operation Iraqi Freedom.

To succeed we must compete, not on cost alone, but on quality, speed, flexibility, technical innovation, and customer service. Dig deep to find ways to help your customer in ways your competitors can't. Add extra value simply by being responsive, smart, reliable, innovative, and fast. Find ways to add extra value by meeting the expectations of your customers, then going a little further.

Target work for customers who require a fast response. Examples of this are custom jobs requiring a quick turnaround. Avoid the manufacture of consumer products (anything you can buy at a department store or from a catalog). Show your customers that the benefits they thought they would get from offshoring don't meet their expectations on the bottom line.

There will always be work for US manufacturers who can solve difficult, short-run, unpredictable problems fast and with high quality. It's a tall order, but thats what it takes to survive in an offshoring economy.

[1] Is Wal-Mart Good for America? Frontline Broadcast. PBS, 12/12/2006.
[2] Degarmo, E. Paul, J.T. Black, Ronald A. Kohser; Materials and Processes in Manufacturing , 8th Ed., Prentice Hall, 1997.
[3] Office of Management and Budget, Department of Defense 2007 Budget, Development and Procurement of Unmanned Aerial Vehicles (UAVs), Budget of the United States Government Fiscal Year 2007.

Dean F. Poeth II, 218 Gower Rd., Schenectady, NY 12302 holds MS and Ph.D. engineering degrees from the Pennsylvania State University and BS in engineering from the Ohio State University. He is a licensed professional engineer in Ohio and a member of the National Engineering Honors Society (Tau Beta Pi), Industrial Engineering Honors Society (Alpha Pi Mu) and Honors Society (Phi Kappa Phi). Dr. Poeth is a Principal Engineer at Lockheed Martin in Schenectady, New York. He is a Lockheed Martin Green Belt and a certified manufacturing engineer.