Bringing manufacturing back to the US — and associated profitability

Posted on February 5, 2012 by aviyer2010

An Accenture report titled “Manufacturing’s Secret Shift” reports a survey that shows that 49 % of respondents faced delivery time issues and 46 % faced quality issues associated with outsourced manufacturing. In addition, 73 % faced material cost increases and 57 %faced transport cost increases between 2007-2010. As a result 61 % of the respondents claimed to consider onshoring to better match supply locations with demand points. Is this a temporary phenomenon, that will revert back as soon as gas prices decrease, or a deeper supply chain shift ? Given rising demand in India and China, will production in those locations have to expand to satisfy their local markets or would it be optimal to export supply from the US ? When will the newly emerging sourcing locations, such as Vietnam, become the new manufacturing centers ?

About aviyer2010

Professor

View all posts by aviyer2010 →

This entry was posted in Global Contexts, Operations Management, Supply Chain Issues and tagged Capacity, Cost, Global, Margins, Outsourcing, Quality, Risk, Supply Chain, Trends. Bookmark the permalink.

1 Response to Bringing manufacturing back to the US — and associated profitability

Kyle Harshbarger (@KyleHarshbarger) says:

February 6, 2012 at 1:42 pm

Safety Stock is calculated with Demand during Lead Time. If you have a huge lead time, you need a huge safety stock. So with Asian production, you have saved production costs and increased inventory costs. This is a problem with high variance products since variance increases Safety Stock as well. If you choose to ignore Safety Stock, then you will suffer from a mismatch of supply and demand.

Basic microeconomics tells us to specialize: USA makes things we are good at, China makes things they are good at (relatively). However with lead time making it difficult to meet the demand, I think we’ll see proximity production become more important for high variance products.

It blows my mind how US fashion companies continue to produce their products overseas. Lead times are massive, and fashion products by nature are high variance. They should be working to decrease their lead times as much as possible to better respond to customer demand, so moving production closer to the customer is essential. Zara and H&M have figured it out, but there is a lot of room for more players to copycat.

Reply