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fork-in-the-road-what-now

I can’t get that hit rock song by the Clash, “Should I Stay or Should I Go” out of my head.

“Should I Stay Or Should I Go” by the Clash
Darling, you gotta let me know
Should I stay or should I go?
If you say that you are mine
I’ll be here ‘till the end of time
But you gotta let me know
Should I stay or should I go?

I’ve been talking to companies that are now making decisions about keeping their manufacturing and supply base in China or bringing manufacturing back to the US. They are asking the question, “Should I stay or should I go?” and that triggers the song playing in my brain…over and over and over. I wake up hearing it and it plays in my head all day long.
In the 1990s and 2000s, companies went to China out of fear of being left behind, not necessarily because they had made an informed decision based on data about the Total Cost of Ownership (TCO). Now it seems they are coming back for fear of being left behind again.
Total Cost of Ownership is an all-encompassing estimate that helps business people determine direct, indirect and consequential costs of one decision versus another. The idea was developed in the 1980s and applied to the costs of implementing software over its entire lifecycle. But when using TCO in a manufacturing or sourcing decision to stay in China versus moving back to the US, there are many more components to monetize and compare.
For example, you may find additional factors that must be considered beyond simple labor costs, import and logistics costs, such as supply base considerations, automation opportunities, supply chain latency, cost of travel, IP theft, quality and so on.
There are also costs associated with leaving China such as buying out employment contracts, obtaining permits to shut down operations, and the tools and dies left behind. The legal ramifications of these things can add up quickly. There is a lot to consider and trying to monetize all of the hard and soft benefits can be very challenging.
Nonetheless, it is important to consider all costs for a true comparison before you decide, “Should I Stay of Should I Go?’

Walmart 2015

Last week we participated in the Walmart US Manufacturing Summit in Bentonville, Arkansas. Walmart has taken the lead and has ignited the Reshoring movement in America by committing to spend $250 Billion for products Made in the USA over the next few years. The annual Summit was an amazing event again this year, with an important “Open Call” day for suppliers pitching their American-made products to Walmart buyers.
Walmart estimates that 1 million new US jobs will be created through this initiative, including direct manufacturing job growth of approximately 250,000 jobs and indirect job growth of 750,000 in the support and service sectors. This alone is important for rebuilding the US economy, but because of Walmart’s size and influence, other retailers are likely to follow Walmart’s lead and establish initiatives of their own that will also result in more job creation in the US. And as we know, Retailers are the “Mothers of all Supply Chains.” These initiatives will affect manufacturers and their global supply chains.
Walmart is quickly becoming a catalyst for the Reshoring movement for another important reason. By igniting the US manufacturing movement, suppliers and their supply chains will cause the reshoring and redevelopment of key industries needed to support manufacturing in general. Take small motor manufacturers, for example. These small motors are in many consumer products such as lawn mowers, vacuums, hair dryers, and small appliances. Yet most of the small motor production was offshored to China in the early 2000s. Bringing back the production of these motors will help boost US content for many US manufactured industrial products.
Plastic injection molding, cut-and-sew equipment and other component parts will be reshored as a result of this movement. The skills to support all kinds of manufacturing were offshored too, and now skilled labor is in very high demand in America. So the Reshoring movement will drive the redevelopment of these industries and skills in America.
The federal government is supporting innovation through the bi-partisan Revitalize American Manufacturing Act of 2014 and the establishment of 45 Innovation Institutes, bringing together companies and universities to co-invest in advanced manufacturing technologies.
Walmart is the company that will make the difference because it is basing the need for innovation on the demand of its customers, and that is powerful.

tppThe TPP (Trans-Pacific Partnership and Trade Agreement) is at best, difficult to understand. There are a lot of arguments to be made on both sides of the agreement and it can be tough to wade through all of them and read the long associated text in articles for and against. So let me simplify why I am for it.

  1. Increased trade helps create more jobs, including manufacturing jobs that pay more. In our quest to reshore manufacturing, we are trying hard to rebuild manufacturing in the US and the TPP will help. One out of every five jobs in the US can be tied to international trade (about 38 million jobs).
  2. Manufacturing jobs pay better (about 18% better than other jobs). In the US, manufacturing jobs pay between $65K and $85K – squarely in the middle class. And middle class people buy houses, cars, big-screen TVs; they shop at Walmart and send their kids to college. They are the heart and soul of the United States and keep our middle-class economy going strong.
  3. 95% of consumers live outside of the US and with the middle classes growing worldwide, particularly in Asia, our US export markets can be expected to grow. Manufacturing products in America for export put US residents to work, and that is good for all of us.
  4. Trade agreements level the playing field. It’s no secret that foreign governments offer incentives and subsidies to their own manufacturers and exporters. And because the US has such an open-economy, allowing for all kinds of imports, we are seen as a big, red target market for foreign products. Trade agreements put equal rules in place so that all signatories have to play by the same rules and regulations. This will help our exporters and slow or stop unfair imports into the US. We will have legal recourse when the rules aren’t followed.
  5. Small and medium-sized exporters benefit the most because the regulatory hurdles and challenges of foreign countries are standardized or removed. In addition, we see the most reshoring activity happening in small and medium sized companies, so growth in manufacturing is in the US, plus an improved ability to export. The projections say that 98 percent of these companies will benefit from TPP.
  6. Those countries participating in TPP will be required to abide by environmental and labor conditions oversight. While this may not fix the pollution and human rights issues in all participating nations, it is a very strong step in the right direction.

If we sit back and do nothing, surely China will step in with an overriding agreement of their own and it may not be so favorable toward US manufacturers. With TPP passage, we will continue to play a leadership role in Pacific trade.

The bottom line for me is the test of rebuilding the middle class in America through manufacturing. TPP will do that by giving access to export markets for small and medium-sized manufacturers. And that is good for America.

reshoringinstituteWe have been working hard over the past couple of years to help companies evaluate and plan for bringing manufacturing back to America. We believe it’s important to rebuild the American economy and in particular, the middle class. Rebuilding our strength in the manufacturing sector is one important way.

For every new manufacturing job created, there are about 1.5 additional jobs created. This is because manufacturing workers spend their money on houses, cars, consumer electronics, food and clothing which drives employment and economic growth in other sectors. All this spending has a remarkably positive economic effect. Communities thrive, employment rates improve and the American dream is once again revived.

Although we have been assisting clients in their Reshoring efforts, we decided to broaden our efforts by establishing a research and support institute. This gave rise to the Reshoring Institute, a collaboration with the University of San Diego.  The Institute is a 501c3 Non-profit organization and survives on tax-deductible donations.

Our Mission

Reshoring Institute provides research and support for companies bringing manufacturing and services back to the America.

Our Vision

In collaboration with the University of San Diego Supply Chain Management Institute, we provide information, research and support for companies trying to “Reshore” or bring manufacturing and services back to America. This may include things like site selection, tax incentives, science and math education, marketing and PR and cost comparison development. We direct this Reshoring work and include student interns in support of research projects and consulting projects.

You can read more about the Institute here: www.ReshoringInstitute.org or contact Rosemary Coates, Executive Director at rcoates@ReshoringInstitute.orgreshoringinstitute

RESHORINGFor the past 15 years or so, I have been helping companies offshore their manufacturing.  There have been, and continue to be, pretty significant cost savings in low-cost labor markets.  But with the waning US economy, it’s time we wake up and put some Yankee ingenuity into bringing some manufacturing back. We think it is possible to bring 15-20% of offshore manufacturing back to the US.

I am not saying we can or should bring it all back.  There are still global cost advantages to low-cost labor markets.  And China represents the largest single target market in the world to sell goods to.  Companies should continue to  manufacture in China to serve the Chinese market.

The U.S. manufacturing sector has added 430,000 jobs since 2010; a small trickle of what we need to recover, but still a move in the right direction. Companies that are reshoring include some of the nation’s largest manufacturers: Apple, General Electric, Ford, Caterpillar and NCR.  A 2012 study concluded that reshoring could add 2 million to 3 million jobs and an estimated $100 billion in annual output to a range of industries by the year 2015.

But bringing manufacturing back isn’t as easy as you may think.  There are a host of considerations and analyses that companies must do to determine the costs and feasibility of reshoring. Several of the important factors in the original offshoring decisions have dramatically changed. Consider these 5 factors as the initial steps in determining your need to rebalance global manufacturing and reshore some activities back to the US.

1)      Cost Increases, Taxes

2)      Innovation and Automation

3)      Market Access and Localization

4)      Skills

5)      Political Environment and Public Sentiment

We are helping clients evaluate the possibilities now.  For more information go to www.BlueSilkConsulting.com/Reshoring

Recent stories in the Western press describe impending doom for Chinese manufacturing, relating the Chinese demise to Japan in the 1990’s.  But to real China-watchers and experts, this is a naïve view.  It assumes that the Chinese government will sit back and do nothing to correct the trends and that the Chinese economy will stagnate.

While Chinese manufacturing is not known for innovation, it really is just a matter of time.  With 700,000 graduating engineers per year, China is quickly becoming the world’s powerhouse in manufacturing engineering and in continuous improvement.  The next phase is innovation and optimization. 

To address innovation, the Chinese government advocates student exchange programs and invites thousands of visiting US professors into its universities to infuse creativity into the education systems. Over time, this will reignite the creative innovation spark that the Chinese displayed over thousands of years, inventing printing, gun powder, deep water bridges, massive sailing ships and irrigation to name a few.  While US politicians tell us not to worry because China cannot innovate, the Chinese are busy proving them wrong.

To address optimization, China has started on the journey to automation.  Automation and the adoption of software systems will dramatically increase productivity at the factory level and will drive continuous improvement and optimization.  Although this is a long road to travel, it is nonetheless the road Chinese manufacturers are on.

It’s time to wake up and smell the green tea.

Mike Daisey, a journalist and feature writer, delivered a radio show about Chinese factory workers on NPR “This American Life” in January.  I listened to the show one Sunday morning with a friend and kept thinking how odd it was that the things he was saying about his interviews with workers outside of Foxconn, just didn’t ring true.  I remarked to my friend throughout the broadcast that his examples weren’t true, or were odd. For example, he claimed he talked to several young girls who told him they were 12 and 13.  If they were underage workers at the Apple factory, why on earth would they say so and risk losing their jobs in one of the best factories in China?  In another example he talked about guards at the factory gates toting guns.  I have never seen anything like this in the factories I have visited.

Well, it turns out that Mike Daisey lied and embellished his story for NPR and for his off-Broadway monologue called “The Agony and Ecstasy of Steve Jobs”.  Only a few parts of his story were true…enough to make it sound real.  NPR has broadcast a retraction and the world press has skewered Mike for lying.

It’s not that those of us with China experience don’t believe there is room for improvement.  Chinese factories in general have a long way to go to improve working conditions and address human rights issues.  Conditions are not consistently up to world standards yet.  But the Foxconn factories are some of the best places to work.  Apple, HP, Dell and other companies have taken pains to monitor the production environments to make them humane and safe.

What bothers me most about Mike Daisey’s lies is that he has incited people to believe more fiction about China.  It’s time we dig deeper and question stories like this in the Western press and demand that our news companies verify all facts prior to printing or broadcasting.

On Nov. 8, 2011, the Senate Armed Services Committee held a hearing on counterfeit parts in the defense supply chain, including electronic parts used to manufacture weapons and other defense department equipment. Investigators found that counterfeit or suspect electronic parts were installed or delivered to the military for several weapons systems, including military aircraft such as the Air Force’s C-17 and the Marine Corps’ CH-46 helicopter, as well as the Army’s Theatre High-Altitude Area Defense (THAAD) missile system. Legislation is being proposed to require defense contractors to certify all parts for authenticity.  This will place a tremendous burden on defense supply chains in terms of authentication process verification

But of course, counterfeiting is not limited to defense goods.  Any electronic gadget or equipment is likely to include some counterfeit parts, and the counterfeiters are getting better and better at it. It is so difficult to tell counterfeit from legitimate parts, that industrial buyers are often fooled.  Even the price of counterfeits may be equivalent or close to legitimate parts, thus eluding suspicion about parts origins.  This is a problem of such magnitude, that we are just beginning to unravel the stories.  Counterfeit parts may cause your iPOD to fail early or not work properly at all.  But think about the real danger in counterfeit parts in machinery, automobiles and aircraft.

The only way to control counterfeiting is to maintain control over your entire worldwide supply chain.  This means verifying and monitoring all parts suppliers, distributors, subcontractors and manufacturers.  Take nothing for granted. Know your supply chains from start to finish. Verify and monitor every step of the way.

The Lunar New Year started on Feb 3 and lasts about 2 weeks.  This is the time that Asian families across the world gather to celebrate family and good fortune.  This year is the Chinese Zodiac Year of the Rabbit or The Year of the Cat in Vietnam.  The Rabbit or Hare is the 4th animal in the 12-year cycle.

Happy New Year wishes are expressed as:  “gung hau fat choy” (Cantonese) or “gong xi fa cai” (Mandarin) which generally means “Congratulations, may you be prosperous”

The Year of the Rabbit is expected to be a placid year and very much welcomed and needed after the ferocious year of the Tiger.

Here’s the prediction from the Chinese Cultural Center in San Francisco: Good taste and refinement will shine on everything and people will acknowledge that persuasion is better than force. A congenial time in which diplomacy, international relations and politics will be given a front seat again. We will act with discretion and make reasonable concessions without too much difficulty.

If you have manufacturing sites in China, you should expect delays in shipping as most of the factory workers return home for the long holiday.  During Chinese New Year, there may be no one left in the factory to answer the phone or check email. 

Be vigilant in checking the quality of products made just before and just after the New Year.  Before the start of the holiday, factories rush to complete all orders and ship everything possible.  Quality may be overlooked in anticipation of the holiday.  Just after the New Year, a significant number of new migrant workers (30% to 40%) start jobs or change jobs in factory towns and there may be a significant learning curve, causing quality deterioration.

I’ve been watching and listening to the events and chatter about Hu Jintao’s visit to the US.  There is certainly a striking difference between the way China and the US are acting now that Obama is President and Clinton is Secretary of State.  While there are still many issues to be resolved, there appears to be mutual respect between the leaders.  This makes me hopeful.

President and Mrs. Obama even hosted a rare State Dinner for Hu.  President Bush just had a working lunch.  This is a significant difference in the respect given to US-Chinese relations.  It’s about time America took its head out of the sand and fully acknowledged the second largest economy and fastest rising super power in the world.

The economics of  the two countries tell the story of why it is so important to have a good working relationship.  The US GDP is $14.6 trillion.  The Chinese GDP is $5.7 trillion and rising at double digit rates.  But if you compare PPP (Purchasing Power Parity) or PPC (Purchasing Power Correction), a comparison of consumer buying power in each country, China’s economy is already larger than the US.  And it will continue to grow.  In the next few years, China’s middle class will be 700 million people;  more than double the population of the entire US.  Not only will this be the largest consumer market in the world, it will become the greatest target market ever for US goods and services.

Of course we all understand that China is still working on things like human rights and democracy.  But there is no stopping the warp-speed economic development inside China.