Offshore Manufacturing A Paradigm for Decision Making

Offshore ManufacturingA Paradigm for Decision MakingBusiness and Systems Aligned. Business Empowered.TMManufacturing & Technology1© 2004 BearingPoint, Inc.AgendaWhy US Companies Choose Offshore Manufacturing ?What are the Current Offshore Manufacturing Trends ?What Difficulties are Encountered by US Companies in Offshore Manufacturing ?What Works for US Companies in Offshore Manufacturing ?SummaryManufacturing & Technology2© 2004 BearingPoint, Inc.Why US Companies Choose Offshore Manufacturing?FinancialUS Companies take advantage of low payroll costs (i.e. wages, healthcare benefits, insurance payments) in Ireland, South Africa, China, India, Singapore, Philippines, South America and Eastern EuropeProduct costs have been significantly cut down (5 to 20% reductions in Cost Of Goods Sold), especially in labor intensive industries such as apparel and textiles, toys, wood working, consumer electronics and automotiveOverall product costs are still lower even after logistics costs and tariffs are factored in; therefore US Companies are able to offer their products with desirable price advantages to their customersWorkforce FlexibilityThe labor pool is almost infinite –both for white and blue collar (i.e. In India 2 million people graduate from college each year)The workers are more motivated to do multiple tasks without increase in grade or payManufacturing & Technology3© 2004 BearingPoint, Inc.Why US Companies Choose Offshore Manufacturing?CompetitiveUS Companies see huge, untapped market opportunitiesfor their goods in developing countries that are coming up on the economic growth curve By establishing manufacturing plants and employing large numbers of workers, they are creating a marketing environmentwhere their goods will be preferred over the competitors (i.e. increasing brand familiarity and positive bias)In free global marketeconomy, US Companies naturally know that if they do not expand into new markets and tap into the abundant labor opportunities; their competitorsin US, Japan and Western Europe surely willLong Term Effects of Globalization in USUS Companies are taking part in the global value chain as innovatorsand designers or marketers and distributors; as opposed to low cost producers or specialized assemblers US Consumers are enjoying lower prices of goods manufactured offshore, and new domestic marketsare evolving made up of the low incomepopulationDue to offshore manufacturing and resulting plant closings, US manufacturing jobs arebeing lost(mostly blue collar), forcing the local workforce to pursue new skills, education and shift to service industriesManufacturing & Technology4© 2004 BearingPoint, Inc.What are the Current Offshore Manufacturing Trends?Offshore Manufacturing Strategies at Tactical LevelIn order to increase market share and sales in emerging markets, US Companies develop low cost versions of their goodsthat are affordable to local consumers in offshore marketsUS Companies use a much lower automation leveland less capital investment in offshore manufacturing (i.e. In China automotive plants use welding robots 30% of the time in final assembly, as opposed to 90% in US)US Companies havefocusedon specific types or modes of production such as component production or final assembly in the countries or regions with the strongest comparative advantage (i.e. Consumer Electronics components in Singapore and China)US Companies are investing in developing countries to improve the infrastructuresupporting their Offshore Manufacturing. Areas of interest are transportation, distribution and 3rdParty Logistics and local supplier networkManufacturing & Technology5© 2004 BearingPoint, Inc.What are the Current Offshore Manufacturing Trends?SustainabilitySince 1970, in some US Companies manufacturing output has more than doubledwith automation, innovative supply chain improvements and business reengineering efforts; resulting in significant workforce decreases. For those companies, shipping and inventory costs, faster distribution, and customer service level are much more important than low wages.For US Companies, the advantages and challenges of offshore manufacturing vary significantlyby The physical nature of the industry (i.e. Steel Industry has high transportation costs with heavy and bulky goods), The organizational environment of the company Legal, regulatory and policy influencesManufacturing & Technology6© 2004 BearingPoint, Inc.What are the Current Offshore Manufacturing Trends?Industrial Production is Increasingly Moving to China Driven by customer demands for industrial machinery that is less expensive, manufacturers are increasingly moving their production to China in order to be more cost effective. In particular Southeast Asia’s manufacturers are adding production experience to China’s low cost. Multinational corporations are taking advantage of this production platform and shifting capital to China to optimize their global production distribution. These forces are widening the capability-adjusted cost gap between China and other production locations, resulting in rapid market-share gains by China. •In the past five years, southern China has established itself as a prime center for manufacturing by drawing workers from the more rural inland. The country is currently building out a solid infrastructure with airports, good communications and logistics support (to the international community) for manufacturing entities abroad. However, labor and shipping costs are increasing, sending more manufacturing to northern China.•Boosted by its recent accession into the WTO, China provides a large population (1.3b) with an attractive cost of labor, willing to work longer hours. Consumption of manufactured goods in China is also rising exponentially. However, the country’s banks are still laden with debt, which could result in financial turmoil not unlike Japan.•Countries like Singapore that have lost their cost-competitive advantages (due to rising labor costs) have already started to transition expertise from high volume/low-end manufacturing to higher value-added leading-edge technology production (as well as the design and development of high tech products).Manufacturing & Technology7© 2004 BearingPoint, Inc.What are the Difficulties Encountered by US Companies in Offshore Manufacturing?Supply ChainUS Companies managing their offshore supply chains are facing the following challenges:Long offshore transit times -shipping, customs out/in and distribution-resulting in higher inventory costsInability to establish a network of reliable and high quality suppliers for raw materials and subassemblies required for offshore operationsPoor logistics infrastructures –limited storage facilities, unpaved motor ways and limited railroads-causing delays, material loss and inventory build up Fragmented distribution and 3rd Party Logistics systems that operate as “black holes” with no visibility to goods in storage or in transitLack of computerized inventory management systems in warehouses which make it difficult to manage assetsRegarding the offshore sales side, inability to collect timely and accurate demand data from offshore consumers, which results in higher inventories and increased cycle timesManufacturing & Technology8© 2004 BearingPoint, Inc.What are the Difficulties Encountered by US Companies in Offshore Manufacturing?Business ComplexityUS Companies also face many political and cultural difficulties while trying to establish their businesses offshore:Lack of understanding culture, political power and government hierarchy to operate within the systemInability to by-pass bureaucracy and navigate business through various regulatory entities at national, provincial and local levelsInability to manage their business within the complex offshore banking, tax and financial servicesInability to prevent or take legal action against the violation of intellectual property rights such as trademark counterfeiting (i.e. From software to clothing billions are lost in piracy and counterfeit every year)Manufacturing & Technology9© 2004 BearingPoint, Inc.What are the Difficulties Encountered by US Companies in Offshore Manufacturing?Customer Support OperationsIn highly competitive manufacturing industries (i.e. PC manufacturing, automotive, textiles and apparel), strong customer support is a significant factor to distinguish a company from its competitors. US Companies must ensure to overcome the below challenges before moving their customer support operations to overseas:Poor telecommunications infrastructures in offshore countries causing customer service delaysInability to find well trained, customer focused support resources who understand the the concept of service qualityand its implications to the success of the manufacturing companyLack of adequate product knowledge and experience Communication problems between the customers and customer support representatives -differences in language or foreign accentsCase in Point: In a move that could dampen the tech sector's unbridled enthusiasm for low-cost outsourcing, DELL Corporation said it would stop routing some customer-support requests to call centers in India after customers complained about the quality of service. (E-Commerce Times “Dell Recalls Tech Support from India After Complaints”) Manufacturing & Technology10© 2004 BearingPoint, Inc.What are the Difficulties Encountered by US Companies in Offshore Manufacturing?Product Development and InnovationAlthough offshore manufacturing of low-cost, high-volume and low complexity products provide competitive advantages; US Companies prefer to stay onshorewhen it comes to innovative, new products with low-volume, high-cost and high technological complexity (i.e. Semiconductor wafer processing systems, CAT scanners, MRI systems, Medical diagnostic and delivery systems, Aircraft Engine Monitoring systems). The main reasons are:Lack of expensive, sophisticated technological infrastructure required to manufacture the complex products such as optics, robotics, precision positioning sub-systems, wet and dry chemistries etc. Communication difficulties between engineering and manufacturing who need to work very closely together, exchanging highly complicated information during the alpha, beta testing and initial launch of these complex products Inability to find high precision and high quality materials or components in low quantitiesLack of offshore experience and know-how in new, innovative technologies, due to the very limited R&D carried out in offshore countriesCase In Point: Offshore credentials are often outstanding. But there is so little real design being done offshore that these engineers have little opportunity to get hands-on experience. Open up a manufacturing facility in Taiwan and you'll either end up relocating much of your U.S. technical staff, or resign yourself to investing the time and resources to train new hires.(Electronic News “When to Build Onshore”)Manufacturing & Technology11© 2004 BearingPoint, Inc.What Works for US Companies in Offshore Manufacturing?Doing Business OffshoreLeaders of US Companies who have established successful offshore operations have worked both on the politics as well as the logisticsof doing business abroad. Some examples are:Understand the offshore culture, ethics and traditionsBuild strong relationships with local government contacts and closely follow all relevant trade regulations and proceduresUnderstand the structure of the supplier network and the structure of the distribution channelsUnderstand how to penetrate the market with new products and how to determine pricing strategiesChoose trustworthy and professional business partners to help facilitate market access, communication channels and market intelligenceManufacturing & Technology12© 2004 BearingPoint, Inc.What Works for US Companies in Offshore Manufacturing?Infrastructure DevelopmentUS Companies invest in developingoffshore supplier networksand communities to compensate for the long lead-times of imported raw materials and subassemblies required for their operationsSome leading US 3rdParty Logistics providersare continuously increasing their presence/market in developing countries, which in turn helps US Offshore Manufacturers to cut down on transportation lead-times and inventories significantlyEstablishing a strong quality managementsystem help US Companies to significantly reduce scrap and improve productivityUS Companies who provide adequate trainingto the offshore workforce, (i.e. usually 3 to 4 times more than in US) reap more benefits by motivated workers, increased loyalty and increased product qualityManufacturing & Technology13© 2004 BearingPoint, Inc.What Works for US Companies in Offshore Manufacturing?Manufacturing OperationsUS Companies adapt their manufacturing processesto maximize the advantages of low labor costs in their offshore operations:Increase the number of shifts (i.e. 2 or 3 per day) Reduce automation and need for expensive capital investment (i.e. In India workers are used to change dies in pressing, body welding and material handling instead of fully automated robots)Use low cost capital equipment developed locallyUS Original Equipment Manufacturers deploy offshore manufacturing to support the stable and predictablepart of their demand (i.e. 60-70% of total demand), and minimize wait time for their consumers and avoid building large inventories for fluctuating demand.Manufacturing & Technology14© 2004 BearingPoint, Inc.SummaryOffshore Manufacturing as an important extension of free global market economy. However, US Companies must take serious considerations in many risk areas summarized below before taking a step: ECONOMIC IMPACTS AND GROWTH CONSIDERATIONS FINANCIAL CONSIDERATIONS GLOBAL SUPPLY CHAIN CONSIDERATIONS REGIONAL CONSIDERATIONS CULTURAL CONSIDERATIONS MARKET CONSIDERATIONS LEGAL AND REGULATORY CONSIDERATIONS SECURITY CONSIDERATIONS US LEGAL CONSIDERATIONSManufacturing & Technology15© 2004 BearingPoint, Inc.