Based on feedback in LinkedIn groups from our posting last week from The Reshoring Initiative’s, founder Harry Moser which beautifully covered the current state of reshoring offering up which companies have done it, who are planning to do it, and what it’s all about, we now give you another guest post around reshoring manufacturing and the serious unknown risks of outsourcing manufacturing to places like China. The guest blogger on today’s post is Terence Burton.

Terence T. Burton is President of The Center for Excellence in Operations, Inc. (CEO), a management consulting firm with headquarters in Bedford, New Hampshire and offices in Munich, Germany.  This blog includes material from his latest book, “Out of the Present Crisis: Rediscovering Improvement in the New Economy” was released in June, 2012.

For additional information, visit www.ceobreakthrough.com

Please also feel free to contact the author directly at burton@ceobreakthrough.com

Reshoring Manufacturing & are There Serious Unknown Risks of Outsourcing?

Based on a book I read recently, the answer is a resounding YES!  The name of the book is “Death by China: Confronting the Dragon – A Global Call to Action,” by Peter Navarro and Greg Autry, and I recommend adding it to your reading list.  If half of this book is factual (I believe that it is much higher based on our own benchmarking and outsourcing industry experiences), Western manufacturing is in deep trouble if our government and corporate America remain on the same outsourcing path.

How Did We Get Here?

One of the fundamental reasons for outsourcing was a rush to establish a presence in China, Brazil, India, and other high-growth countries with the potential to generate huge demand for goods and services. Another major driver was the availability of low-wage workers who could produce goods at such low costs that organizations could essentially flood the global marketplace with their products. Companies went after outsourcing like the next gold rush, in search of quick incremental revenues, significant cost reductions, and huge profits – a winning, can’t-miss strategy.

In retrospect, though, many of those outsourcing decisions were based on a flimsy foundation, driven by a cursory spreadsheet analysis that focused on labor and other visible profit-and-loss elements of costs.  These costs are often irrelevant in the totalreshoring manufacturing dragon scheme of outsourcing.  Some organizations, moreover, blindly followed the outsourcing paths taken by other companies. Several executives even mandated that “X levels of outsourcing be achieved by Y date” without any analysis at all. Along the way, companies became confused about the difference between price and total landed cost, and they failed to consider all of the cost factors associated with outsourcing.  Why should they?  The financials looked healthy, and all of that hidden stuff will be swept under the rug as restructuring write-offs by the next leadership regime.

Those overlooked factors— the hidden costs and risks of outsourcing, were not considered or even recognized in the outsourcing strategies of most organizations.  However they are very real costs that can represent anywhere from 14% to as much as 2X-3X+ of total production cost.  On top of this, many of the economics of outsourcing have changed dramatically such as oil prices, natural gas rates, transportation and freight costs, rising wage rates, lost opportunity due to knock-off products, coordination and third party costs, environmental, safety, and brand risks due to the unknown substitution of toxic or substandard raw materials, etc.

Rationalize Outsourcing or Surrender the Future

Many of these outsourcing decisions have not been revisited since they were implemented 10-15 years ago.  Nobody likes to hear bad news, but some of these decisions were wrong from the get-go.  Over 50% of outsourcing decisions need to be relooked at in terms of short and long term feasibility.  Now is an especially appropriate time for companies to take a fresh look at their current strategies and policies and be sure they understand the true costs of outsourcing, and perhaps start leading the charge for reshoring manufacturing to their home bases.  Some of the initial decisions are still no brainers; for many other scenarios, an objective analysis of all the facts will identify significant benefits from an improved sourcing and fulfillment strategy.

Several organizations are off to a good start.  There are many positive movements reshoring manufacturing back to America and rebuild the U.S. manufacturing base.  In other cases, the basic sourcing strategy might remain unchanged, but with significant wastes and costs eliminated in the total supply chain.  One approach to improvement is to rationalize outsourcing decisions of the past, using a total cost of ownership (TCO) model that captures both visible accounting costs and the huge hidden supply chain costs/risks such as professional time and travel for coordination, scrap, warranty and returns, currency exchange issues, excess and obsolete inventory, cash-to-cash implications, lack of flexibility and responsiveness to market shifts, premium freight, technology pirating and intellectual property theft, and on and on.  In many cases, this analysis by itself points the needle of outsourcing strategy toward a home direction.

Death By China – The Quick Study

Unfortunately, the complexities of repatriating manufacturing back to the U.S. run much deeper and include global politics, regulatory policies, free trade practices, and a number of other legalese issues knotted up in our inefficient government.   

“Death by China” provides a candid understanding of the realities behind China’s assault on America and the global economy.  Here is the reality: China is attacking onreshoring manufacturing Death by China every front, with every available economic, political, and policy weapon – from protectionism to cyber attacks to espionage to currency manipulations and much more!  China is doing whatever it takes to capture crucial resources, even if it means back room nuclear proliferation by the world’s most dangerous regimes.  This book tells an incredible and incredibly shameful story about China’s deliberate, engineered power shift in the global economy.

China’s competitive edge comes from a complex array of eight unfair trade practices – each of which is expressly forbidden under true fair trade rules.  The authors provide an exceedingly potent and compelling “Eight Weapons of Job Destruction” that include:

  1. An elaborate web of illegal export subsidies;
  2. A cleverly manipulated and grossly undervalued currency;
  3. The blatant counterfeiting, piracy, and outright theft of America’s intellectual property treasures with absolutely no consequences;
  4. An incredible unwillingness to deal with massive environmental damage in favor of  continued production cost advantage;
  5. Grossly inadequate health and safety standards that create brown lung, butchered limbs, and a dizzying array of cancers;
  6. Unlawful tariffs, quotas, and other export restrictions on key raw materials as a ploy to gain full control over the world’s metallurgy and heavy equipment;
  7. Predatory pricing and dumping practices that push foreign competition out of key market opportunities, and then gouge consumers with monopoly pricing; and
  8. China’s protectionism policies, disguised tariffs and quotas, inflated customs duties, domestic content laws,  and other barriers to keep foreign competitors from setting up shop on Chinese soil.

China has graduated from the factory floor and is hacking the internet to batter down the firewalls of industrial, financial, academic, political, and military information systems around the world looking for valuable data and quietly documenting vulnerabilities that can be exploited  for further future devastating effects.  The outsourcing policies of the past decades have also greatly accelerated the development of China’s military capabilities.  In the event of a hot war, where will the U.S. manufacture performance clothing, armaments, military vehicles and spare parts, equipment, and supplies?  The manufacturing base that existed during WWII and that was converted to provide these products is gone . . . and do you think China will sell their enemy these products?

Fair Trade Is A Mirage

Another reality: Fair trade does not exist.  Rebuilding a U.S. manufacturing base by reshoring manufacturing and other factors, is much more complex than relooking at the total cost of ownership or individual patriotic decisions to re-shore products back home.  The book provides a wake-up call about what happens when the West is focused on the next quarter, while China has been focused on the next quarter of a century.  The authors describe the past decades as a period where is no honor among thieves – and no patriotism among American corporations.

A Few Chilling Facts

Throughout the book the reader is torn between a little ”China bashing” and hard evidence that begs the question, “How can this be happening?”  The latter chapters provide a prescription for breaking down the Eight Weapons of Job Destruction.  It is blatantly obvious that the solutions are complex and will take years of combined industry, regulatory, legal, and political policy to unravel.   Unfortunately, our government is presently too preoccupied with a number of other more important scandals such as Fast and Furious, Benghazi, the IRS cover up, and secret AP subpoenas.  Meanwhile, one can only hope that the American liberty bell shakes executives and political leaders out of their slumber so that they finally realize that China’s economic policies are bankrupting the United States of America.  This book leaves one wondering, “What have we allowed to happen to our economy, our country, our future generations in the interest of short term profits?”

In summary, “Death by China” does not signify the end of the World, but it does provide a well structured wake up call backed up by lots of compelling facts and examples.  It also underscores the “total fact-based” need to improve outsourcing, and develop true fair trade relationships with our global trading partners.

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