Spend Matters welcomes a guest post from David Simchi-Levi, MIT engineering Professor and OPS Rules Chairman.
On December 6th, Apple's CEO Tim Cook announced a plan to invest $100M in manufacturing a line of Mac Computers in the US. While cynics may say that this is only assembly, will create only 200 jobs, and is partly motivated by public relations, there may still be practical considerations for the move and it may ultimately have some positive unintended consequences for US manufacturing.
In the last year, there has been a lot of discussion and excitement around reshoring. In parallel, a growing number of US executives are repatriating their manufacturing capabilities--moving some production operations back from overseas. In August 2010, Ford announced plans to bring about 2,200 parts-production jobs back. Another example is Caterpillar, which is investing $120 million in a new Victoria, TX, plant to make excavator machines--devices formerly made in Japan. Similarly, GE has announced 15 new manufacturing plants or existing facility expansions in the US, from a new locomotive manufacturing plant in Texas and an aircraft engine composites factory in Mississippi to appliance and lighting facilities in Kentucky, Alabama and Ohio. And now Apple!
This trend has sped up in the last few years not only because of job losses in the US but also because the economics that made off-shoring attractive in the first place have changed for the following reasons:
- Oil price - the move to low-cost manufacturing in the 90s was driven in part by cheap oil prices. But oil price has tripled in the last decade, and as a result, logistics costs have increased significantly. Most recently another twist has been added with the US producing cheap natural gas, thus allowing certain industries to reduce manufacturing costs. Therefore, the combination of high transportation costs to ship from overseas and low manufacturing costs to produce in the US can financially motivate re-shoring.
- Labor Costs - in the last few years, labor cost in China has increased year-over-year by almost 20% while labor cost in the US has increased year-over-year by 3% and in Mexico by 5%. So, if your company took production sourcing decisions five, seven or ten years ago, you may need to revisit these decisions today.
- Automation - cheap sensors, fast computing and new technologies have led to new user friendly manufacturing automation that increases productivity. These improvements in productive change economics and reduces the importance of low labor costs. As a result, the focus of manufacturing companies is more on skillful workers rather than low-cost countries.
- Risk - global companies have realized in the last few years that strategies such as outsourcing and offshoring significantly increased risk because their supply chain is geographically more diverse, and as a result, exposed to all sorts of potential problems. This drives companies to reevaluate their supplier and manufacturing base in order to increase flexibility and reduce risk. I have developed the Risk Exposure index™ that enables companies to prioritize their efforts and address the "black swan" risks that they had no idea how to approach before.
All of this of course does not imply that manufacturing will disappear from Asia, but rather that we see a move from a global manufacturing strategy to a more regional strategy. In such a strategy, China manufacturing may focus on emerging markets, Eastern Europe on European markets and the US or Mexico on the Americas (see my paper in Sloan Management Review).
This is reflected in the results of a survey I ran at MIT in mid-2012 of 108 U.S.-based manufacturing companies with multinational operations over the past two months, which was quoted in this WSJ interview: Some Firms Opt to Bring Manufacturing Back to U.S. The companies range in size from annual sales of about $20 million to more than $25 billion, and most of them are over $1 billion. I note that "about 14% of U.S. companies surveyed plan to move some of their manufacturing back home."
"Among the main reasons cited for reshoring: a desire to get products to market faster and respond rapidly to customer orders; savings from reduced transportation and warehousing; improved quality and protection of intellectual property."
Finally, the unintended consequences of the Apple move: increased use of US made parts and automation technology, creation of a highly specialized labor force and innovation related to the close proximity of Apple's development with manufacturing.