Analysis: Home-Sourcing
The contracts you lost to India and China are starting to come back home. Are you ready?
BY BOB KILL
Sean Mowry, left, president of Metal Craft, talks about strategic opportunities with Bob Kill, president of Enterprise Minnesota
For all manufacturers who watched their businesses decline as original equipment manufacturers opted to ship their supplier relationships to cheap-labor countries such as China and India, there is now a solid piece of advice: Those contracts are coming back home, and it will
pay to get ready.
I've heard over and over from manufacturers that the offshoring fad is quickly, even dramatically, losing its appeal for OEMs. Long gone are the extraordinarily inexpensive costs of overseas labor paired with favorable exchange rates that made hiring foreign suppliers such a
no-brainer.
There have been other issues for the offshoring OEM set as well: Product quality is sometimes suspect, intellectual property frequently lacks any legal safeguards, and linguistic and cultural barriers can often complicate training workers overseas - not to mention the
frustrating lags in turnaround time.
Searching for speed, quality and flexibility, many OEMs are quickly dropping their offshoring tendencies in favor of hiring stateside suppliers, some just down the street from their facilities. Let's call this new trend home-sourcing.
OEMs that have engaged home-sourcing have slashed lead times. They receive products in smaller quantities more frequently, which enables them to reduce inventory costs.
They're also able to tap into advice from local consulting or professional services organizations. At Enterprise Minnesota, we're often called in by a manufacturer when an OEM is struggling with a product specification. They might be negotiating over whether the supplier is
using the best process. We can come in as an unbiased consulting organization and evaluate the process, the machinery and the chemistry - and give them impartial advice. That's something OEMs just can't do when the supplier is in India or China.
The suppliers that are benefitting most from home-sourcing are those that have spent time recalibrating their businesses early in this recent downturn. They did some deep strategic thinking and developed a plan to become better suppliers, to find new customers, and to make
sure they weren't squeezed out of work during the recession. They have worked hard to manage up their supply chains and provide more value-added capabilities to their biggest and most important clients. Many manufacturers opened the door to make gains from home-sourcing, as OEMs
similarly re-evaluated their relationships and business dealings with suppliers.
Of course, this is easier said than done. Companies still are adjusting to the fact that their supply chains and relationships can be rather complex. This complexity is especially evident when OEMs crave smaller production quantities and less inventory, as well as quick
troubleshooting, and yet expect high-quality components. Large equipment manufacturers find that it's easier to achieve all of these multifaceted goals and give these issues the attention they need when their vendors are located nearby. When the economy was good, OEMs weren't so
concerned with inventory and total cost of ownership; they were negotiating more on price and tactics instead of high value and strong relationships.
Now it's all about working with clients on the total cost of ownership. That includes thinking about raw materials, manufacturing costs, financing, inventory and shipping -- the whole picture of what it takes to make a product. We always tell manufacturers that if your
relationship with your key customer is with a purchasing agent, you are selling on price. But if you're working with a supply chain executive, then it's easier to negotiate on the total cost of ownership: the quality, the quick turnaround time and so on.
Home-sourcing plays a large role in the total cost of ownership because it means smart OEMs are moving beyond price to select their vendors based on just-in-time manufacturing, ease of problem solving, proximity and quality. When they take the discussion away from price, the
design and production issues are easy to work out and efficiencies are easier to realize. OEMs can keep only 20 components in stock instead of 200, knowing that extra inventory is only a short trip away instead of across an ocean. They've eliminated the soft costs of traveling to
the vendor and working out any finished quality issues, saving time for rework and stocking up with inventory and product.
Keep the focus off price
The end result: When OEMs decided to reshore, they turned to the suppliers that showed a willingness to grow and change as the manufacturer's needs evolved. Now, those suppliers are well on their way to nimbly surviving the recession. The manufacturers that are still
struggling are those that hunkered down without thinking strategically or weren't proactive in working with key customers on being home-sourced into the supplier of choice.
To fully understand the opportunities of home-sourcing is to understand how it fits into the dynamic supply chain as a whole. Many OEMs have invested significant time and effort in tightening their supply chains. As a result, vendors looking to fulfill OEMs' desires to shift
business back home must expand their sales and marketing efforts. They should focus their messaging on their abilities to help customers bring production close to home. Suppliers that spent the past two years reaching out to customers with this logic -- emphasizing their ability to
take on more work and handle just-in-time or small-batch manufacturing -- are getting rewarded with new or additional business from home-sourcing OEMs.
To take advantage of the recent penchant for home-sourcing, the most important move manufacturers can make is to focus not on price, but on value-add design work during discussions. They should help each OEM take a holistic approach to supply chain management, pointing out
that they can help the customer to meet other priorities, including speed, flexibility and precision.
Suppliers are also making themselves more attractive partners by pursuing continuous improvement within their own operations. They are adopting lean manufacturing techniques to become faster, more efficient and more cost-effective, sometimes even with the help of their OEM
partners. Other vendors have made the move into tier-one status by obtaining certifications of quality, such as ISO-9000 or AS9100, an ISO certification required for working with the aerospace industry. This added value fosters a high level of confidence in the quality of a
supplier's products and processes, strengthening the partnership and making it even more mutually beneficial. All of these investments are beneficial to assertive manufacturers. Some are even branching out into selling their services to new sectors, from medical devices to aerospace
and wind energy.
How do you adjust?
In my travels visiting manufacturers throughout Minnesota, I'm surprised at how narrowly some of them view their companies. They think of themselves only in terms of their capabilities. The simplest example is a job shop that thinks of itself only in terms of providing
machining services to somebody else's specifications. To prospective customers, it says, "Look, I've got big machines and I've got fast machines and I can do round parts and tall parts and so on." Everything in that message is about them. They don't try to reach out to the
customer.
A slightly wider view is held by companies that produce a defined product (or service). These companies also think primarily about themselves. They are knowledgeable about their product and spend their marketing efforts trying to identify ways to fit their products into the
needs of customers. While this is better than merely emphasizing your capabilities, it could go further. The business that will thrive in the new world supply chain is enlightened enough to think beyond its own capabilities and intellectual property to what its customers will need,
preferably in conjunction with the customer: That's third-level thinking.
To gain the clearest perspective, it is imperative to think about your universe of supply chain. You can do this by thinking of it as a continuum with five circles, with your company represented by the middle circle. The circle to your right is your customer, and the circle
farther to the right is your customer's customer. The circle to your left is your supplier, and the circle farther to the left is your supplier's supplier. This may seem obvious, but typical manufacturers rarely think beyond two of those circles -- either themselves and their
supplier or themselves and their customer.
By driving yourself to think strategically about the five circles, you'll realize it's not enough to think of suppliers only in terms of profit margins or to insist that your customers order in the way you're used to delivering. Instead, in every case, ask yourself how to help
both your efficiencies and theirs -- your revenue possibilities and theirs.
That brings us back to Enterprise Minnesota's road map of programs, because we're trying to encourage every business to integrate all these possibilities in order to be most successful. Enterprise Minnesota's mission is to help businesses grow profitably, and we know that
profit comes from controlling costs or enhancing revenue. Or, better yet, both!
Forcing yourself to think about that expanded universe of five circles instead of just one or two will give you a clearer perspective on the integration of costs and revenue -- the integration of profitability and innovation, business growth and operational excellence. Here
are some ideas to help you get there.
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Lean up your processes. And think beyond the manufacturing floor.
There is much more that can be made more efficient throughout your entire office. Even if your company has a history of aggressively applying GreenLeanSM principles all through your organization, it never hurts to try to find new ways to enable you to better deliver a quality
product, on time, at a reasonable price.
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Lean up your supply chain "neighborhood."
Think about the effect your supplier's supplier or your customer's customer can have on your operation. Are there ways that you can reach out and help those companies learn and improve from your lean expertise? The leaner they are, the better it is for your business (and
theirs).
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Enhance your quality systems.
Give your customers confidence in your processes and products by pursuing widely accepted and expected quality standards like ISO.
Are you able to respond to and accommodate customers' shifting requests quickly? In terms of human capital, are you able to resolve conflicts and problems with new ideas that keep you on the cutting edge?
Develop and build designs that will not only meet your customers' current needs but also strive to anticipate their future needs.
Showcase your business by marketing with words and images that will matter to your customers. Convey your company's status as a willing and enthusiastic partner that will not only deliver a product order but also will help solve their problems and exploit their
opportunities.
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Problem -solving innovation.
Foster a culture of innovation that looks for opportunities to help solve problems beyond your shop floor -- problems facing your customers or even your customers' customers.
Continuously move forward with a strategic company journey that consciously integrates all of these efforts. When I walk into a business that has potential to grow, the first place I feel it is talking to the key decision maker. Effective leaders can articulate a direct
connection between plan and results.
The bottom line is that shrewd manufacturers aren't waiting for an economic upturn to enhance their profitability. The truly smart ones are identifying and preparing to exploit opportunities such as home-sourcing. They are the ones that will cause the economy to come roaring
back.
Home-sourcing is a trend that's going to continue. In this economy, no company wants to carry inventory. It's expensive and it eats up working capital that could be used for other purposes. Every OEM wants a flexible and fast response from its suppliers, and they have
rediscovered value in the high-quality, precision manufacturing that is a hallmark of American -- and Minnesotan -- production.
Minnesota is blessed with a diverse manufacturing population, and our 8,000 manufacturers are known for precision-engineered, high-value manufacturing. Home-sourcing is a great benefit to the manufacturers in Minnesota and across the Midwest as a whole, whether it's a company
supplying the agriculture, construction, medical or recreational industries.
If an OEM can find a supplier right down the road that offers flexibility, ease of troubleshooting and tighter inventory, it will start turning to that local supplier again and again. And that's a win-win for everyone.
Bob Kill is president and CEO of Enterprise Minnesota.
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