A struggle that is not often discussed when it comes to reshoring is companies learning to manufacture their products again. It may seem difficult to believe that a manufacturing company could forget how to manufacture, yet it is true. They outsourced manufacturing and focused more on new product development and sales and marketing rather than production.
Many companies have let their manufacturing capacity atrophy over the past +30 years. These companies used to manufacture all or most of their products themselves, often having manufacturing facilities located near their headquarters. However, as the appeal of inexpensive contract manufacturing in China was difficult to resist. Companies started to phase out their own manufacturing and moved their operations overseas to reduce costs and take advantage of the developing supply chains. The operations experts eventually retired, and no one took their place.
The system worked fairly well for some time but could not last forever. A number of companies found that foreign produced products were not as inexpensive as they used to be, and quality and delivery problems could no longer be tolerated. Perhaps even more importantly, the geopolitical situation has changed considerably as well, and companies needed to have at least an exit plan from China even if they did not use it.
The Situation
One such company is a long time MTG client. MTG worked with this client for years in China, assisting with its various suppliers across multiple business units. The efforts were largely successful, but the situation began to change through COVID. Relations with one of its key suppliers began to degrade. Costs were rising and the supplier changed one of the raw materials (without informing the client) that caused significant quality failures in the hands of consumers. These failures were not dangerous to its customers, but they were damaging to the company brand and market share. The long lead times exasperated the issue as there were literally months’ worth of products arriving that could not be stopped. Not only was there a quality; there was a quantity problem. The problem was fixed; however, there was significant financial and reputational damage in the process.
The quality issue was the last straw. The client decided that they needed to own their manufacturing again. But how to do it? Due to our work in many of their suppliers’ factories, MTG knew more about manufacturing their products than anyone on their team. Here is how we provided a solution for the client.
Re-Introducing Manufacturing in a Company
- White Paper the Entire Manufacturing Facility
MTG knew all the shortfalls of the current manufacturing facility. There was poor control and equipment maintenance. They had too many operators and the production line was poorly laid out. Our team was able to layout an ideal facility that streamlined the process. We were able to reduce the number of operators by 2/3 and build quality systems that would identify and eliminate defects for the product was finished. The white paper was the foundation of the next steps.
- Determine Where to Manufacture and How
The client was not sure where to manufacture their products. Their headquarters was in Canada and many on the team liked the idea of bringing manufacturing back to the home office. Yet they also had a lot of sales in Europe. MTG completed a comparative analysis of the various locations to understand from cost, capability and logistical standard which place made the most sense to manufacture.
We advised them that there were two strong choices: Mexico or Canada. Both were in NAFTA and were viable to sell into the US market. Canada allowed better coordination with their design engineers and more reactivity while Mexico was less expensive and had an excellent supply chain.
- Complete a feasibility study on the new manufacturing process
The next step was feasibility on the various options. MTG helped our client run though scenarios with more or less automation. More automation made Canada more cost competitive while more manual processes made Mexico more attractive. We ran complex CAPEX analysis on the various equipment that they would need to purchase, the employee skill sets required, etc.
During this phase, the new factory became less theoretical and more actionable. The CAPEX study found that there were many ways the company could keep low while purchasing high quality equipment and develop the right partnerships to meet their goals.
The analysis showed that Mexico was better choice. MTG introduced the client to a good local partner that would be able to assist with many of the administrative aspects of the company.
The client was now armed with the knowledge of where they should go and what their new manufacturing facilities should
- Build a plan based on the results of the feasibility study
MTG and the client used the results of the feasibility study to develop a detailed implementation plan for the new facility. We knew the layout, the equipment and labor needed, and the desired production. The implementation plan provided the clear tasks, milestones, and timelines for everything needed to begin production at the new location.
Re-starting Manufacturing Takes Time but May be Worth the Effort
The process of starting production at the new location provided the client with the skills to bring manufacturing back into its organization and accomplish its goals. It is now in control of its production capacity and able to respond quickly and effectively to customers’ demands. They also are able to more easily control costs and hedge their bets against possible geopolitical challenges.
Reintroducing manufacturing into your organization after years of contracting it out is difficult yet may be the best option for your business. The changing economic global landscape and consumer demand for more reactive companies are pushing many companies in this direction.
What do you think? Is it wise for companies to bring manufacturing back into their organization and reshore?
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