Regional Manufacturing: from Philosophy to Practice
By by Pamela J. Gordon, TFI CEO
Mar 26, 2015
Moving supply chains closer to end customers — for cost savings and customer responsiveness — is one of Craig Carlson’s passionate philosophies.
Though many other supply-chain managers have regional-manufacturing philosophies, they’ve candidly admitted that they (1) fear broaching to their executives alternatives to China, or (2) have achieved little movement of their company’s overall supply chains.
While Outerwall (formerly Coinstar) has always used North American contract manufacturers to build their kiosks for predominantly North American customers, 8 years ago the company started sourcing labor-intensive sheet metal sub-assemblies, cables, and plastics from China, to take advantage of lower labor costs there. Today, Outerwall’s supply chain for these parts is dominantly in North America. From this regional-manufacturing strategy, the company reduced lead times without increasing costs.
How Outerwall accomplished this successful move is featured in the third in TFI’s Supply-Chain Rescue series.
TFI’s Pamela J. Gordon: You started at Outerwall, headquartered in Bellevue, Washington, in 2012. How much of the labor-intensive supply chain has Outerwall since brought back to North America for North American customers?
Outerwall’s Craig Carlson: We’ve moved approximately 60% (sheet metal, cables and thermo-formed plastics so far) and are in the process of awarding another wave or parts here in 2015.
For example, in mid-2012 we began to evaluate 10 sheet metal suppliers here on the West Coast, then narrowed the list to 5. We then initiated a request for quotation (RFQ) for the sheet-metal parts we needed, and awarded the business based on a weighted matrix of cost, lead-time, quality-audit results, the level of sophistication and compliance with the suppliers’ own Quality Management System, perceived management strength, and environmental issues. We chose 1 supplier and were surprised to find our winning supplier to be less expensive than China on 4 of the first 5 high-labor content parts.
In Asia, labor costs have continued to climb while North American suppliers have gotten more competitive, and of course the lead times are much shorter due largely to transportation.
Gordon: What are some of the financial points you proved?
Carlson: Costs are now much more competitive here in the USA than they were 5-10 years ago, while lead-time and quality are much easier to manage. Further, China’s and Mexico’s labor rates are now much closer than they were in the early 2000s.
The financial benefits I cited were on the revenue side as well. As Yogi Berra (New York Yankees) is quoted as saying, “It’s tough to make predictions, especially about the future.” The forecast is likely going to be wrong and blue-bird orders are a real blessing if you have a supply chain that is agile and can respond quickly.
Gordon: Finally, how do you get the best from the local suppliers?
Carlson: Don’t be shy about engaging your local suppliers and telling them exactly what you desire of them, even though they may not be eager to hear about your need for greater cost competitiveness and responsiveness.
Drive your suppliers to reduce their minimum order quantities by addressing set-up and change-over times. In exchange, strive to make these cooperative suppliers captive vendors who will be rewarded with 100% of your business, within reason. Develop a Certified Supplier Program. For example, if a supplier can deliver on time (not early) and without a single lot rejection for one year, eliminate your own incoming inspection. Have suppliers submit a Certificate of Conformance guaranteeing that every part meets the spec, that it is the exact quantity ordered, and that these parts can go directly from the suppliers’ trucks to point of use on the production line.