Resources:
Caterpillar, www.cat.com
General Electric, www.ge.com
MFG.com, www.mfg.com/en
Sauder Woodworking, www.sauder.com

Ensuring a steady stream of low-cost, high-quality parts is a growing headache for U. S. manufacturers that source parts overseas. Governmental, economic, societal, and cultural factors are forcing U. S. OEMs to rethink the strategies that led them to outsourcing in the past decades, says Mitch Free, CEO of Atlanta-based MFG.com. “But tangible failures of suppliers, quality, training, and logistics have also forced these businesses to recognize and investigate the costs extended supply chains placed on their abilities to respond to customers, innovate, and compete effectively,” he says.

As evidence, he cites the most recent MFGWatch survey conducted by MFG.com, where a remarkable 44% of North American participants — from design engineers to purchasing professionals — say they have experienced a significant supply-chain disruption that forced them to find an alternative supplier. This is up from an already significant 35% figure last quarter, and strongly suggests that supply-chain contraction will be the trend well into 2012, says Free.

One consequence: “Backshoring — repatriating work to the U. S. after initially outsourcing it to low-cost countries — is becoming more prevalent as domestic manufacturers reassess the total costs of their products,” he explains.

Many issues are under scrutiny — R&D, engineering, and intellectual property protection to logistics, quality, inventories, and customer service. “Costs to do business in previously lower-cost countries are steadily increasing due to labor rates and currency fluctuations,” says Free. As a result, more manufacturers either have or are seriously considering a backshore strategy to save costs, improve quality, and better manage brands and technology, he says.

As examples, he notes Caterpillar, Peoria, Ill., has announced it will repatriate production of its construction excavators to a new factory in the U. S. Next year, General Electric, Fairfield, Conn., will backshore production of some of its water heaters to a plant in Kentucky. And Sauder Woodworking, Archbold, Ohio, a company that makes home and office furniture, found more value in bringing production back to the Midwest after offshoring much of it to “low-cost” sources.

Sauder defies the logic that low-tolerance, high-volume product assembly would never return to the U. S., explains Free. “Since the most-effective strategy to increase margins in those products is usually seen as being in labor and materials, the possibility of them returning to a more mature manufacturing base was seen as slim-to-none. But other factors, such as responding to customers’ new-product requests, shorter delivery times, and swift corrections to improve designs and quality were cited by Sauder as influential in their decision to backshore.”

Sauder also studied the total costs for mold tooling for plastic-injection parts. Tooling made overseas costs only 25% or less than comparable U. S.-made tooling. So, in this case, offshore production made better economic sense.

“And that perfectly represents the reality of backshoring strategy — assessing true value and selecting the best source based on overall costs,” says Free. “As more companies revisit their production strategies, we will see some projects and products return, but certainly not all.”

Manufacturers and OEMs will also wrestle with the matter of high-tolerance, low-volume, precision parts and products. Factors to consider to select the right source for these goods, says Free, include:

Intellectual property. IP protection continues to increase in importance when production depends on extended supply chains and is in countries with less IP support.

Proximity to R&D. Segregating production of high-technology products from design and project engineers often delays time-to-market. It can also impede the expertise needed to innovate and create new products, says Free. “Simply put, OEMs of tight-tolerance products will find that ROI extends beyond the individual product.”

Supplier management. “If the automotive recalls and product failures over the past year have taught OEMs any meaningful lessons, it’s that tight cross-pollination, control, and collaboration become exponentially more important with product sophistication,” notes Free. Quality and responsiveness are much more critical. Shortening the distance between a manufacturer’s engineering core and its suppliers can shorten lead times and increase its responsiveness to markets, he says.

© 2010 Penton Media, Inc.