Just as the winds of greater freedom of trade are headed Eastwards, the future of British manufacturing is coming back from there. One in six manufacturers reportedly took on work returning to the UK in the past year. With all the talk and the publicity, are you unsure about Re-shoring? Why is it happening? Is it all good? Is there a downside for your company or opportunities? If so, how best to navigate them?
The logic of “Re-shoring,” bringing manufacturing back on-shore to the UK, is compelling. But, it carries inherent risks by worsening the age-old capacity/inventory dilemma – more capacity= more investment in equipment and labour, but less delay, or investment in more inventory with even more delay.
Off-shoring: Direct labour is typically no more than 10%-15% of the cost of most industrial products. Yet, a lot of Western manufacturing was “off-shored” to the Far East and/or Eastern Europe in the last 20 years to reduce labour costs. It seemed like a good idea at the time.
Re-shoring: The total cost of ownership (TCO) of products (including adverse exchange rates on imports, cost of money, warehousing, insurance, handling, damage, obsolescence etc.) and associated risk are rising through:
- • higher off-shore labour costs, shipping and insurance rates
- • growing intellectual property risk
- • more demand for faster response to smaller orders delivered faster and still on time
- • more product diversity and customisation – “mass customisation”
- • shorter order-to-cash and cash-to-cash cycle requirements since Cash is still King
- • harder co-ordination of demand with supply and new-product development
The response is to bring manufacture back on-shore to the UK or to Re-shore and go for Mass Customisation.
Mass Customisation: the conflicting aims of simultaneously:
- • reducing unit costs through more “efficient” mass or traditional batch production
- • responding to smaller order quantities for ever more customised, diversified products
There’s a danger in getting better at making more of what hasn’t yet been ordered (which ties up cash in Working Capital in redundant inventory that isn’t working) while having less capacity to make what is needed now to meet customer demand.
Traditional batch production means:
- • although less frequent machine set-ups
- • although less time lost to machine down-time
- • capacity used making what is not needed yet, instead of what is needed now
- • tying up cash in inventory of products made to inherently inaccurate forecasts that will not be sold until much later, perhaps at a discount
- • irrelevant, or “redundant” inventory
Re-shoring is colliding with Mass Customisation, or exploding product diversification.
Re-shoring and Mass Customisation means we can no longer make bigger batches of a few of the same things. “Any colour as long as it’s black” is not all hyperbole.
Re-shoring can therefore mean:
- • making product to demand in smaller, more frequent customer order quantities
- • more frequent machine set-ups so
- • more time lost to down-time for machine set-ups
- • more expenditure on additional capacity
Manufacturers face critical dilemmas in winning new business. Do they:
- • invest in additional capacity, additional inventory or both
- • wait until they win the business before investing and risk being unable to supply
Traditional Lean 6-Sigma Solutions
Some companies feel “leaned out.” They’ve eliminated waste, albeit creating “islands of excellence” that don’t always connect to the bottom line. They’ve overcome 6-Sigma “analysis paralysis” but they’ve hit “glass ceilings” to the next level of performance.
flow beyond Lean breaks through to superior performance with:
- • smaller run-quantities just large enough to recover the time lost to set-ups that reconcile the inventory/demand dilemma
- • no more infinite capacity planning but instead
- – finite capacity planning for finite capacity environments
- • no more traditional planning time off-sets of weeks and days, that embed still more “redundant” inventory into the
- process but instead
- – lead times reduced to hours or minutes of “touch-time” work content using
- – real-time work signals to manage work being done in real time
The logic of “Re-shoring” is compelling, but it carries inherent risks by worsening the age-old dilemma
i.e. insufficient capacity = more inventory. Taking the above steps will reconcile this.
Cash recovered when redundant inventory is sold as product at market rates need not be reinvested in inventory! Instead, it can be invested in growth, innovation, exports, M&As, MBOs and more re-shoring.
Maestro’s heritage goes back to the “Father of flow” who was nominated for a Nobel Prize in Economics for Working Capital Management. See Wikipedia.
I have taught and implemented these principles of flow in over 20 industries over the past 20 years in almost as many countries. For more information check Case Studies.
For more information on what this might do for you Contact Us
Michael Morris. UK Operations Director. See LinkedIn