MANUFACTURERS ARE having their day in the sun at the moment, especially in our industry. How were these suppliers able to resist the rush a few years back to move production overseas? In most cases, the ability to continue manufacturing in the United States came down to trade-offs in three areas: a cost/benefit evaluation, comparing the known American costs and the anticipated costs overseas; assessments of product quality levels; and service issues.
In the cost area, overseas sources can offer compelling economic benefits on the front end, compared to domestic costs, particularly in product categories where manufacturing is labor-intensive. But by moving production abroad, the supplier loses control of a whole host of other cost risks that formerly either did not exist, or were predictable and manageable. Currency risk, for example; export subsidy risk, for another; and wage and materials cost inflation risk, for a third, are new exposures to which the importer has, knowingly or not, subjected his business. Overseas manufacturing provides far less ability to anticipate and manage costs than domestic production, hence such new phenomena as the mid-year price increases that came into play last spring and summer. This recent and disruptive element in the traditional supplier/distributor relationship was driven by unanticipated cost increases passed along from overseas manufacturers to industry importers, and, for the most part, domestic producers did not participate in that exercise.
Product-quality issues also had to be considered when evaluating moving from the “known” (domestic) to the “unknown” (overseas). No one in our industry foresaw the product safety concerns that surfaced over the past two years. Initial product quality discussions were far more mundane, and centered around things like agreed quality levels and lot-to-lot consistency. In many cases, the issues on the table looked much like those one would raise for discussion with another American factory in a traditional make-or-buy negotiation. What we have learned since is that manufacturing standards in China are not managed or regulated as strictly as they are in the United States. Who would have thought that melamine would find its way into milk powder? Or that the quality standards agreed upon by the contracting party would not be adhered to by the sub-contractor’s sub-contractor?