Another Ducking Digest?!
September 18th, 2023: Made in America and Onshoring
So yeah, the obviously made-in-America, guilty as charged. I’m as passionate as most folk about making that happen first. And when that comes up, and obviously it will come up, the reassuring question, especially the, I think, the supply chain mantra is, you know, get the response right. So the response, the response is no response until we fully understand what’s being asked of us. And then don’t like to be intentional around the problem, but not to the extent of knowing every answer. We have to know every question that needs to be asked, but it’s not for supply chain to know all the engineering or quality issues. We just know they have to be addressed, and these boxes have to be checked. So what do I mean when I say no, no, what’s being asked? I understand what the imperative is. Well, you know, we have to rewind the clock and say, you know, how did we get here today? You know, what was the motivation, the legacy motivation for us to outsource? Was it reducing fixed, fixed invariable cost? Was it just that, or was it to allow us organizationally to focus on our core technical competency? And if so, what were the following implications of that? And then third, you know, was it to allow us to be more flexible tomorrow, allow us to ramp the volume to be more of a dynamic, high-demand supply organization? And how are all these three parameters going to be impacted by this decision, by this imperative to come back? So yeah, an intentional supply chain team, you know, focusing on these big three, and which ones impacted by the return or driving the return, or is it two, or is it all three, right?
So if we go through them one by one, focusing on core technical competency, there’s two ways of doing that: bring it in-house or source it domestically. So let’s feel the less common one first, the, you’re bringing it in-house. You know, that’s less likely because it’s kind of tough, right? The genie’s gotten out of the bottle. You know, we’ve gotten out of that business. We don’t manufacture anymore. We don’t carry raw inventory anymore. And you look at it, can be done, you look at the example of some of the companies that have set up dedicated facilities. But there’s also industries that have gone away completely, you know, one near and dear one to me is printed circuit board, bare board manufacturing. You know, 25 years ago, the U.S had 25 percent of that market; today, they have four. 25 years ago, China had eight percent; now they have 54. But, you know, even though it’s a 90 billion dollar growing industry, the point for supply chain is not just these big macro numbers but the expertise, you know, the focusing on core technical competency of building bare printed circuit boards is less available domestically. So we got to make sure that we’re gonna have our bases covered there. More likely, we’re going to, well, and go ahead, and then I would argue that there’s the whole capex or facility expansion factor that has to be considered as well, outside of the expertise. Yes, thank you, and I glossed over that. That’s, and that would be certainly the driver that would make this a less common solution. But, you know, especially perhaps in small businesses, especially where the decision-making is not only held, perhaps, you know, a leader has a vision that, hey, this used to work just fine when I did it myself, so yeah, I can spend a few million setting up a new line, building a bigger warehouse, again to hold more parts. Wow, that’s really trying to reinvent the past, right? More likely, outsourcing, going from offshoring to onshoring and outsourcing domestically.
Now, you know, knowing what the original decision-making criteria was helps us in choosing who the new partner is going to be, if it’s going to be a new partner. We really have to do a thorough needs assessment, not just checking the box of can they match or can they come up with a competitive domestic cost, but do they also have the next level expertise at the process engineering level, the quality improvement level, at the root cause analysis level. You know, we don’t want to get into bed with a new supplier, manage this big supply chain transition, only to discover that they work well during the even-keel good times, but once issues arise, they’re unable to go to the next level. So we definitely want to learn from past relationships, learn from our former suppliers, and make sure we capture all that. Why? Because if the new supplier can’t support it, guess who has to? Supply chain, and all of a sudden, supply chains in a mess, trying to orchestrate root cause analysis or orchestrate next-level supplier management or orchestrate expediting rather than be able to lean on a full-service outsource partner. Second thing we mentioned, second motivation we mentioned for our outsourcing was this flexibility and faster time to market, and that’s where I, you know, I think you mentioned that one of the examples that’s been well documented recently is the Bath and Body Works campus, and I believe they built in North Carolina. Bath and Body Works pulled back offshore production of their, what are they called, beauty products, the personal hygiene products, and they’re making them in North Carolina. They built a dedicated campus, a big campus. They got close to the U.S cost, congratulations there. Clearly, there are lessons learned, shared learnings. That caveat is that Bath and Body Works is producing 300 million units a year, nearly a million a day.
Sarah, I, in my small manufacturer world, I can’t get my head around that. I don’t know what that looks like on a big day. Maybe I do a thousand for something but never a million. That’s amazing. But still, we’d want to look at that and say, what can we learn? Yeah, and I would say in a second bucket under the flexibility and faster time to Market, one of the big challenges or things that have to be considered is the reliance on new suppliers. So if you are coming into a new region and you’re going to be looking at locally, you are going to potentially take a really big risk and rely heavily on untested suppliers, right? Absolutely. And we definitely want classic supplier selection. We want to find a supplier who supports customers like us, same level of technology, same level of quality, ideally better, right? Same level of volume, same level of dynamic demand, so that we know we’re getting hooked up with someone that’s used to our culture, our way of behaving. And the faster time to market, the flexibility issue, we’ve got to avoid the assumption or trying to connect the dots that just because the supplier’s in the same city rather than on the other side of the ocean, that does not necessarily translate to a shorter cycle time, shorter lead times. So we’ve got to be careful that we, it’s on supply chain to map out all these steps of what’s going to drive my overall lead time and how is it going to compare. Sure, I’m going to save all that 22 days on the ocean, that seven days to clear the Port of Long Beach, but other than that, how is everything else going to stack up? How’s the local sourcing going to compare to what we got accustomed to in local and building testing into your dilemma? You definitely need to do testing when working with new suppliers. And then what happens if the player doesn’t work out? You have to have the alternative queued up and ready to go. So just a lot to think about under that one. Yeah, definitely a good practice there, having a plan B, you know, that we don’t have nothing. Then the third route, so we talked about focus on your core technical competency. We talked about flexibility, dynamic supporting demand change, the 800-pound gorilla, the fixed and variable cost, what’s the impact there? And it’s easy to get sticker excitement, if you will, right? If that’s not sticker shock, sticker excitement, you know, look at all the money I’m going to save. I’m not going to pay for supplier engineers and quality managers to make quarterly flights to Asia. There’s a hundred thousand dollar saving right there. I’m not going to pay for international freight or tariff charges or freight logistics or customs clearance charges or bond charges. I’m going to work with perhaps, I’m going to work with less finished good safety stock level because I have a, I believe I’m going to have a higher assurance of supplier. But that’s exciting, but it’s all got to be offset by the domestic labor expense. So, you know, what we need is that’s all got to factor into a comprehensive bottom-up cost role that’s going to drive a total cost of ownership comparison. And that’s where, you know, the, that’s where an example of supply chain needs to know the question to be asked and without necessarily knowing the entire answer. And that’s where what I’m thinking is that we want our bodies in cost accounting or finance to come alongside us and join the supply chain transition team or the onshore team and help us with that and own that part of the communication. We don’t want to get into a situation where Lindsay or Sarah are offering an offer on their own and supply chain managing this quantum shift as independent actors. We want it to be a team effort. We want the organization to be reminded that supply chain is certainly being collaborative and being intentional and leading the charge, but not doing all the work. You know, finance has to support us, engineering has to support us, the quality organization has to support us because it can go wrong, right? In 2017, Stanley Black & Decker bought Craftsman for several billion dollars, 2 billion dollars, and then a couple of years later, in 2019, they invested 90 million dollars up the street from you, Sarah, in Fort Worth, on a new factory, only to, you know, to produce the Craftsman ratchets domestically. And then, tragically, March this year, they announced the closure of that plant. And a lot of things happened. Yeah, sure, there was COVID, sure, there was supply chain disruptions, there was a big issue with getting the automation to work to try and avoid the take the sting out of the domestic labor expense. And it didn’t get there, unfortunately. So they made the decision to cut it off, especially when their inventory increased to six billion dollars, an incredible number. So, you know, the good news is that Stanley Black & Decker is doing well organizationally, but it’s certainly a cautionary note that these initiatives are not necessarily deemed to always be successful.
So, Lindsay, let’s have you dive into that. I think it’s a good time for us to talk about some best practices. If we do have manufacturers listening today that are thinking about this whole onshoring concept and kind of weighing, is this something that makes sense for their organization or not? Yeah, it’s not a knee-jerk activity. We need a clearly defined need, clearly defined problem statements. You know why are we doing this? What does success look like? What’s the exact outcome going to be? Is it cost? Is it shorter time? Is it sleeping at night with a higher assurance of supply? We need to document the process. Here’s how we change suppliers, and here’s how we bring an overseas activity closer to home. Here are the benefits. Yeah, sure, here are the benefits. But here are the risks. Here’s what we have to pay extra attention to. Walk, crawl, crawl, walk, run, crawl, walk, run, crawl, walk, run. Have a proof of concept. Start with one widget before we do a hundred, or all hundred, or the whole product line. The first rule, wing walking. First rule of wing walking is don’t let go. So we don’t let go of the Asian supplier or the low-cost switching supplier until we have a new supplier up and running and demonstrating operation. That will mean that we have a double supply chain going. That will mean that we have to ignore ERP messages, say cancel these orders or reschedule these. Address that. That will mean finance needs to potentially fund extra finished goods as the two overlap. But we certainly don’t want to burn the bridge. We certainly want to keep, you know, perhaps part of our plan B is if this doesn’t work, we have to go back to offshoring. So we don’t want to burn the bridge. Take the high road. Keep the legacy supplier as part of the team. We want to know how much it’s going to cost. We want to know what the inventory assumptions are going to be. What’s that going to translate to, both in terms of component stock, critical components, finished goods? How does that all look? And then from a selfish or myopic perspective, from a supply chain perspective, we want to remind the rest of the organization what we’re doing. And, you know, so the community, yes, communication, and yes, communication across the team. Here’s what I’m doing, guys, and here’s why. And here’s what I’m expecting of you and my team, down through the organization to my reports. Here’s the direction that the team is going in. Here’s why it’s working. Here’s where we need help. And then up in the organization, management team, this is what you asked for. This is the direction we’re going. Here’s how the project’s shaping up. Here’s who’s involved. Here’s where we’re on track. And then externally, to the suppliers, here’s my messaging to my suppliers. So, you know, don’t, I think it’s, don’t let the supply chain light be hidden under a bowler, and whatever that Hebrew parable is, right? You know, we want everyone to see that supply chain is coordinating, leading, being intentional.
So, Lindsay, in your list of best practices, one of the things I wanted to call out for the audience is the fact that you mentioned assessing safety stock, which can be a big shift if you are buying and managing things overseas, and then you move it to domestic or local production. How should somebody assess and determine how to pivot or change their safety stock levels? Because this is a big deal when manufacturers have limited cash flow, and this can really impact, do we buy X amount of safety stock, or do we invest in technology or invest in our people, right?
Great, great loaded question. So, safety stock ties to risk, right? And risk is everywhere. In the economics world, they talk about the beta factor. You know, the bigger the risk, the bigger the beta. I think that’s how it works.
So, how big is the risk on this project if everyone sits around and says, “Yeah, we can. We spoke to the supplier, we pulled in engineering, we pulled in quality. They say it’s a no-brainer. We can knock this out in 90 days.” Okay, so maybe I need less safety stock if we do an assessment and say, “Oh my goodness, yeah, there’s like half a dozen gotchas here that we’ve identified. We need to be careful.” Plus, we’ve got a couple of customers that will not allow us to be more than, you know, three or five days late with any Asian low-cost region sourcing, especially for a small company.
I’d expect safety stock to already be in place for about 30 days, and that covers me, Sarah, for the aberrations, especially recently, of the Asian supply chain moving around, on US port police, etc., and maybe even during COVID. Maybe that 30 got closer to 60 or even 90. So, yeah, it’s probably at least a month’s overlap, Sarah, you know, as a general starting point for the conversation.
You know, I’d start to come rather than starting the conversation weekly and saying, “Doing its safety stock,” you know, I’d say, “Stock,” was saying, you know, “When we think about the overlapping supply of two suppliers, should we plan on one month’s overlap, or is that running the business too hot?” It has to be a team decision.
John and Eric, I saw you drop dust notes. Hello, looks like Eric is joining us from Ecuador. I’m not sure where John is joining us from. If you have suggestions for future topics that you’d like us to discuss, feel free to drop a note in the chat or shoot me a note on LinkedIn, and Lindsay and I will be back next Monday at 10 A.M.