Manufacturing starts to come home.

by Dan Markovitz

Kevin and Bill have written eloquently and often about the hidden costs and perils of outsourcing manufacturing. Now Booz & Company has joined this (very small) chorus and published an article on the benefits of "backshoring." (It wouldn't be a legitimate consulting firm article unless there was some new jargon in the title.)

As Kevin has written about before, higher transportation costs, rising wages, and higher raw materials prices in China have eroded the obvious cost advantages that seduced companies overseas in the first place. Better control over intellectual property is another big factor companies are considering.

But now there's a whole raft of new reasons for the return of manufacturing to the US that have nothing to do with cost. In The Case For Backshoring, NCR is cited as a company that's coming home. For years, the company had outsourced production of its ATMs to Flextronics factories in Asia and Brazil.

But recently, NCR has rejected this strategy — at least to a degree. In 2009, the company decided to reclaim responsibility for making one of its most sophisticated lines of ATMs from Flextronics in Brazil and instead manufacture the machines in Columbus, Ga., not far from the NCR innovation center, where its new technology is on display. The reason: The company was concerned that outsourcing distanced its designers, engineers, IT experts, and customers from the manufacturing of the equipment, creating a set of silos that potentially hindered the company’s ability to turn out new models with new features fast enough to satisfy its client banks.

What's most interesting in this story is that simple manufacturing cost wasn't the primary driver in the decision to bring manufacturing back to the US. NCR sees domestic manufacturing as key to increasing sales as well. It enables them to make higher value-added products that their customers want.

The ATMs being made in Columbus now are NCR’s most sophisticated, capable of scanning checks and cash and eliminating the need for the customer to fill out a deposit slip. This feature has provided a welcome revenue lift for NCR — bringing in as much as US$50 million a year, significant for a company with $5 billion in annual sales. But these machines likely never would have been developed had large customers like JPMorgan Chase and Bank of America not persistently prodded NCR to move in that direction. That type of potentially profitable interaction between NCR and its customers is difficult, and launching desirable new products is slowed considerably, NCR’s Dorsman says, when the manufacturing facilities are offshore.

And in a painful echo of Boeing's ongoing Dreamliner nightmare,

NCR also found that having Flextronics manufacture high-end ATMs in Brazil — and relying on the vendor’s third-party suppliers, many of which NCR was unfamiliar with — left important internal constituencies in the dark, further slowing and complicating new product launches. Hardware and software engineers, sourcing executives, manufacturing and operations staff, and customer service managers all had trouble applying their expertise throughout the many remote handoffs between separate organizations.

It's a hopeful sign that a consulting company has published this article, as they were often the biggest cheerleaders for outsourcing in the first place. (Lego, anyone?) But now we're reading about Innovation. Time to market. Increased sales. Better products for customers. Gosh, what reason will they come up with next?

Comments

[Jim Fernandez]

Great post.!
Do you think some new incentives from our government might create another reason for manufacturers to stay in this country? Some manufacturing might even come back. Gee, might even create some jobs.!?

(Hey Mr. President sir, I've got an idea.!!)

[Dan Markovitz]

Jim,

Thanks for the comment. I’ve heard some talk of government providing incentives (tax breaks, etc.) to get companies to come back home, but I haven’t seen the money yet. More importantly, I think for companies that only look at direct cost, there will never be large enough government incentives. They have to understand all the hidden costs of outsourced manufacturing — and that seldom shows up in the income statement.

Dan