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?
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