Rajan Suri, founding director, Center for Quick Response Manufacturing
With the global supply chain crisis creating enormous delivery delays, everyone seems to be in agreement: We need to reshore production back to the United States.
With U.S. labor costs several times higher than those in low-cost countries (LCCs), most executives assume it will cost more to manufacture here or purchase components made in America. But it doesn’t have to be that way.
Here at the University of Wisconsin-Madison’s Center for Quick Response Manufacturing (QRM) we have worked with many companies to show that manufacturers can reshore production while simultaneously reducing costs.
QRM is a strategy developed over two decades and by partnering with more than 300 companies, and the center has gained several key insights that may change your thinking about reshoring in the new year.
Misdirected concern about labor costs
The common perception is that LCCs have a huge advantage due to low labor costs. However, for most U.S. manufacturers, direct labor (people actually doing the machining, fabrication, assembly and so on) accounts for less than 10% of operating costs. Half of costs fall into the categories of overhead and SG&A (selling, general and administration). The remaining 40% is for purchased items (raw materials and components).
Now factor in that products made overseas have lead times of three months or more (longer through our current crisis) — including manufacturing, transit and time at ports and customs. The QRM Center’s research has shown that long lead times add many indirect costs such as forecasting, replanning, expediting, sales time, administrative time and warehousing. By making products in-house and reducing lead times by 50% or more, our partner companies have significantly reduced their indirect costs. Also, by working with U.S. suppliers to reduce their lead times (and thereby their costs), companies have reduced their purchased item costs. Together, these reductions have exceeded 20%, eliminating the labor cost advantage of LCCs.
Shifting from cost-based to time-based thinking
To significantly reduce lead times, executives must shift from “cost-based thinking” to QRM’s “time-based thinking.” Factories were historically organized to minimize the cost of each operation and each purchased item, not to minimize the time it takes for products to flow through the system.
For example, the chart above shows the progress of an order through an actual Midwest company. It spends five days in order entry; then it takes 12 days for components to be fabricated, nine days for assembly and eight days to be packed and shipped — for a total lead time of 34 days. Shown in purple is “touch time,” referring to the time someone is actually working on this order: less than 20 hours. Based on an eight-hour day, touch time is less than 2.5 days out of 34. This ratio is not unusual. From hundreds of projects, we have observed that touch time typically accounts for less than 10% of lead time. The remainder is the “blue space” in the rectangles, where nothing is happening to the job.
Cost-based efficiency improvements focus on reducing the purple space. However, even a 20% reduction of the purple space would cut only a half day out of the lead time. Time-based thinking asks management to focus on reduction of lead time as the primary goal — i.e., reduce the blue space to see significant gains.
QRM principles begin by defining the organizational structure needed to slash lead times, not only on the shop floor but also in the office. Next are new approaches to capacity and material planning, and we complete the implementation with ways to change the mindset of the whole organization. As reported in dozens of case studies, QRM has helped companies reduce lead times by more than 80% and operating costs by 20% to 40%, enabling them to reshore products without increasing overall costs.
Exploiting 21st century markets
U.S. companies also can take advantage of the opportunities in today’s markets. Unlike Henry Ford’s customers — his 1913 production line turned out the same Black Model T in large quantities — customers today expect to select from thousands of options. Some markets even require custom-designed products.
Products made overseas spend months in transit. If there are only a few product options, those can be shipped ahead to the U.S. However, if a business were to provide thousands of options, the overseas competition would be financially drained by the need to stock all these supplies in a warehouse. The business would gain even more competitive advantage if it could tailor each product to a customer’s requirements and still deliver it within a few weeks. The overseas competition would need time for design and manufacturing in addition to transit time.
Our partner companies making high-variety or customized products have found QRM ideally suited to their situation; recent lean manufacturing methods are better suited to higher volume and lower variety. By exploiting 21st century markets with QRM strategy, companies have experienced significant increases in market share.
At the QRM Center, we have not only demonstrated the successful partnership that can exist between university and industry, but we have also enabled local manufacturers to regain their competitive edge, reshore products and create significant numbers of jobs.
Rajan Suri is emeritus professor of industrial engineering at the University of Wisconsin-Madison and founding director of the Center for Quick Response Manufacturing. He is the author of several books on QRM and has received awards from the Society of Manufacturing Engineers and other national organizations for his development and implementation of QRM principles. More information can be found at qrmcenter.org.