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Total cost of ownership and other global manufacturing trends

Total cost of ownership and other global manufacturing trends

Total cost of ownership in manufacturing and other global trends are discussed with Jim Gitney, president and CEO of Group 50, in this informational podcast.

Total cost of ownership in manufacturing and other global trends are discussed with Jim Gitney, president and CEO of Group 50, in this informational podcast.

Tecma Group of Companies:

Hello and welcome to another edition of Tecma Talk Podcasts. This is part of a continuing series of informational discussion with experts that cover a wide range of topics that are related to manufacturing in Mexico, and other issues that touch upon the subject.

Today, we are very fortunate to have Jim Gitney with us. Jim is president and CEO of a consulting firm out of Los Angeles called Group 50.

Tecma Group of Companies:

Jim, how are you doing today?

Jim Gitney:

I’m doing absolutely super, Steve. Thanks very much for having me on this podcast.

Tecma Group of Companies:

We know that you are going to have a lot of information to offer to those that listen and subscribe to these podcasts. One thing that I would like to ask, however, before we get on with the discussion of the topic we will consider today is that you provide us with a little background on yourself, your company and whatever items you think that might be a good preface to what it is that we are going to talk about today.

Jim Gitney:

Sure Steve, I would be happy to.

I’ve spent my career in corporate America working with companies like GE, Black & Decker, Sunbeam ad Rainbird; all of which had very strong manufacturing bases in the United States. Early on in the 80s, we started exploring the possibility of manufacturing product in China and other low cost regions. Over the course of the next twenty years, we moved a tremendous amount of manufacturing product to Mexico, and then on to China. In essence, at one point in my career, we taught the Chinese to make countertop appliances. I’ve been involved in manufacturing, new product development, marketing and sales. I’ve worked in the C-suite, CEO and Chief Operating Officer in several companies. That’s my background.

About ten years ago, I started Group 50 Consulting. Group 50 is made up of people with experience that is very similar to mine. We’ve spent many years in corporate America and now consult with companies, providing them the opportunity to take advantage of our operating expertise, knowledge of the things we would do again and wouldn’t do again and best practices from around the world.

Tecma Group of Companies:

You bring quite an expansive viewpoint to the discussion at hand. What we are going to talk about today is manufacturing. Manufacturing has been the backbone of the American economy for years. I know that one of the things that, in addition to working with customers that want to go to Mexico, you do things that help them to make their manufacturing efforts effective, and, basically, that will be the crux of our discussion.

Before we get into specific things that are tangibly aimed at manufacturing cost-effectively, can you give us an overview of what current trends are relevant today in manufacturing and distribution?

Jim Gitney:

Globally manufacturing exists everywhere, as we well know. Over the last twenty years there has been a concentration of manufacturing in China. Many of us have read about manufacturing becoming such a smaller part of the economy in the United States. I’ve heard numbers as low as fifteen percent of GDP. This is a trend that has been going on for the last fifteen to twenty years, as I mentioned earlier. As China has continued to develop economically, and as demand internally in China has grown, we have seen a fairly significant increase in the cost of doing business in China. Wage rates tend to inflate between fifteen and twenty percent per year. You have to go further and further inland into China in order to get back to the wage rates that we had become accustomed to as manufacturers. Of course, that significantly increases lead times and also the cost of transportation, but that just China. What we are finding is that the there are countries around the world that are beginning to specialize in very specific types of products and activities.

China has been primarily involved in assembly and semi-conductors manufacturing. We see the woven materials industry in terms of gray goods concentrating in Pakistan. We see IT concentrating in India. We see metals and metal fabrication concentrating in Thailand and Vietnam. What is happening is that regions are beginning to develop their areas of expertise. For instance, hi-tech manufacturing and CNC machining are concentrated in Eastern Europe where you can get very very high quality products still taking advantage of relatively low wages. Things continue to shift. What is happening is that, as a result of these concentrations and economic demands, we are seeing prices rise across all levels to the point where Mexico is now within striking distance of being at parity with some of these other low-cost regions.

Tecma Group of Companies:

We see that the information that we reviewed shows that while Chinese wages have been rising, on average, by about twenty percent, Mexico has been pretty flat. Particularly talking to electronics manufacturers that we are in contact with. What they are telling us is that, items that were produced at cost advantage in China just four, five or six years ago, today, once you add all the costs that it takes to get something from China to the United States, they’ll come in with something manufactured that may be similar and there may be only something like a five percent difference.

Jim Gitney:

That’s a great point. To tell you how much things have changed: When I was running manufacturing for Black & Decker’s Appliance Division in the mid-90s, we could land a completed and packaged toaster oven for less than it cost to buy the raw materials to manufacture it in the United States. We were seeing forty or fifty percent differentials in cost.

The other trend that is occurring is that companies are beginning to, and there are still some stalwarts out there who believe that effectively acquiring product only focuses upon the difference between the cost per unit in terms of “today I bought it for a dollar and tomorrow I can buy it for ninety-eight cents” as a cost reduction. Many companies, and the work that we do, is to focus on the total cost of ownership. We have developed proprietary models around that, but we look for the total cost of ownership which touches on some of the things that you had mentioned: the cost of capital for having incremental inventory, the amount of working capital that you have tied up in inventory that you could be using for designing and implementing new products in the marketplace. Lead time resource requirements in the Far East, or wherever you are sourcing this product from, etc., etc., etc.

When we look at that model, we see, in studies that we did last year for several clients, that we confirm what you just said. From a total cost of ownership perspective, the differential is only six or seven points now in Mexico. In several places within the United States it is only about ten additional points. If you start thinking about that, it starts to add up to some real dollars, and provides an opportunity for companies to manufacture and distribute their product closer to the point of consumption. This adds a whole bunch of other benefits to the business that are difficult to put price tags on.

Tecma Group of Companies:

As an addendum to the pre-podcast conversation that we were having, what you are saying is a lot like what Harry Moser with the Reshoring Initiative says. Again, he is a gentleman out of Chicago, and we have a podcast we did with him. Anyone who wants to more information on this particular issue can access it on our website. As we mentioned before, you and Harry might want to have a conversation, because you speak the same language.

Jim Gitney:

I plan on following up on that.

Tecma Group of Companies:

You were talking about cost structure trends, and the ability to deliver product to customers that are located in proximity to where they are produced. Technology is changing rapidly. You want to get things to market quicker. When you look at all of the trends that currently exist in the aggregate, what are the implications that they hold for the future of manufacturing?

Jim Gitney:

I think that, from the perspective of North America, we are going to see a lot of manufacturing come back to the United States and to Mexico. I have always been one that believed that one of the reasons that we “offshored” so much stuff was because we were not willing to do the hard work required to be competitive. I am really excited to see a trend that demonstrates that we are now competitive again an have the ability to bring product and manufacturing jobs back to the US.

There are, however, industries in which this will not be the case. I’m not sure that we will ever see gray goods produced in the United States again. I am not sure that we will see clothing, retail clothing that you might buy in a department store, manufactured in North America again.

When you get to products that have some bulk, some technology behind them that change in terms of their design and feature set on a routine basis, I think that we can expect that we’ll see a lot of that product coming back. We’ll see more and more automotive manufacturers bring manufacturing back to the United States and Mexico, and they continue to do very well. I thing that that’s just one indication that, if you do it right, you can be very successful.

Tecma Group of Companies:

From the point of view of the business that we do at Tecma, in a discussion like this it is not an issue of when items are reshored from a place like China, specifically, or even other countries that you have mentioned. It really isn’t a “zero sum game” in terms of whether it goes back to Mexico, or to the US. If you look at the structure of the maquiladora industry in Mexico, ninety percent of the material inputs that are incorporated into the products that are made in Mexico come from the United States. In essence, if manufacturing comes back from China to Mexico, and is built in Mexico, the whole supply chain that supported the Chinese manufacturing (which was in the Far East) gets left behind. A new, North American supply chain takes its place, and, typically, ninety percent of that supply chain making that product is based in the US. It is necessary to look at things in regional terms. When things come back from China to the US, or Mexico, it’s a win for the whole continent.

Jim Gitney:

What’s interesting is that when we work with companies to bring product back to the United States, that’s a tactic. What we really need to do is to work with companies and to focus on what their supply chain strategies are. When you think about supply chain strategy, it’s not just “where do I produce the product?” It’s where are my customers located? What’s the lowest cost distribution model? What’s the lowest cost manufacturing model, and where do I want to focus my efforts on longer term in terms of servicing my customers?

For example, one of the clients that we are working with has a majority of their product shipped to the Eastern United States. They want to concentrate a big push into Europe. Moving manufacturing and supply to the El Paso – Juarez corridor makes a tremendous amount of sense economically. We are talking about savings that are material to the company. We’re not talking about a few thousand dollars.

The work we do working with companies like Tecma allows us to put together a longer term supply chain strategy that supports the corporate strategy. All of those pieces need to fit together. The idea of moving a product from China to Mexico is pretty simplistic, but, just as easily, can be a mistake, if it isn’t incorporated into the broader strategies of the whole business.

Tecma Group of Companies:

There is a word out there. We have all kind of “shorings” these days. I have seen this word pop up, but I am not quite sure as to what it means. Maybe you can clarify it for me. What does “nextshoring” mean?

Jim Gitney:

As consultants we have a tendency to want to develop things that that are proprietary and unique. McKinsey wrote a report about “nextshoring.” It’s basically the term that they use to define to move production and distribution closer to the points of consumption.
Again, this goes back to my earlier comments related to what your business strategy is. Twenty-five years ago we couldn’t get complete product , counter top appliances and many other products, manufactured in China or Mexico. We had to teach companies how to make those products. We started out by engaging the maquiladora and other companies in Mexico to make components just like we did ten years ago in China. Eventually they were capable of producing complete products.

Today manufacturers and distributors have a myriad of places that they can go to get complete products. This is because general capacity of manufacturing worldwide has evolved so much. Engineering, with increased technology and 3-D modeling, has made it so much easier to get product produced in other places. What McKinsey is talking about is, because you have that flexibility regarding where you can go to get product manufactured, it’s much more important that you focus, from a strategic perspective, where manufacturing is going to be done, what will be its cost and how do you make it as close to consumption, as possible?

Tecma Group of Companies:

That clarifies that. One thing that you alluded to, in fact said specifically , is that for years US manufacturing had not been competitive and, perhaps, there was a tendency to want to take things to lower cost places because the hard work of becoming competitive was not something that people wanted to do. With that being the case, can you explain to me what has created this resurgence in Amerrican manufacturing competitiveness?

Jim Gitney:

It has primarily been caused be increases in cost in China, and other producing countries. If we just look at labor rates, as an example the average cost per hour for labor in North Carolina $11.00. The average cost of labor in Mexico is $2.40. The average cost in China is something less than that. It depends on what part of China that you are in, but it could be $2.00, it could be $2.20. If you are going to just look strictly at labor, you’re going to say, “Well, it’s pretty clear to me where I am going to go.” Labor has become such a small percentage of the cost of a product. Twenty-five years ago labor could have been thirty or forty percent, because there were many hand operations, long assembly lines and those kinds of things.

Fast forward to today where automation and design has made, on average, labor only four to six percent of the cost of a product. In many cases shipping has become a higher percentage of cost than labor. When that happens, the labor differential becomes less of an issue. Now it is a matter of how cost effectively can I get components shipped to a location, apply the little amount of labor that I need and very quickly move it to a distribution center where I can very quickly ship it to customers. When you have supply chains such as that between the China and the United States where you are sixty days or more between the time a product is finished in China and it arrives in your distribution center, you lose a tremendous amount of flexibility and incur a tremendous amount of cost. Those are the components that are changing and making manufacturing in North America much more competitive.

Tecma Group of Companies:

There is a certain degree of complexity that is associated with this. Obviously, manufacturers are busy manufacturing. They’re on a production floor worrying about how to make their plants run more smoothly and they may not have the time to think about these things. That is where someone like you and your company, Group 50, comes in to be able to come in to do the research that is required to find out how they can take advantage of the changes and the trends that you have brought up during this discussion.

For those that have the time to do some investigation, what should they be looking at in terms of taking advantage of the things that you just got through enumerating?

Jim Gitney:

I will answer the question two ways, Steve:

One is that we work with clients, and will help to point them in those directions to provide them with the the information that will provide them with an opportunity to significantly reduce the amount of time that they will have to dedicate to research, and to not have to reinvent things. That’s one of the advantages of having a partner like Group 50, when you are examining the effectiveness of your supply chain and attempting to identify various strategies that will make it more cost-effective.

What you are looking for is a multitude of things. You are looking for cost, obviously. You are looking for reducing lead times. As a result of reducing lead times, you will be looking for a significant reduction Iin the amount of working capital required to to support your supply chain, and you are looking for effective partners like Tecma, or OEM manufacturers who understand what your product is and have the ability to support you. The umbrella over that total cost of ownership. Those are the areas that manufacturers that are looking to redesign their supply chains must focus on. That is a fairly significant effort, because what happens is that a lot of times chief operating officers, and heads of manufacturing and purchasing personnel have a vested interest in the effort and the suppliers that they put into place. It becomes really difficult to stand back and to say “how do I rejigger this,” tear it apart and reconstruct it, if you will. That’s the last piece. They need to be able to redesign their supply chain from a total cost of ownership perspective by pulling themselves out of the fray and looking at things as though they were on a clean sheet of paper.

Tecma Group of Companies:

That makes a lot of sense. Like you say, sometimes it is difficult to know where to begin to deconstruct these things so that you can put them back together in a way that will produce an outcome of more effective and competitive costs.

This discussion is one that is fascinating, and we surely could go on for quite a bit more time. I think, however, that you have been able to do, very successfully here, is to communicate to people what things they want to keep in mind when attempting to make their businesses more agile and more competitive in terms of both cost and producing a better product.

If any of those that are listening to this have questions for you, would you be willing to answer them? If yes, how can people get in touch with you?

Jim Gitney:

Here is the offer that I make to the listeners: They can call me in my office at 909-949-9083 during business hours Pacific Standard Time, or thy can send an email to jgitney@group50.com. I will schedule some time with them, and will be more than happy to take a half hour or so, just like we’ve done today, and talk with them about there specific needs and there specific business, and help direct them in areas that they ought to focus their investigation.

Photo Credit: Kenneth Lu

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