THE AGE OF SMART-SHORING
With wages escalating overseas and the push for job creation in North America, business should be conducted where it makes the most sense. VirTex, a U.S.-based Electronics Manufacturing Service Provider (EMS), has witnessed the drive for re-shoring/on-shoring initiatives over the past five years. However, the company did not investigate the true reasons why this is so.
So, why are businesses bringing some—if not all—of their manufacturing production back from lower-cost regions? According to VirTex:
Time and The Need for Speed: Offshore manufacturing can lead to a slower time-to-market with less time-in-the-market, which has a direct impact on profit.
The Need for a Skilled Workforce: As consumer desire for higher levels of customization increases and manufacturers see a shift toward more demanding and complex system assembly, a higher level of skill is required. The U.S. is already equipped with a skilled workforce, with quality and productivity three times higher than the yield rates from the lower-cost labor countries.
From Transactional to Transformation: The world has entered the era of disruption. The Original Equipment Manufacturers (OEM) are faced with innovation challenges such as; product commercialization, access to state-of-the-art technology, limited resources and supply chain risk, all in an accelerated time-to-market cycle.
The Spirit of Innovation: Innovation is no longer limited to R&D labs. Technology advancements in: automation, industry 4.0, operational effectiveness, Lean, Six Sigma, software and new technologies, including 3D printing, have taken some of the costs out of production, enabling what was classified as “higher cost regions” to be more competitive.
However, the main reason manufacturers are moving from lower-cost regions is they are no longer yielding the same returns as they once did. This is definitely the case for all electronic production, but it is also true for lower volume/highly complex electronics products. If you look at the market trend data, you will see a strong push in the market back to U.S. based manufacturers for this production fit.
For all of the reasons highlighted above, plus other important contributing factors (such as protecting intellectual property, simplifying the supply chain, quality control and keeping close to the end-market), the U.S is not only very competitive but is also a very practical choice. As a byproduct of this shift in the macro climate, the reshoring initiative is creating more American jobs.
To be clear, VirTex is not witnessing a complete manufacturing turnaround. It is not stating that all current production built in lower-cost regions is homeward bound. But experience shows more companies are making more educated decisions. The result is supply-chain operations that are blended—in other words, simply doing business where it makes the most sense.
As Rick Polansky, the senior vice president of Business Development at VirTex, put it: “They are following a ‘hybrid’ approach. They are smart-shoring.” Companies recognize that there is not “one” outsourcing model, nor is there “one” on-shoring model that fits all OEMs, Polansky argues.
Smart-shoring is a driving force for EMS and OEMs to maintain their competitive positions in the U.S., according to Polansky, who notes that VirTex works with its customers to assess the correct solution to meet their needs and project requirements and find the perfect place to do business.
How does one assess the best balance between off-shoring and on-shoring? For its clients, VirTex factors in time, cost, risk and flexibility before tailoring a smart-shoring solution, says Polansky, who adds it will be the total cost after all is said and done will be key. Here is how it breaks down:
Time: If a customer in Austin requires speed-to-market, waiting six weeks while their product is on the ocean from Asia eats into their time-to-market, time-in-the-market, customer response and time-to-profit, which, ultimately, comes at a cost to their business.
Cost: If you look at the labor rates, Mexico compared to China, it’s close to 19 pesos to the dollar, which is a large reduction in the labor rate. So, as China goes up, Mexico is coming down. Through time, you get to a point where it makes financial sense for some of the production to be done locally. For one customer, VirTex concluded production was more competitive with a hybrid model of U.S. and Mexico than standalone production in Asia.
Experience has taught VirTex that, if a hybrid solution can be provided of; automation, throughput, and logistics to be within 3-5 percent of the price for Asia, OEMs will choose to manufacture locally. If it’s within 10-20 percent, they will research lower cost. So, if local production makes sense for all parties, VirTex will do what they can to source smartly, to achieve that 3-5 percent mark. And again, it is the total cost when all of these factors are considered.
Flexibility: OEMs need their manufacturing partner to scale up and down in much shorter windows and that is a flexibility that they lose if they go offshore. The time-to-react when production is in Asia, or shipping from Asia, is challenging. Add to that the time differences, the language barriers and the cultural approaches, an OEMs see an added value, which helps to remove the pain point of inaccurate or fluctuating forecasting, lead times and supply chain variances.
Risk: VirTex says it continuously assesses the fast-paced and developing world that we live in and understand that supply chains have become increasingly complex with numerous touchpoints. OEMs want to reduce or spread this risk by simplifying their supply chain and mitigating their production risks. The solution is to build in a regional ecosystem. However, the full scope of this it may still utilize high volume modules from Asia, complex labor-intensive systems from Mexico, all supporting a quick response factory in the States.
Smart-sourcing adds additional protections for a U.S. skilled workforce, OEMs, intellectual property and the U.S. economy, while allowing for high-level customization, speed and local support.
VirTex Enterprises is a leading Tier III EMS provider.
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