Contrary to popular belief, China is no longer the obvious choice for locating the manufacturing functions of large U.S.-based companies, which are now looking at more regional and flexible approaches to manufacturing, according to Professor David Simchi-Levi and colleagues.
"Is It Time to Rethink Your Manufacturing Strategy?" was published in the Dec. 21 issue of MIT Sloan Management Review. Simchi-Levi, a professor of civil and environmental engineering and engineering systems, will expand on the paper's findings in May at "The Future of Manufacturing in the U.S.," a conference co-sponsored by the Leaders for Global Operations program, of which he is a faculty co-director.
Since the 1990s, many large companies have moved their factories overseas to countries where labor was less costly than in the United States. At that time, the authors noted, long supply chains — the complex systems for moving products from suppliers to manufacturers to customers — were not a problem because oil for transportation was relatively inexpensive.
More recently, however, several changes have made China less attractive as a manufacturing center. Oil has become more expensive; natural disasters around the world including tsunamis, earthquakes and volcanic eruptions have disrupted supply chains; and labor costs in many countries including China, while still lower than in the United States, are rising.
All this doesn't mean that America will ever again be the manufacturing dynamo it once was. But it does mean that "a significant number of companies are now going through the exercise of looking at whether they should relocate their manufacturing facilities," Simchi-Levi says.
Flexibility is becoming the new watchword for large U.S. companies. This may mean having more plants in more strategic locations around the world, with each plant able to produce most or all of the company's products rather than specializing in one or two. Also, locating plants closer to customers, wherever they may be, reduces "time to market" — the period between when a finished product leaves the plant and when it arrives on store shelves. Thus, the authors see a shift to a more regional manufacturing strategy where China manufacturing may focus mostly on markets in China and Asia, while manufacturing in Mexico or the United States may focus on North American markets.
"For example, with the prices of flat-screen TVs falling fast, executives realized that reducing shipping times from about 40 days (when flat-screen TVs were produced in Asia) to seven days (making the units in Mexico) would have a big impact on the bottom line," the authors wrote.
Moving manufacturing facilities is not trivial; in addition to the cost of building a new facility, there must be an ample supply of labor — skilled and professional as well as low-skilled — at the new location. And closing a facility in the United States has more far-reaching implications than just the American jobs lost, Simchi-Levi says.
"Once you lose manufacturing, you also lose the accompanying skills, and it is difficult to bring them back," he says. "When manufacturing goes away, you also start to lose innovation, product design and product development. Prices don't start and end with the manufacturing cycle."