December 1988 The Roemer Report

The Hidden Cost of Offshore Manufacturing

American manufacturers continue to make heavy investments in offshore production. How­ ever, the wisdom of many of these decisions could be doubtful. We believe many factors now support major new investments in domestic manufacturing...and this could have a very positive impact on the trucking industry. A recent Harvard Business Review story on the economics of offshore manufacturing makes a strong case for a resurgence in U.S. manufacturing. It's written by Norman Berg and Constantinos Markides. They point out that your preoccupation with labor costs could keep you from taking a closer look at many of the other manufacturing costs and competitive considerations involved. Here's a closer look at some of the potentially hidden costs of offshore manufacturing: (1) Manufacturing may not even save on labor costs. A survey by the National Association of Accountants found that labor costs really represent only about 15% of the cost of making the average product. Moreover, the preoccupation with these labor costs could deflect a company from taking a hard look at the key factors that make up the remaining 85% of its cost structure. These include savings in administration, inventory control, distribution, R&D, and marketing. (2) Manufacturing may well increase their costs in other vital areas. For example, higher inventory and administrative costs through offshore sourcing are very prob­ able. You've also got to factor in increased transportation and worker training costs along with tariffs. A company's quality costs are also likely to go up because parts produced overseas are less likely to meet specifications. Finally, the extra time it takes to get a product from an overseas location can retard your ability to meet shifting market conditions. (3) A manufacturer can hollow itself out. When you subcontract manufacturing to an offshore producer you stand a much bigger chance of also losing cherished design and product innovation capabilities. New product design and practical technological innovation thrive in an environment of constant feedback. In many cases, the choice to produce offshore is really a decision to freeze the product. A company simply can't make rapid design changes and product enhancements if it's working through a remote location. (4) The economics that favor offshore production don't always last. Consider the three factors that make offshore production costs the most inviting: low wages, a strong dollar, and the absence of trade barriers. None of these factors are within the control of a company. U.S. firms that went offshore a few years ago, for example, have seen the price of their products rise with the drop in the dollar. (5) You could find your organization trapped. At any time in the future its host country can pressure it to transfer more advanced technologies or to finance other local spin-off enterprises. (6) A firm can also strain friendships at home. The cooperation of its labor union and its workers in vital areas from productivity to process innovation will be far less likely. There are sound reasons for a decision to go offshore. These include access to key natural resources, the need to expand your export markets, and to be more responsive to local markets. But a knee-jerk decision based on saving money on labor costs may give a firm far higher overall costs than it bargained for.

TIME: THE FINAL COMPETITIVE FRONTIER: Time is emerging as the ultimate strategic weapon. That's the conclusion of George Stalk,Jr., in a provocative article appearing in a recent issue of Harvard Business Review. Time is now the competitive equivalent of money. quality. productivity. and even innovation in shaping your competitive future, Stalk argues. He says that leading-edge Japanese companies have already shifted to time-based strategies...and with remarkable results. Their new goals involve shortening the planning loop in product development cycles and trimming factory process time. Indeed, they are managing their time like other companies manage costs, quality, and inventory. A company that can introduce new products faster enjoys a massive competitive advantage. It will inherently be more market responsive. Japanese automakers can develop new products in half the time as many U.S. and German competitors. The manufacturing strategies of these leading-edge manufacturers focus on short production runs and small lot sizes. Their innovations take the form of small incremental product improvements, but they introduce them more often. Western companies tend to focus on larger production runs, making significant improvements more often. Your innovation must be redefined within the critical context of time. Consider the example of the air-conditioning industry where Japanese are introducing innovations at a rate four times faster than American competitors. Stalk issues a startling competitive challenge: he says, “Western companies will have to cut their new product cycles by 300% or Japanese manufacturers will easily out-innovate them." In naked terms, your company has just three competitive choices: (1) co-existence with your competition, (2) retreat from your competitors, or (3) attack your competitors indirectly or directly. The first two options hold out no hope for real growth. Attacking competition does. A time-based strategy can give you a powerful new weapon to mount this attack.

THE FUNDAMENTALS OF GREAT DECISIONS: If there is one quality that all of the world's most successful firms have in common, it is simply this: the ability to think better than the competition. Managers of top firms have mastered the fine art of collective thinking, says management consultant Ben Heirs. His new book, The Professional Decision Thinker, outlines five foolproof rules for turning managers on every level into proactive thinkers. Rule #1. Stress the creative aspects of friendly competition and the destructiveness of politicking. Encourage openness and objectivity at all times. Rule #2. Make sure that everyone understands the four-stage decision-thinkingprocess: (1) Formulate the question. (2) Brainstorm alternative solutions. (3) Examine the consequences. (4) Make a decision by balancing risks with probabilities for success. Rule #3. Assign specific thinking responsibilities to each team member. Make sure everyone knows exactly what his/her part of the process is, and why it's essential to the overall solution. Rule #4. Use courtesy and sensitivity to stimulate your team. You don't have to be buddies with these people, but you do have to treat each one with personal care and sincere interest. Rule#5. Watch out for complacency. Even good thinkers get sloppy when the pressure to succeed wears off. Keep them sharp by asking lots of "what­ if' questions.

WHY CUSTOMER RETENTION IS VITAL TO TRUCKERS: The average face-to-face personal sales call increased 9.5% from 1985 to 1987. The average cost of a face-to-face sales calls now about $252. That's an increase of 160% over the past 10 years. A McGraw-Hill study on business-to-business selling costs also found that the average cost of a direct industrial sales call (not using dealers or distributors) was even higher at around $291 per field sales call. Retaining your existing customers through intensified service marketing efforts looms as an increasingly vital alternative to the high cost of new account acquisition. Many firms are now examining the real economic payoff from an hour of selling time vs. an hour of customer retention and service time. New McGraw­ Hill findings further suggest that it costs nine times as much to acquire a new customer as it does to retain an existing one. Many firms have found that a customer-retention focus has proven to be a valuable source of information for making field sales calls much more productive. The American Management Association notes thata typical company will receive 65% of next year's business from this year's customers. It also indicates that customer turnover can run between 20% to 30% of your customer base. The bottom line is that any percentage increase iu customer retention can create a powerful improvement in your net revenues.

THE HEARTLAND'S INDUSTRIAL RESURGENCE: Several years ago, visions of the industrial North as a rusted wasteland were commonplace. But it never quite happened. A few years ago, this nation's northern industrial states were wearing the image of an aging rust belt. To paraphrase Mark Twain, reports of the region's industrial death were greatly exaggerated. The South and West do lead the nation in overall business growth. But a recent survey shows that nearly one-half of the nation's 50 fastest growing metropolitan areas are in the industrial North. The individual state nonresidential construction figures dramatically illustrate this recovery. Six of the top ten states are so-called rust betters. and a seventh. Virginia. is rigbt on the border. Several reasons stand out in analyzing this growth trend in traditional business centers. The ability of northern industry to diversify in response to global economic changes is perhaps the most important. The devaluation of the dollar and the resulting increases in foreign trade generally favor northern industrial cities. Growth of high-tech industries around established manufacturing center and engineering schools also favors the northern states. Our transition to a service-oriented economy naturally focuses around well-established business and residential areas. Labor skills and many other key resources are still more plentiful in the northern part of the U.S. Will the region regain its lead? Probably not. Rather, today's emerging economic trends suggest a geographic balance in development and growth among all areas of the country.