Managing Domestic Supply Chains

How consumer goods manufacturers leverage domestic supply chains for fast cycle times that global outsourcing can’t match.

The story of the Oneida factory in Sherrill, N.Y., is reminiscent of many other U.S. plants: the company had been manufacturing flatware there since the late 1880s, but by the 21st century faced stiff competition from importers, changing market conditions, and labor policies that retained the most senior, expensive workers longest.

Oneida Ltd. ceased North American manufacturing operations in 2005.

Up from the ashes rose Sherrill Manufacturing, a $10-million independent contractor to Oneida that fulfills niche, fast-turn, and difficult-to-forecast orders.

The company currently accounts for 6 percent to 7 percent of Oneida’s total demand, serving as a hedge to its international production sources.

“We can produce here faster than Oneida can manufacture and ship goods by air from overseas,” says Gregory Owens, co-founder with Matthew Roberts of Sherrill, a two-year-old, privately held small firm, which also makes products Oneida otherwise would have discontinued.

“Our production is very automated, and we can manufacture cost-effectively.”

Sherrill is just one example of a cohort of consumer goods manufacturers hidden behind headline-grabbing statistics on the tide of U.S. manufacturing shifting overseas.

Fully 90 percent of brand owners outsource some manufacturing, and more than half expect to increase their use of contract manufacturing over the next two years, according to Strategic Manufacturing Outsourcing: How to Achieve a Return on Relationship Investment, an October 2006 report from AMR Research, Boston.

It’s a fair bet the lion’s share of that outsourcing will be to low-cost countries.

Companies maintaining a notable portion of domestic production fall into a narrow niche of markets where the need for extremely tight cycle times, specialized skills, or local control means it makes sense to maintain at least some U.S. manufacturing operations, sometimes called on-shoring.

These consumer goods manufacturers are capitalizing on close proximity to their U.S. customers by leveraging their supply chains to add value.

The lower logistics costs associated with domestic operations help these manufacturers balance out higher operations costs.

Without brokers, freight forwarders, ocean/air carriers, and customs concerns to worry about, many factories rely on long-standing relationships with a variety of domestic transportation providers, often a combination of parcel, LTL, fleet, and customer-provided transportation, to move goods from the distribution center to the recipient.

Many are also migrating to direct-ship services on behalf of retail customers.

A related trend is postponement, in which product components are manufactured elsewhere, then shipped into the United States, where the final manufacturing process occurs. This strategy, made popular by Dell, enables a high degree of control and customization.

New Balance Athletic Shoe is depending upon strategies such as these with its New Balance Executional Excellence program (NBEE), launched in late 2006.

Underpinning the program is the strong commitment of owners Jim and Ann Davis to U.S. manufacturing; while New Balance also produces in Asia, many competitors source entirely offshore. The company has spent years honing an approach that offsets the considerable disparity in labor, regulatory, and other factors between the United States and low-cost countries.

“We had to adopt a business philosophy that combines the benefits of U.S. manufacturing with an approach that allows us to compete successfully, even though our costs are higher,” says Herb Spivak, executive vice president of distribution, quality and sustainability for Boston-based New Balance.

The NBEE initiative dramatically reduces production time on the athletic shoe styles it covers—about 15 percent of New Balance’s line. The company guarantees dealers that it will always have NBEE products on hand to replenish inventory—a capability unavailable from fully offshore manufacturers with six-month lead times.

To deliver on that promise, New Balance creates initial assortments in Asian factories, then replenishes retailer inventory through domestic production.

To accomplish that without building up safety stock, New Balance cut U.S. cycle times on one pair of sneakers from three weeks to one day using lean manufacturing techniques, including streamlining processes to eliminate delays.

Now, instead of manufacturing to forecast, the company checks warehouse inventory daily and plans the day’s manufacturing for its five U.S. plants to replace missing SKUs.

That’s a key capability for a company whose competitive edge is offering three to five widths in every size, compared to most competitors’ one. A single style of shoe may spawn as many as 75 SKUs, making it a challenge for retailers to stay fully stocked.

It’s also important to satisfy New Balance’s target demographic: elite athletes and everyday baby boomers who value performance over trendiness. Retailers can place an order today and receive it tomorrow, via parcel shipments sent out from the New Balance warehouse—currently 40,000 to 50,000 pairs move under NBEE weekly.

“This program allows us to maintain our loyal customer base,” says Spivak. “We don’t advertise the way Nike or Adidas does, and we’re not a fashion brand like Skechers or Puma. We need to compete on other criteria, including NBEE and the performance and quality of our product.”

The Right Ingredients

It takes a confluence of specific conditions to make domestic manufacturing the right choice for a particular company.

Although higher margins allow room for increased production costs, it’s not automatically high-end products that make the most sense to produce domestically, particularly because high-end can also mean high labor input.

Markets where companies can operate successful domestic plants share common traits: fast cycle times are highly valued, the market seeks a large amount of variety and customization, and longer cycles mean too-costly risk.

“It doesn’t make sense for markets with high demand error to go offshore,” says Lora Cecere, research director, consumer products at AMR Research.

The kitchen cabinet and furniture industries provide a textbook lesson in the do’s and don’ts of creating and exploiting fast-cycle expectations, according to Conrad Winkler, vice president of the operations strategy practice at consulting firm Booz Allen Hamilton, McLean, Va.

The furniture industry stood by as 30 percent to 40 percent of production quickly shifted offshore, he says. By contrast, domestic kitchen cabinet makers responded to the looming threat of global production by sharply reducing cycle times to as short as two weeks.

“Speed and reliability is very valuable to builders and contractors. Companies stuck with four-month lead times are vulnerable,” says Winkler.

Promotion cycles are another factor. “If packaging or promotions change frequently, companies are often left with a large amount of throw-away or discounted goods. That provides good local producers a big advantage over those manufacturing farther away,” he adds.

New Era Cap is another consumer goods manufacturer playing the proximity card to competitive advantage. The 87-year-old, Buffalo, N.Y.-based baseball cap manufacturer began outsourcing production to factories in China in 2001, but it maintains three U.S. plants for two key product categories: the authentic 59FIFTY hats worn by major league baseball players, and custom-designed hats.

The custom hats business grew as baseball caps transformed from souvenir to fashion icon over the past decade. Rappers, entertainers, and other icons lend cache to the idea of trendy, unique caps.

New Era’s custom program allows retailers to design their own styles in small runs that help them stand out from competitors, and enables New Era to replenish Asian-made large-run hats with local manufacturing.

The company sometimes needs to modify the design to reduce the number of production steps—a key strategy for operating in higher-cost locales.

The custom hat process takes New Era’s U.S. plants four to six weeks from order to delivery, a cycle the manufacturer is seeking to trim through lean manufacturing techniques and reliance on parcel and LTL providers to speed shipments.

Keeping Raw Materials Flowing

One significant hurdle for many domestic manufacturers is ensuring a stream of raw materials to fully capitalize on their proximity advantage.

In the food business, for example, a plentiful supply of raw material exists in their backyards—though as the farm belt becomes the fuel belt, even food manufacturers are seeking offshore sources.

Other domestic makers, however, must devise nimble inbound supply chains to ensure the right flow of offshore components.

New Balance, for example, cut its procurement cycle for Asian components and materials from 12 weeks to three. Those goods are delivered to a U.S. “supermarket,” where they are picked and cut to size and spec as needed.

“We still deal with four to five weeks’ transit time for orders from Asia, but managing the supermarkets intelligently creates a shock absorber,” says Spivak. “Although on any given day consumption may vary from forecasts, over time it tends to modulate and meet expectations.”

But challenges remain.

In apparel and textiles, “companies producing in this country get squeezed out on volume orders, but in order to gain collaboration with suppliers they need volume,” says Geoff Krasnov, co-president of Style Source Inc., Allentown, Pa., which provides apparel and textile sourcing and manufacturing services.

The challenges of sourcing raw materials leave these businesses searching for smaller domestic suppliers for whom short runs have meaning.

Prioritizing raw materials sourcing in the larger context of production is crucial for domestic manufacturers. Mary Kay Inc., for instance, places its cosmetics plants directly in its markets across the globe.

This helps the company minimize cycle times; market proximity is a bigger deal than being near suppliers, says Lane Burtz, vice president of purchasing, package engineering, and transportation for Mary Kay, which operates a plant in Dallas as well as Hangzhou, China.

“Raw materials are becoming truly global,” Burtz says. “Serving our markets well is more important than the location of materials, so we usually choose regional production and transport the materials from wherever the source may be.”

Another important consideration is the chemical and energy consumption required for manufacturing.

Fifty-five percent of manufacturers in a recent AMR Research study, The Hidden Backbone of U.S. Manufacturing, say they have “significant, direct dependence” on chemicals for production. A full 90 percent of respondents expect chemical costs to rise, with 62 percent calling the increase “substantial.”

In addition, 43 percent believe domestic chemical capacity will decrease, as compared to 20 percent who see it increasing.

“On average, manufacturers will shift 25 percent of production abroad if pricing and supply issues are not solved,” the study notes.

These issues, particularly the price of natural gas, put the resilience and competitiveness of U.S. manufacturing at risk, according to AMR.

In addition, one presumed domestic advantage that is falling away is the sophistication of manufacturing technology and equipment.

As manufacturers began eyeing offshore locations, technology investments in local facilities often waned just as low-cost countries ramped up to offer better quality. Those seeking to revive shuttered plants now face the additional hurdle of upgrading the infrastructure.

Making it Pay

Labor costs fueled much of the initial push to outsourcing, but savvy companies are now starting to evaluate total costs when making domestic vs. offshore manufacturing decisions.

“Companies now are thinking more holistically about the supply chain,” says AMR’s Cecere. “Instead of thinking in isolation, they’re analyzing trade-offs in total costs,” though discrete manufacturers are further along in this evolution than process manufacturers.

But that’s not to say labor isn’t a looming issue. U.S. manufacturing businesses paid an average hourly wage of $17.17 in May 2007, according to the Bureau of Labor Statistics. A 2002 Bureau report estimates an average Chinese manufacturing wage of 57 cents per hour.

Those attaining domestic production success combine investment in automation and lean manufacturing with a frank explanation to workers of the financial hardship of producing domestically.

At New Era, the need to boost production capacity came just as hundreds of union workers at its Derby, N.Y., plant undertook a nearly year-long strike, pushing the wage issue to the forefront.

But by the strike’s close, the resulting clear-eyed, open discussion of the company’s economic realities lifted the veil of distrust in the management-union relationship.

Today, that “allows open and honest dialog about our challenges,” says Jim Patterson, vice president, global operations for New Era.

The company evaluates its manufacturing costs from a global perspective. While there is some room for give and take, “we aim for each business unit to be profitable, not to subsidize one operation with another,” he says.

At Sherrill, the majority of workers came from Oneida. They presumably reckoned that conceding on pay was preferable to losing their jobs completely. Government credits and subsidies also help soften the blow.

Sherrill’s additional cost-cutting strategies include vertical integration—the plant also makes its own buffs and compounds, and operates a machine shop to create and maintain equipment. It also leverages excess warehouse capacity by offering 3PL services.

Overlooking an Opportunity

Despite the hidden opportunities domestic production offers companies such as Sherrill, New Era, New Balance, and Mary Kay, not all manufacturers fully exploit the proximity advantage.

“Even though a domestic factory is capable of extremely fast lead times, many companies do not segment U.S. factories from overseas factories,” says Booz Allen’s Winkler. “So they end up with the same lead time.”

For many companies, the information technology to enable a more holistic, strategic allocation of production capacity already exists; the failure occurs in management policy.

“Enacting domestic production takes sophisticated supply chain, sales, and operations planning processes,” says Winkler.

Companies committed to doing whatever it takes to enable domestic manufacturing are seeing the impact in their supply chains—and on the bottom line.

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