US Manufacturing is resilient and has never been in a better position to reclaim what was previously given away, as discussed in Now is the Time to Take It Back. Outsourcing inherently introduces significant risks to service and quality, and the calculations typically used to make the case to outsource are highly inaccurate and overstated; even a 20-30% miscalculation would single-handedly negate any potential savings. Any remaining cost gaps can easily be solved for by leveraging lean methodology to eliminate waste. This concept of Leanshoring is already happening around the country, led by those willing to do the work by aggressively and creatively finding lasting solutions that solve the real problem all businesses face: waste.
One of the biggest wastes we see across manufacturing, logistics, and warehousing stems from the inability to dynamically right-size labor capacity. The presence of too many full-time employees creates major productivity losses while simultaneously incurring expensive, unnecessary labor costs. Too few operators, and you're forced to either extend lead times or turn away business - impeding you from capturing revenue growth and realizing respective margins. Labor is one of the largest cost levers you can control, and being able to perfectly align yours with demand gives you a tremendous advantage. You are able to quickly work down an overdue backlog and recover service levels. You are able to steal market share when orders spike or seasonality occurs in your industry. You are able to quickly scale and grow your business while also eliminating the constant headaches that always accompany outsourcing. I know from firsthand experience just how true this is.
Initially, I went down to Mexico to stand up a high-volume production line for electrical control panels. I was quickly sidetracked by trying to figure out how to consolidate a 20,000 sqft building to another location within the production network. The current site was utilizing 8,000 sqft for a single production line and had plenty of empty office space, so I understood why this site was targeted for consolidation. Once I walked out onto the production floor, the improvement opportunities were obvious: no defined production stages, constant expediting, and a stockpile of defect material on the dock. The next two days uncovered a number of issues, but the two obvious ones were improving lead time and material cost.
The panels were manufactured for an internal division, and the product line had a lead time of 16 weeks, which masked the service impact of this factory's poor performance. However, in a growing market category, the 16-week lead time was beginning to impact on-time deliveries and service levels to the end-customer purchasing the electrical panels. Furthermore, I received information regarding the stockpile of material on the dock, and I learned that the local vendor cost was 3x internal production rate with a 15% defect rate, which caused the visible dock congestion of wasted material and money.
Localization and Leanshoring
The analysis and rationalization process led to moving the electrical panel production line back to a Midwest facility to deliver the following results:
- No bottlenecks: In our facility in the Midwest, we had excess labor (with the appropriate higher-skilled wiring knowledge), excess floorspace, and excess capacity in our fabrication department and our powder coat line.
- Material Savings offset increased labor costs: Even being overly conservative, we could produce our own sheet metal components at half the cost. This was not internal “at cost” pricing, but with above average margins. Solving the 15% scrap was incremental variable cost productivity that helped further expand the margins, and corporate got to keep the fixed cost savings by eliminating the rooftop in MX.
- Consistent and predictable service: Eliminating the customs issues and the incremental transportation time, we committed to reducing lead time back to the 8 weeks originally planned for, and with the in-house knowledge, we quickly scaled and solved the overdue issue within three months.
Using lean methodology to drive the localization effort, we obtained the following results:
- Generated 400% labor productivity, allowing us to self-fund other projects
- Reduced total inventory by 76%, freeing cash and improving turns
- Improved internally quality by 72%
- Reduced lead time from 16 weeks in MX to less than 2 weeks in the US
The total project savings realized were $3.1MM, all while repatriating the work involved from Mexico. The key to continuing to drive increasing operational flexibility is by leveraging tools like Veryable that enable you to access flexible labor to scale.