There are a growing number of reasons to manufacture some, or all of your products, in the USA. Be it cause marketing, profitability, or a hedge against risk, the USA is becoming more attractive and industry experts are advising multinational companies to explore the potential savings of making products here.
Trolling around the Stanford Cool Products Expo last month, I came across a fantastic product with an even better story. Coffee Joulies. I had seen Coffee Joulies on the Kickstarter website a week before, where they had successfully raised $300k, which was $291k over their goal. Clearly, there was something remarkable about this product.
Coffee Joulies are a small stainless steel ball that you place into your coffee. It uses a special, non-toxic material to absorb your coffee’s heat when it’s too hot–and cools it down 3x faster than normal. Once the Joulies bring your coffee down to a desirable temperature (140 degrees F), it then begins releasing the heat back into your coffee and keeps it at that temp for up to 2x as long as it would otherwise. Brilliant.
When I talked to one of the Joulies people at their table, I asked them how they planned to manufacture the product. The story got better. They desired to produce the product in the US, but had no idea whether they could find a supplier that could do this. They looked, but to no avail. Then, in twist of fate, one of the inventors saw a factory on a late night TV show that was one of the oldest manufacturers of flatware in the country. They reached out to them. The manufacturer was in the process of closing down their US facilities. Thus, with a smaller order, the Coffee Joulies folks had to start in Mexico, but they struck a deal with the flatware manufacturer and agreed that as soon as they had enough orders, they would be able to bring production back to the manufacturer’s facilities in the States and keep the facility going. When they made this fact known to their funders/fans on Kickstarter, some even checked in repeatedly to see if they had reached the volume to bring production back to the States. Although difficult to measure, there is an emotional appeal to many when it comes to “Made in the USA”.
But “Made in the USA” is becoming more than just a cause marketing appeal designed to pull on your patriotic heart strings. It’s becoming a good business decision. Boston Consulting Group (BCG) recently issued a report that they expected a “manufacturing renaissance” of sorts in the United States by 2015. The reasons? Expected increases in wages in China and the appreciation of the Yuan, are projected to narrow the cost gap between Chinese manufacturing and U.S. manufacturing considerably. However, reconsideration of manufacturing source location will likely occur only in specific categories. As the report points out, “products that require less labor and are churned out in modest volumes, such as household appliances and construction equipment, are most likely to shift to US manufacturing sources. Products that are labor-intensive and produced in high-volume, such as textile, apparel, and TVs, will likely continue to be made overseas”. Depending on your market, just as companies rushed overseas to slash their labor costs and improve profitability, Made in the USA may become a driver of this.
In January, another leading consulting firm, McKinsey & Co., issued an article entitled “Building the Supply Chain of the Future”, in which they tag flexibility and risk management as the drivers of success in today’s supply chain. They encourage companies to “splinter” their long, global supply chains, down into smaller, more nimble supply chains. By doing so, companies enhance their ability to react more quickly with SKUs that experience considerable demand volatility, as well as, reduce uncontrollable risk caused by unforeseen natural disasters and geo-political spats.
This last example does not necessarily entail “Made in the USA” as a strategy, but it certainly calls into question a long trend of extending global supply chains further and further into low-cost countries as a method of reducing cost. The fewer countries your product components must travel through, the lower the risk something will happen that delays your supply. And, after all, freight costs add zero value to a product. Coupled with more competitive wage levels, there’s no doubt that this will be another compelling reason to consider U.S. manufacturing sources.
But note the fact that I say consider, because each case must be evaluated to determine the best strategy for your supply chain. With so many other issues to deal with as a startup, many founding teams and early employees just do not have the bandwith or expertise to perform an analysis. Ideally, one would use an approach similar to what is suggested in this Harvard Business Review article, which offers an excellent case study of how a company can analyze where to locate manufacturing by using a real options valuation analysis to determine the value of being local and flexible. If going to that level of analysis is not doable, a company might begin by simply having both US and offshore manufacturing sources quote the product and then tally up the associated costs of doing business in each scenario to see what the Total Cost of Ownership in each looks like.
Going a step further towards optimization, a company could work to understand the potential value that can be unlocked through greater flexibility–by delaying the point of SKU differentiation to occur with a local source, or reducing excess inventory with shorter lead times. Rather than forecast future demand purely by assumption, shorter lead times allow a company to wait to place an order and actually observe early demand before forecasting how much product they’ll actually need. Observing actual demand should allow you to refine your forecasts and minimize excess.
The level of analysis you go into should be driven by the stage in the lifecycle your company and product are at. There’s no need to boil the ocean when your product has not yet gained reasonable traction. However, when you’re in the market and expanding, or fighting competitors, the supply chain can become a KEY point of competitive advantage. Whether for purposes of marketing, profitability, or risk, it’s clear that there are a growing number of reasons to seriously explore the offshore vs domestic question.