Getting Control of ‘Miscellaneous’ Print E-mail
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Written by Peter Bigelow   
Tuesday, 04 September 2012 02:50

Are production migration trends driven by contemplating the details, or just impatience?

While I have a deep respect for accountants – those infinitely patient folk who take great pleasure pouring over numbers and making sure the “credit” and “debit” columns always balance – at times I do question if they understand the difference between efficiency vs. making a buck! Over the past year or so, a new buzzword has entered our vocabulary: reshoring, which when its meaning is fully understood leads back to an overzealous accountant not really understanding the real cost of efficiency.

Reshoring, the buzzword, describes the act of bringing to one’s home continent manufacturing that had been moved to lower labor-cost regions. To many, its mere mention gets them giddy thinking that every time they mutter those patriotic syllables, it puts another nail in the coffin of “cheap foreign production.” For me, however, that word suggests a misguided accountant just put a costly nail in the coffin of an unsuspecting company.
To be sure, the global economy has provided great options for companies from all parts of the world. Even the most provincial business purchases some supplies and materials created in some foreign factory or from a foreign raw material. Equally, the market for product made in even the most expensive regions includes all parts of the world, even those low-cost-centric Asian countries. Moving production in many cases makes good sense, either for cost-efficiency reasons or to be close to the end-customer. Yes, globalization tends to work extremely well when intelligent people thoroughly think through the opportunities, risks and challenges of moving production a state, country or continent away. The operative words here are “intelligent” and “thoroughly.” Regrettably, all too often they are either minimized or altogether missing in the context of the requisite business analysis.

So when I hear that Mega Corp. is shuttering their plant in Timbuktu and moving production to the good old high-cost home country because they did not find the cost savings they expected, I shudder to think what, if any, real analysis went into the original decision to move to Timbuktu in the first place. I suspect some sharp accountant was banking on all the “efficiency” the lower costs implied would happen. Yes, labor costs are lower. Yes, fixed overhead costs are lower. Yes, lucrative incentives are available. But in business as well as life, the difference between financial success and economic ruin all too often is determined by how well you control those easy-to-ignore minor details that collectively are best called “miscellaneous.”

As a kid, saving up my meager allowance so I could afford an expensive purchase always seemed to take far longer than I wanted. My parents would remind me that while I had a budget, the one category I did not allocate enough for was all the miscellaneous stuff that I would buy and forget about. When I finally embarked on the world with a real job, I always had to be mindful of how I spent those renegade dollars so not to spend too much on the miscellaneous stuff that would, if not controlled, make paying the important stuff, like rent, impossible to afford.

In business it is the same thing. Budget for materials and supplies works great, as long as the miscellaneous called scrap, overtime, training, travel, etc., does not get out of control. When production is moved to another facility, be it across the street or the ocean, the one thing that does not go away is miscellaneous expenses. Instead, they typically grow exponentially, the farther away that new facility is.

Miscellaneous expenses that kill any move include costs of training employees and working through logistics differences between the old and new facilities. Now add the variables of hiring all new employees, who speak a different language, have a different culture and are producing products they are not familiar with, and the miscellaneous costs ramp significantly. Add again the lack of qualified supervision or rotating management that reluctantly travels to and from the facility every few weeks, providing little if any consistency, and the ramp gets even steeper. Finally, have that facility and those employees now produce a high mix or changing product offering, and the ramp truly can become an infinitely escalating cash-starved road to nowhere.

While the issues to consider when moving a manufacturing plant have not changed over the years, what has changed is the “follow the herd” pressure that some companies felt, resulting in their truncating the decision process. However, planning requires intelligence and thoroughness and not just a quick financial review of efficiency. I am sure that the many, many companies that have very successfully relocated their manufacturing globally did thoroughly analyze and plan by engaging their highly intelligent people from operations, as well as accounting. People who had experience in managing a business, dealing with change, resolving problems and staffing and training so to hit the deck running. I bet those same successful companies asked a whole lot of “what if” questions and spoke at length with companies that had made similar moves. And most important, I bet those successful global companies budgeted human and financial resources to weather even highly unlikely dilemmas. Those companies were undoubtedly sweating the details and thinking of all the possible miscellaneous distractions with a punch list as to how to quickly resolve each one and eliminate as many as possible.

Can the same be said about those who reshored? My guess is too many fell victim to their own impatience to move, looking at the simplistic efficiency of balanced debits and credits that their accountant presented and did not think through the extent that those miscellaneous items would really cost, especially in a foreign country. The typical complaints from companies returning home are those miscellaneous but real things like high employee turnover, continual training required, difficulty managing from afar and the resulting high costs from the low-yield production – all of which should have been thoroughly understood prior to making any move.

Much of the reshoring taking place is because when considering the efficiencies of moving overseas, the company only looked at the accountants’ numbers, not the total costs, including those pesky miscellaneous items that require real intelligent analysis to understand. My bet is most companies now reshoring would never have left in the first place had they done their homework, proper due diligence, and looked past the accountants’ spreadsheets.

What can we learn from this? Perhaps the term reshoring is really just a buzzword for “not concentrating on the important”: controlling large and small miscellaneous costs and using intelligence to thoroughly understand what efficiency truly is.

Peter Bigelow is president and CEO of IMI (imipcb.com); This e-mail address is being protected from spambots. You need JavaScript enabled to view it . His column appears monthly.

Last Updated on Tuesday, 04 September 2012 13:41
 

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