Dispelling the Manufacturing Myth American Factories Can Compete in the Global Marketplace (1992) / Chapter Skim
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5 CONCLUSION
5 CONCLUSION
Pages 77-100
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From page 77... ...
Although generalizations must be approached cautiously in an economic activity as diverse as manufacturing no two companies are alike, let alone whole industries the committee believes its analysis has illustrated many of the forces at work in global factory site selection.
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From page 78... ...
Consequently, access to technologies and capabilities is becoming an increasingly important attractor of manufacturers: Access to skills, Technology, and Capabilities · access to component technologies · access to design systems · access to process equipment · access to work force skills (management skills, engineers, technicians) Finally, manufacturers choose sites for production facilities
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From page 79... ...
Factors that wouict affect a decision to move manufacturing offshore to gain access to foreign markets include: Access to Markets i ~ avoiding import duties, tariffs, and other trade barriers · meeting in-country value-added requirements · closeness to customers and suppliers, better understand.ng of the market, faster response to the market · benchmarking products and processes against worId-cIass competitors to improve management practices, learn about new technologies, and build skills All of these attributes are attractive because they fit into a firm's overall strategy for maximizing total business potential (and are reflected in the mode! on page 14~.
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From page 80... ...
a Japanese company) · time (e.g., Digital's manufacturing strategy changed significantly between 1965 and 198512 Having examined site location decisions in the wider context of corporate strategies to maximize total business potential, the committee found that cost is clearly no longer the only factor in site location decisions and today, in the cases examined, is not the dominant factor.
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From page 81... ...
As a result, moving production offshore simply to save labor costs may incur management and logistics costs that outweigh the labor savings. The primary reason for the diminished importance of direct labor costs, of course, is that advances in manufacturing processes and automation have been very successful in reducing the direct labor requirements in modern manufacturing operations.
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From page 82... ...
Offshore management culture may be a source of cost advantage as well: management methodologies that improve quality, for example, can also chive up productivity and lower costs. When the domestic corporate manufacturing culture is too set in its ways to make methodological advances, firms will go abroad to find managers who can immediately be trained in worId-cIass manufacturing practices (or who practice them already)
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From page 83... ...
. Exchange rate differentials, along with changes in trade status, can have profound effects on the cost advantages of a given manufacturing environment.
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From page 84... ...
Particularly if the customer's motive is long-term investment avoidance, OEM production will likely be a disadvantage. Myth 4: Moving Offshore Is a Quick, Expedient, Reversible Solution to Transient Competitive Pressures Many companies moire manufacturing capacity abroad, through investment or OEM sourcing, with the intent of repatriating production after further R&D creates the next-generation product or process.
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From page 85... ...
Further, experience with offshore manufacturing can expand a firm's vision of its own manufacturing system, spurring it to build global manufacturing capacity. For instance, by benchmarking its domestic operations against its offshore plants and suppliers, AT&T has identified specific areas for improvements and mechanisms to improve.
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From page 86... ...
AFTER MYTHS: RETHINKING COSTS, COMPETITIVENESS, AND ATTRACTIVENESS Because site location decisions are driven by a variety of forces (not just cost factors that are widely misunderstood) , it is necessary to find a new way of thinking about what kind of and how much manufacturing the United States can attract.
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From page 87... ...
At the bottom end are low valueadded manufacturing activities, characterized by a high degree of direct labor, Tow skill levels, and low wages. At the top end of the continuum are high value-added manufacturing operations, those characterized by high skill levels and high wages.
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From page 88... ...
The onshore/offshore threshold, for example, is affected by several forces, some inherent to the system such as exchange rate fI~ctuations and changing wage differentials, others clependent on innovations in individual firms, advances in technology, or changes in the character of different manufacturing locations. The committee has identified several forces that can drive the onshore/offshore threshold down, thereby decreasing the minimum value-added that can be justified at the domestic wage levels.
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From page 89... ...
Cost advantages of offshore manufacturing are usually transitory for a given location, as seen, for example, in the rising wages and labor shortages in newly industrialized countries. An extreme example of this dynamic are efforts in Singapore to move blue-collar production to Batam Island and turn the onshore labor force into commuting managers.
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From page 90... ...
This practice of greenfielding management offers significant short-term cost advantages when the domestic corporate manufacturing culture makes immediate methodological manufacturing improvements difficult. A final critical factor affecting the onshore/offshore threshold is trade policy, though the pressure it exerts may be upward or downward.
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From page 91... ...
market; (2) eliminating unfair trade practices (such as product dumping)
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From page 92... ...
This trend is already apparent in semiconductor wafer fabrication, where cost differentials on huge investments are of secondary importance to the strength of the local infrastructure, particularly skill levels (the real determinant of how efficiently value can be added)
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From page 93... ...
A broad base of innovative, highly skilled personnel has, historically, enabled American firms to be pioneers of the value frontier. The skill base (both technologically and methodologically speaking)
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From page 94... ...
To expand the effective base, U.S. corporate and government policies can push back any of the three boundaries (the onshore/offshore threshold, the market threshold, and the value frontier)
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From page 95... ...
While there is evidence that environmental cost factor differentials and unfair trade practices have contributed to dwindling U.S. competitiveness in certain frontier industries, the fact remains that effective management and methodological innovations are decisive advantages in global competition.9 To expand the value frontier, U.S.
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From page 96... ...
Second, innovations in manufacturing methodology and technology are changing the way manufacturers add value; low-skilled, direct-labor-intense manufacturing is a declining breed. As long as the world manufacturing base keeps shifting up the value continuum (as direct labor content shrinks)
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From page 97... ...
Finally, movement of low-value but often high-volume production offshore can have a significant and detrimental effect on infrastructure. Domestic manufacturers' decisions to move offshore can devastate the local supplier base because the volume requirements of the high-value goods left in the United States cannot support the large supplier network.
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From page 98... ...
The cost advantages of offshore locations can often be offset by strong, effective management of a skilled work force keeping appropriate manufacturing process technology in tight control.
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From page 99... ...
By 1985, however, the rationale for moving offshore had changed. Instead of looking for low-cost labor, Digital was siting factories in order to gain market access, to gain access to skills and technology, and to create a worldwide manufacturing network that would be less vulnerable to currency fluctuations.
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From page 100... ...
, the onshore/offshore threshold will be upheld. Whether firms actually moire offshore will be determined by their ability to rationalize costs onshore through better management or other factors such as market access or access to skills and technology.
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