Argo Consulting experts weigh in on the economic case for moving production away from China and the benefits of using a total cost analysis.
October 24, 2019
By: Fernando Assens, CEO at Argo Consulting, Tony Donofrio, Supply Chain Practice Leader at Argo Consulting, Bruce Work, Vice President, Supply Chain Practice at Argo Consulting, and Stephen Francis, Senior Consultant at Argo Consulting
Though political factors have dominated recent news, the economic case for moving production away from China has also been building over recent years.
To understand what has changed, it helps to remember that China became the “World’s Factory” via a combination of cheap labor, container shipping, command-and-control government investment in infrastructure, and the World Trade Organization’s almost 20-year designation of China as a developing economy.
Well, it appears that China has developed very well indeed, and they now have the increased labor costs to prove it — and when we see the Chinese offshoring work to places like Ghana and Peru, it’s tempting to draw the conclusion that China is not a key focus anymore. The reality is not quite that simple.
The Chinese may have begun their path as a provider of cheap labor, but they have built an enviable infrastructure, with huge container ports that offer frequent sailings. This far outstrips the abilities of most other nation-states, which may only offer feeder-ships, adding strings to the supply chain that increase costs and lead times.
The Chinese have also invested in education. This coupled with decades of hands-on experience and knowledge transfers from sometimes reluctant Western partners, they can often now compete on a level playing field with their former mentors.
In contrast, the US has seen a multi-generational decline not only in the physical infrastructure needed for manufacturing but also the mental infrastructure of skills and knowledge — and the relatively small number of skilled operators, managers, and subject matter experts are currently enjoying the tightest labor market in the memory of anyone currently in the workforce. Given this, we are dubious of well-meaning talk of reshoring operations back to the US, except under certain limited conditions.
The critically important right-shoring question is not a simple one to answer. Therefore, it is recommended for companies to perform a system-level, cross-functional Total Landed Cost analysis of any currently offshored value streams. In particular:
- Look at where raw materials are coming from, and where finished goods are going — and couple this with a network study of several destinations.
- Look at value through the eyes of the customer — do they care about lead times? Innovative products? Customization?
If a company is producing high volume, labor intensive, lower complexity products, it will likely have a hard time finding a production area that can match China’s total landed costs.
If, on the other hand, a company is shipping objects that do not travel well (e.g. those with a relatively low density such as an injection-molded toy in a bubble package), it may have a business case for moving production closer to the customer. The same is true if a company has critical intellectual property wrapped up in product, project-based workflows, made to order or low volume production runs, or high-complexity products.
What should you look for in target locations?
- Start with port service (sailing frequency, vessel capacities, lead times, etc.) and then look at other transportation infrastructure. Can the area provide sufficient skilled, semi-skilled, and unskilled labor? Are there research universities and other institutions that can add value, or help you rapidly improve the skills of the local workforce?
- Consider local incentives and other financial factors. Obviously, a favorable tax structure can make a huge difference, but political risk is not exclusive to China.
- Consider other costs: How much will you be paying for power — and how reliable is the grid?
- Can you leverage the expertise of Third-Party Logistics carriers? Would installing and using a Transportation Management System improve your shipping costs and responsiveness?
- Can you offset increases in labor cost per unit, perhaps by combining judicious shop-floor and back-office automation with Lean Manufacturing? If so, you may be among the small percentage of firms who are candidates for reshoring to the US.
Companies that offshore product development functions often find themselves losing innovative capacity over the long haul. If innovating will win new business, it will be a combination of Lean Product Development and Product Value Management that will be helpful for reducing labor inputs and simplifying production for new products, giving greater flexibility when choosing production sites.
If customers are based in the US, it is recommended to consider Mexico, which can sometimes top China for Total Landed Cost. European companies have long looked to Eastern and Southern Europe; if African economies continue to stabilize and expand, they may become increasingly attractive also.
A right-shoring analysis should be thoroughly conducted as soon as possible, as it is important move forward fully informed, and with eyes wide open.
Head of Supply Chain Practice
Tony Donofrio, principal and head of Argo’s supply chain practice, has more than 30 years of experience in supply chain. Tony has a reputation for taking on tough challenges, creating growth opportunities and outperforming the competition. Prior to Argo, he worked at four Fortune 50 companies and is recognized for outstanding bottom line results and share growth.
CEO and Co-founder
Fernando Assens, CEO and Co-founder of Argo, has focused on achieving lasting, operational improvements by transforming processes and people for the past 20 years. His experience in the consulting industry dates to 1992, where he began in Operations Improvement and Change Management. Prior to working in consulting, he held management positions in operations and finance with two European consumer product companies.
Vice President, Supply Chain & Logistics Practice
Bruce Work, Vice President of the Supply Chain & Logistics practice at Argo, is a senior executive with more than 25 years of experience in Retail, Manufacturing, Consumer Products/Packaged Goods industries. He has built worldwide supply chains and operating infrastructures as well as led Due Diligence and Acquisitions efforts for multiple Fortune 1000 companies.
Senior Consultant, Performance & Development Practice
Stephen Francis, Senior Consultant for the Performance & Development Practice at Argo, is the lead author of the analysis and implementation techniques that Argo uses to drive rapid, sustainable change in clients’ culture and leadership capacities. He draws on a deep background of more than 20 years in organizational development, training and development and executive coaching.