Lean Six Sigma Paving the Way for Reshoring of Manufacturing

Companies have been offshoring manufacturing to China and other developing countries for the past few decades; some to save cost through lower wages while others succumb to herd mentality in their effort to keep up with their competitors. Initially, companies who offshored were focused solely on per unit cost and the ways to drive that number down. Unfortunately, per unit cost shows an incomplete picture and is unrepresentative of the Total Cost of Production. It makes sense for some companies to offshore production but that model does not work for all.

In the last five years, manufacturing companies have started to realize this and a new trend  to reshore manufacturing operations has begun. Even multinationals like General Electric (GE), who once pioneered the idea of offshoring, is bringing production back to the United States. Companies are getting smarter with better use of technology to produce intelligent data and in turn are better utilizing tools such as Lean and Six Sigma to help them understand the true total cost associated with making a product, regardless of location.

Companies use Lean tools like Value Stream Mapping to help understand their end to end supply chain and are starting to realize there are many other factors that go into the Total Cost of Production besides just per unit cost. They are seeing that the per unit cost of an item does not take into account high shipping cost, fees and duties, slower response to quality issues, waste of keeping large inventories, sending large teams internationally to deal with production/quality problems, loss of intellectual property and finally the slow reaction to the innovation of products. Now that companies are seeing the true total cost, many are realizing that the advantages of making their products in low wage countries are not as great as originally planned.

Aside from the added cost associated with offshoring, companies are also busy figuring out how to make cheaper products at home. Companies are  using Lean and Six Sigma in more innovative ways to drive down cost and quality defects. Examples such as the use of automation, poke yoke or error proofing, better root cause analysis and advancements in technologies help reduce waste, which eventually results in a more competitive option for items that have been reshored. 

Having said this, the reshoring movement has to be kept in perspective. Most companies involved are bringing back only some of their production destined for the American market. Much of what they had moved over the past few decades remains in developing countries such as China. As mentioned before, a lot of companies are still under the herd mentality to offshore and many others are taking the hybrid approach of moving some operations back and at the same time expanding research & development activities in their overseas markets. But, reshoring is gaining momentum and will only get stronger. In a survey of American manufacturing companies in 2012, 37% of companies with annual sales above $1 billion said they were planning or actively considering moving production facilities from China to America. 

2 Comments

  • Testing Software Offshore: Has It Run Its Course?
    • Nick Tan October 4, 2013 5:00 pm

      That’s an interesting point that there’s a reshoring trend happening in the technology front as well. Would be interesting to learn about the reasons driving that behaviour. With manufacturing, this trend of reshoring started quite a few years back. It’s not till lately that there has been enough critical mass for the industry to observe this trend and start documenting in industry/main stream publications.

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