We have all been aware of the movement of manufacturing jobs to low-wage countries such as Mexico in the 1980s and now to China in this decade. The principle reason for this shift to overseas factories has been the low wages in these countries. In the last several years there has been a reevaluation of the need to move production overseas. The reevaluation is based on several factors that affect manufacturing costs.
First, the wage rates in China have increased dramatically in recent years. The Economist magazine (May 14, 2011 issue) cites an increase in wages of 69% in China from 2005 to 2010. Future wage growth in China is calculated to increase at a rate of 17% a year. This increase is far higher than American wages. While wages are going up these emerging economies, the productivity growth has not increased. By contrast, in America the financial recession has kept wages stagnate over the past several years while productivity growth has increased over 2.5% a year. The wage differential between the Asian production areas and America is shrinking.
Second, the global supply chain has its own set of issues. As the price of oil increases, so transportation costs will have to rise. If goods traveling from Asia have a freight time of 90 days on a ship this time is multiplied by the rising shipping costs.
Third, global supply chains are by definition complex and subject to disruptions that are difficult to predict and to cover with safety stock. The March earthquake and tsunami in Japan was a painful reminder of this fact for many companies. As you look for low wage countries in which to place your production, have you thought of the disruption from local political events? Many companies are re-thinking the need to shorten their supply chains to allow for shorter reaction time and better control over extraneous factors.
Fourth, to have 90 days of transportation time in your product lead time means that you need 90 days of inventory on hand. Has anyone been including the cost of holding inventory in their product costs? How can you react to customer needs effectively when it takes 90 days to get the product from the factory to the customer?
Finally, many companies are beginning to realize that the labor cost component in their product is becoming smaller as they become more efficient. What happens to that justification for overseas production if you apply Lean Principles to your domestic production?
Is history repeating itself? Companies shipped parts to Mexico in the 1980s to take advantage of low wages, and by the early 1990s were bringing this production back to the US. Will the fad of sending production to China follow the same pattern?
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