Issue link: https://industrialengineer.epubxp.com/i/777540
20 ISE Magazine | www.iise.org/ISEmagazine U management The classic dilemma of where to manufacture By Paul Engle "Should I stay or should I go?" - The Clash, 1981 U.S. manufacturers are scratching their heads as they head into uncharted wa- ters for 2017. Not simply a new year, but a new political climate has everyone guessing. Combining uncertainty with a strong dollar, companies face difficult decisions regarding offshoring and the high cost of operating stateside. The U.S. dollar continues to strengthen against nearly all major currencies, especially versus small- er economies. As interest rates rise, this trend promises to continue or accelerate. Our friends to the north complain as their Canadian dollar slides. Their products appear to be a bar- gain, with U.S. products out of reach. Should companies move their opera- tions out of their domestic homes, leav- ing thousands without jobs? As if a strong dollar wasn't enough, experts forecast wage increases as em- ployment markets tighten and lower cost labor dries up due to tough immigration policies. Many business models assume a near infinite supply of low cost labor, but some states have increased the mini- mum wage and the supply of entry level workers continues to shrink. This forces many smaller businesses to raise prices, making it difficult to compete with low cost imports. The new administration appears ready to negotiate significant tax concessions to keep companies from moving opera- tions, along with penalizing those that leave the country. This creates the classic dilemma for executives – take advantage of low cost labor and services in Mexico, Eastern Europe and Asia, or attempt to negotiate favorable tax treatments and stay in the U.S. Our experience in the electronics industry mirrors these manufacturing challenges. One client faced the daunt- ing prospect of seeing its entire customer base shift suppliers within two years af- ter significant upgrades in manufactur- ing processes and automation. Tax in- centives couldn't stem the sizable losses. Compelling economics evaporated cus- tomer relationships forged over decades. The result? Millions in write-offs, hundreds of lost jobs and a company fac- ing potential bankruptcy. Products with high labor content that do not lend well to automation might never again be manufactured in the U.S. These products, such as consumer electronics, tend to carry lower margins, have longer shelf lives and come in stan- dard configurations. Recovering such manufacturing may not be possible with today's processes. Manufactured goods on the other side of the spectrum appear to be better can- didates. Many U.S.-based factories have employed mass customization and high levels of service to compete effectively. Consumers appear to value quick and personalized service. Companies that can provide a customized product with a short delivery cycle may succeed against less expensive Asian competitors. Another example comes to mind: proprietary products with a strong brand and effective dealer network. One client continues to manufacture in the Mid- west despite facing competitors from Mexico. Its sales and profits grow each year because the small price premium is more than offset by high levels of quality and service. Investments in automation and other productivity increases allow the enterprise to match competi- tion for large orders, while smaller cus- tomers appreciate on-time delivery and hands-on service. Could this company move manufac- turing off shore? Certainly, but the sav- ings may not materialize given increased costs in transportation and inventory levels. Our advice for companies considering a move offshore includes taking a hard, objective look at the potential benefits compared to the uncertainty of the new political climate and tax incentives. Paul E gle is a ma ageme t co sulta t with a BA i a ce. He has more tha 0 years of experie ce i a ageme t, operatio s, product developme t, sales a d marketi g, strategic pl i g d busi ess process improveme t. You may co tact him at paulfe gle@outlook.com. Not simply a new year, but a new political climate has everyone guessing.