Impact Manufacturing

By Jason Tuma

Globalization. Outsourcing. Off shoring. These words have joined “religion” and “politics” as subjects to avoid in polite conversation. It seems everyone has an opinion about whether U.S. companies doing business overseas has been beneficial or harmful to U.S. manufacturers and manufacturing workers.

Really, both are true.

Companies such as Lincoln Electric and Caterpillar have increased revenue and market share by locating plants overseas and either selling finished goods to local markets or shipping components to another company plant for assembly into final products. Both of these companies — and many others — have maintained significant operations in the U.S. while growing overseas and have reinvested profits from resulting efficiencies back into U.S. operations. This model ultimately benefits U.S. manufacturing, although restructuring (i.e., plant closings or job reductions) is sometimes a necessary part of creating an efficient and profitable global company. From a long-term perspective, however, smart global expansion makes companies stronger and positions them to create more jobs everywhere they do business.

“What happens is, globalization creates competition,” explains William Sinn, a Hong Kong-born U.S. citizen and owner of Sinn & Companies, which helps businesses tap into China as a purchasing resource, manufacturing base and marketing destination. “When there is more competition, there will be more choices for the customer. The company will need to do better in order to be able to keep the customer. It will force companies to develop better processes, or to invent better material, or to design new products to serve the customer. Ultimately they need to add more value to serve the same customer.”

Sinn gives the U.S. auto industry as an example of an industry that chose not to adjust as competitors such as Honda and Toyota embraced globalization. And while the recent “rightsizing” of U.S. auto companies has certainly been traumatic to displaced workers, there is universal consensus that the leaner reincarnations of Ford, GM and Chrysler will be stronger and have greater potential for long-term survival.

Another globalization-related mistake made by U.S. auto companies — and other manufacturers — was to use newly accessible markets such as Mexico in the 1990s and China in the early 2000s to chase low-cost supplier opportunities based solely on per-unit cost. Even in cases where these companies maintained relationships with U.S.-based suppliers, they used the threat of plentiful and cheap overseas labor to excessively beat down these long-standing suppliers on price. Many business leaders now recognize that this model eventually backfires and is the source of much of the negativity associated with globalization.

While there may indeed be beneficial opportunities to manufacture in or source from lower-cost environments or providers, this decision should be made after considering total cost of fulfillment and how the decision will affect customers.

“The total cost of fulfillment is all of the costs of moving materials from one end of the fulfillment stream [or supply chain] to the other. These go far beyond the transportation costs most firms calculate to include the carrying and storage costs of inventory, the cost of material-handling equipment and labor, and the management time devoted to gathering all of the information needed to constantly monitor performance. These costs also include all of the transport, inventory, handling and management costs incurred by customers and suppliers along the fulfillment stream. The senior managers of every firm in the stream would find the total cost surprising large once summed.”

— Robert Martechenko and Kevin von Grabe, Building a Lean Fulfillment Stream¹

According to Sinn, there are plenty of examples of companies of all sizes that have benefited from moving into overseas markets by making smart decisions with a long-term focus. One of his clients, for example, had $3 million in sales two years ago when he began selling his product in China. The company has since doubled its revenues.

“They produce a product here that satisfies a specific need, and the Chinese companies don’t know how to do it,” Sinn said. “Companies that embrace globalization and are willing to improve will progress. The rest of the world will catch up only if we let them. Control is in our hand.”