For years, manufacturers have insisted on putting factories in the greater San Jose area. The CIRCUITS ASSEMBLY Directory of EMS Companies lists hundreds of entries with Silicon Valley zip codes. Damn the costs — siting near customers — actual or desired — takes precedence!
In the first quarter, the most up-to-date data available, industrial space vacancy rates were 2.7%, near an 18-year low. That’s despite more than 200,000 sq. ft. of new industrial space coming online in the period, on top of about 3 million sq. ft. of new industrial space that came online last year.
Ironically, industrial space rents, while climbing, are a relative bargain. The average rent was $1.27 per sq. ft. in the March period, more than twice that in 2010 ($0.60 per sq. ft.), but well below the national average. That comes to more than $381,000 in rent a year for a modest 25,000 sq. ft. factory. But tack on energy, and labor costs — unemployment rates are not only lower than the national average, but workers earn a small fortune — and it all adds up to a very expensive enterprise.
Today the pendulum is shifting, if only bit by bit. We are seeing furloughs, layoffs and even some big names starting to blink. Jabil,Creation Technologies, and this week, Benchmark are among those closing factories in Silicon Valley.
Will more follow? In an industry where margin and cash flow often make all the difference, it won’t be a surprise if more players head for lower-cost pastures.
It’s been way too long, let’s look in on Patty and the boys…..
It was 5:30AM and Patty’s alarm went off. She was unusually tired
today because of a PTA meeting last night. She had become much more interested
in the school her twin sons went to when she found out that the school was no
longer teaching cursive writing. She was too late for that battle, but had
heard that the school was not going to teach long division. Another mother told
her that the reason was that long division was too hard and it could be done
with a calculator. When Patty heard this she “went through the roof.”
Fortunately, when Patty attended the PTA meeting, she and the other
parents were assured that long division was still being taught.
Patty’s sons would learn cursive, however, as both her mother
and her husband’s mother would teach the boys during baby-sitting sessions –
and once a week the boys would read one of the 100+ letters to home that their
great grandfather wrote to their great grandmother during World War II. All
written in cursive of course!
After her morning jog and workout Patty was in her office at Ivy
U by 7:30AM. She turned on her laptop and saw an email from Mike Madigan, her
former employer’s CEO. It read:
Dear Professor Coleman,
One of my golfing buddies owns a small jewelry firm, Galahad Jewelry in Providence, RI. One of the units in the company produces silver charms for charm bracelets. This unit is not performing well financially. After chatting with him I sensed that productivity is low, inventory is out of control, and the processes are not lean.
Could you visit his factory and perform an audit? Maybe Pete can go with you – just make sure he behaves.
The note finished with contact information for the company.
Not only was Pete willing to go, but Rob also had a colleague in
nearby Brown University that he wanted to visit. A few days later our trio
was heading south to Providence in Rob’s Buick.
“You guys don’t know squat about making charms for charm
bracelets. Do you really think you can help them?” Rob teased.
“Hey, we’ve got the great Professor Coleman here. She can solve
any problem! — Seriously, we’ve discuss this before, most manufacturing
processes are similar. I won’t be surprised if we can help them a lot,” Pete
answered.
They stayed in a hotel near the Galahad facility the night
before the audit. They arrived at the facility the next morning and met
with the site superintendent, Don Smithson. After exchanging pleasantries,
Patty and Rob toured the manufacturing, inventory storage, shipping, and
administrative areas. By then it was lunchtime. Pete had stayed behind to watch
the manufacturing line and collect productivity data. During a late lunch, they
requested some additional production and cost data from Smithson. They then
requested that Smithson give them two hours to develop a summary of their
findings.
After preforming all of the necessary calculations, Patty and
her team prepared a Powerpoint presentation. Smithson had gathered a few of the
process engineers and the manager of production Ervin “Bud” Clark. Clark was an
intimidating man with sharp features and, it appeared, a quick temper.
Patty started the meeting by reviewing the strengths of the
operation. The facility was so clean it could only be described as spotless.
The production workers appeared to have very good attitudes and the quality of
the resulting charms they produced was excellent. Bud Clark beamed as Patty was
sharing this information. Then she reviewed the “Opportunities for Improvement”
(OFI’s).
‘The greatest OFI is the line uptime. From the data you gave us,
and from what we gathered today, we calculated that your uptime is 30%,” Patty
began.
At this, Clark turned red in the face and demanded,” What do you
mean by uptime Dr. Coleman?”
“Simply the amount of time the line is running during an 8-hour
shift,” Patty responded.
Clark was now shaking with fury, “This is the greatest insult I
have ever experienced, my lines are running almost 100% of the time. Smithson,
let’s kick these Ivy Tower intellects out of here, they’re wasting our time!”
he grumbled.
Smithson calmed Clark down and then said to Patty, “Thirty
percent seems very low, how did you calculate it?” he asked.
“We did it two ways. Rob and I took the production metrics you
gave us and calculated uptime, Pete also monitored the line and took readings,
both methods yielded about 30%,” Patty responded.
At this Bud Clark exploded, “My lines run nearly 100% of
the time. I can’t be convinced otherwise,” he fumed.
“Dr. Coleman, can you share some of the details relating to how
you calculated 30%?” Smithson asked reasonably.
“Of course. Pete monitored the lines from the start of the shift
through lunch. The time was from 8AM to 1PM.” Patty stated.
“Well, it shows right off the bat that you don’t know our
schedule,” Clark fumed, “lunch is over at 12:30.” He was so riled that his face
was red and he was shaking.
“That’s true Patty” said, “I’ll let Pete explain.”
“Technically the lunch period starts at 12 noon, but the workers
shut their machines down at 11:48AM today. The lunch period is supposed to end
at 12:30PM, but the workers did not get back to their stations until almost
12:45PM. It then took them until 12:55PM to get the machines running. So the 30
minute lunch period was actually 1 hour and 5 minutes,” Pete explained.
“Boy, what an eye opener,” Smithson said.
Bud Clark seemed numb, but then he chimed in, “There’s no
way that extra lunch time gives us only 30% uptime,” he snarled.
“True,” said Pete, “but the 15 minute break at 10:00AM was
really 35 minutes.”
Now Smithson was getting agitated at Clark.
“Bud, what is going on?” Smithson said.
Patty felt it was time to interject some calming comments.
“To be honest, this type of situation is what we see in most
audits,” Patty said sympathetically.
“Let’s let Pete finish,” Clark said glumly.
“Works starts at 8AM, but the team really didn’t begin making
parts until almost 8:30AM,” Pete went on. In addition, set-ups for new jobs are
performed on most machines two to four times per day. In theory they take 15
minutes, in practice more like 45 minutes,” Pete went on.
“So with all of this downtime our uptime is only about 30%?”
Smithson groaned.
“Yes,” Pete responded.
Patty then showed how the production data for the last 3 months
support the 30% uptime number.
“The good news is that if you can increase productivity
by only 10%, your profits will more than double,” Patty added cheerfully.
“I find that hard to believe,” Clark said with an agitated voice
and a red face.
“Me too”, said Smithson, “ if I increase productivity by 10%, I
only have 10% more parts to sell, so profits will go up only 10%.”
“That would be true if you had no fixed costs, your fixed costs
are high. Every additional part you sell brings in more revenue, but costs less
to make because your fixed cost per part is lower,” Patty explained.
“I developed an equation the shows this,” she went on.
“In this equation nimproved is
the number of charms produced in a day after process improvement – let’s say
that is 10% more than the current amount. We’ll use nold as the current
amount per day. Pu is
the price you sell the charm for and Cu is
the material cost. CostFixed represent
the fixed costs,” she explained.
“I plotted a graph of profit versus productivity increase from the cost and production metrics you gave us. Note that current profits are at about $160,000/yr. With just a 10% increase in productivity the profits go to about $360,000/yr,” Patty continued.
Figure. Patty’s Graph of Profit Increase
vs Productivity Increase.
Both Smithson and Clark sat in their chairs dumbfounded. “If we
can’t improve productivity by 10% we should be fired,” Clark humbly replied.
Discussion then ensued on how to improve productivity, much of
it focused on how to minimize or eliminate turning the machines off. Both
Smithson and Clark became energized by this discussion and also expressed their
gratitude to Patty, Rob, and Pete.
“Did you notice anything else beyond production that could help
us reduce costs?” Smithson
asked.
“You could save quite a bit by better inventory control,” Rob
responded.
“I’m off the hook on this one Smithson,” Clark teased.
“I own inventory control,” Smithson agreed, “what did
you find?”
“Well you have way more inventory than you need. We especially
noted a block of silver as big as a microwave oven in your store room. We
calculated its value at about $500K. I asked some people who have been with the
company for over 15 years and they say it was there when they started,” Rob
explained.
“The block is so big and heavy, we could never figure out how to
work with it so we just put off dealing with it. Weeks became months and months
stretched into years,” Smithson sadly replied.
“In addition, the shipping department, although neat, had
multiple shipping cartons of the same box size that were partially used. People
also commented that they sometimes had to hunt for items for production or
shipping,” Rob went on.
Smithson sat in his chair looking glum.
“Dell estimated that the cost of one week’s inventory is about
1% of the value of the inventory, you have about 30 weeks of inventory. We
estimate that your inventory carrying charges are greater than your profits,”
Rob explained.
“I always wanted to assure we never ran out of material,”
Smithson added a bit defensively.
“A worthy goal, but you can almost certainly accomplish that with five, or at most 10 weeks of inventory,” Rob replied.
The group then began discussing to how to reduce inventory and outlined a plan. Our trio agreed to come back in six weeks and access progress in both productivity and inventory control.
On the car ride back to Ivy University, Rob sensed that Patty
and Pete were a little pensive.
“Hey you two, what’s up?” Rob asked.
“It seems like déjà vu all over again,” Pete chuckled.
Patty agreed, “The first productivity problem the Professor
helped us with at ACME was so similar to this it’s so surprising.”
“That was the first of our many adventures together with the
Professor, too many years ago now,” Pete added.
Patty agreed and Rob noted a little catch in her voice ….
We don’t have nearly the number of unskilled or semi-skilled manufacturing jobs as once before, thanks in part to hands-free automation and a higher level of engineering knowledge / skilled labor needed for the non-automated work. Overall employment in the sector dropped about 12% between 2003 and 2013, and more than 20% from 1993 to 2013.
We are no longer the global leader in either manufactured goods — a title lost in 2010 — or valued added manufacturing — which we ceded in 2013 — although the data are skewed of late in China’s favor because of currency valuation changes.
And here’s no question manufacturing as a percent of GDP has certainly slipped in the US (and not to our advantage, but that’s a different discussion).
How bad is the labor problem in China? We are aware, of course, of the steady hikes in wages, which have annually risen by at least double-digits for over a decade.
But now it’s being reported that Taiwan-based component makers have had enough, to the point where some are considering repatriating their production from China, or packing it up for Brazil, Mexico and elsewhere in Southeast Asia.
Now, I’m not going to put too much stock in an unsourced report. That said, the notion that Taiwan could steal back jobs from China has been floating around for months. The average salary in Taiwan has risen just 0.9% in the past decade, despite a working population of just 11 million. (China, by contrast, has an estimated 920 million working aged citizens.) Monthly wages in Taiwan’s manufacturing sector were NT 41,087 (US$1,358) as of October, and have trended considerably more slowly than China for some time.
All in all, it’s a stunning development, given that just a few years ago China’s promise appeared mostly still in the “potential” stage. Is it possible that promise will ultimately go unfulfilled?
Don’t laugh: When it comes to manufacturing competitiveness, the divide between the two nations is not so wide.
Flextronics, Celestica, Plexus, Beyonics and other major EMS companies are heavily invested in Malaysia. Plexus’ largest factories are there, and the company has expanded of late. Flextronics has 11 factories alone in the country. Four of Beyonics’ six plants are there.
As Flextronics’ VP of supply chain Mark Shandley explains in this article today, customers like Malaysia for its lower and less complicated tax structure, the superior IP protection, and competitive labor rates (although Malaysia, like China, is experiencing large hikes). Sharp differences in attrition are noted as well.
The reshoring drumbeat continues to get louder, and has now attracted the attention of the trade groups. The IPC this week launched a survey in an attempt to quantify the trend.
I took a look and would admit to finding the way some of the questions are asked perplexing — click here to see for yourself — because I don’t think that the answers derived will necessarily show whether the trend is real or not.
Most of the survey is aimed at where manufacturers plan to locate their sites, as opposed to where buyers intend to source from. In my experience, manufacturers are the tail on the supply chain dog: They move to where they think they can land the most business.
Another potential problem I see is the way the questions are worded. For instance, one asks, “Does your company plan to move existing operations to the Americas in the next three years?” If the respondents are primarily US-based companies with US-only operations, then the trend may well appear to be “no.”
The supply chain is very complicated, and the implications of reshoring a potential game-changer for many companies. I commend IPC for its attempt to generate some quantitative analysis, although I’m uncertain whether the questions as asked will get to the core of what’s really happening (or not happening).
While Guadalajara and Juarez get most of the press, the city of Saltillo, Mexico, has a lot going for it in terms of manufacturing capacity and infrastructure.
To that end, this podcast with Powerbrace Corp. hosted by The Offshore Group on the subject of establishing a manufacturing supplier base is worth a listen.
Although many manufacturers from the U.S. and other nations have production facilities in Saltillo, sometimes referred to as “Little Detroit,” not all of them take full advantage of the local Mexican supplier network that has grown in the city and the region over the last several decades.
Saltillo is apparently known for its technical expertise, with precision machine shops, foundries, steel mills, heat treating facilities and powder coating operations, plastic injection molding and other services. Saltillo also is home to 19 technical and 14 vocational schools.
To the list of those bullish on the prospects for US manufacturing, add the Boston Consulting Group.
The consultancy group has issued a report that, in essence, gives China about five years before the gap between the two nations is closed.
The report contains few surprises. BCG points to steady increases in China’s wage rates and logistical costs, coupled with higher productivity in the US, as reasons for its optimism. Automation in China will have a deleterious affect on manufacturing there, as it will further reduce any labor rate advantage.
Moreover, any shift to other lower-cost nations such as Vietnam or Brmitl will be mitigated in part by those nations’ weaker infrastructures.
Pointing to past successes in fending off Taiwan and Japan, BCG says that US manufacturing sector in well into a period of adjustment and retrenchment, and “conditions are coalescing” for another American factory resurgence.
The Indian government said in April it will soon unveil a national manufacturing policy, which aims at attracting overseas investments and increase the share of the sector in the economy. “India will come out with a national manufacturing policy within this year, hopefully before June,” Indian Commerce and Industry Minister Anand Sharma said recently. The country will also be taking other initiatives along with states to promote the manufacturing sector, Sharma also said.
“I hope, we will be able to do it soon,” Sharma said at a CII function in New Delhi.
The Indian government aims at increasing the share of manufacturing sector from 16-17% to 25-26% of the GDP by 2020. It’s said that over 80% of the country’s overall industrial production is from manufacturing.
Sharma said that India’s first National Manufacturing Policy is in the works. It will likely include integrated “green-field” mega-investment zones to attract global investment and cutting-edge technologies.
India 2.0. Millions of skilled workers are expected to join India’s manufacturing segment in the near future. A good new policy would help attract those individuals as well as increased foreign direct investment into the country.
India’s exports this fiscal are likely to increase to $235 billion, from $178.6 billion in 2009-10. The new export strategy aims at doubling India’s exports to $450 billion by 2014.
On the proposed Anti-Counterfeiting Trade Agreement (ACTA), which is a new international treaty being framed by a group of developed nations, the minister Sharma declined to pursue that line of thinking. He said India would not accept any such attempts to discuss intellectual property rights outside the multilateral WTO framework, as reported multiple journals in India. India is opposing ACTA, saying that it would have far-reaching implications for non-members of ACTA. The countries such as the US, EU, Japan, Australia, Canada and New Zealand are still evaluating the agreement.
“Few countries will group together and try to change what is and will always be a multilateral regime called the TRIPS agreement. If it has to revisited in any stage in future, it will be only in multilateral forum — the WTO — it cannot be done outside,” he added.
For reference, make a note of these links:
Confederation of Indian Industry: www.cii.in
Federation of Indian Chambers of Commerce and Industry: www.ficci.com
National Manufacturing Competitiveness Council: http://nmcc.nic.in
Aviation Week & Space Technology reported in its Feb. 28 issue that unrest in the Middle East and North Africa appears to be causing delays of decision-making on larger weapons acquisition deals in the area.
Aerospace industry pauses briefly in mid-air
Delays in large purchases are to be expected, of course, as countries in the Middle East watch to see what they’ll actually need as new governments shake out. But wait-and-see is still troubling news for countries like the U.S. who sell into large contracts in the area.
US manufacturing affected. US manufacturers, with billions of dollars in regional deals already on the books for 2011, are suddenly faced with a new uncertainty about sales and earnings. Many of these deals were set years ago and are simply still playing out. But whether contracts are new or legacy, the key to most of us is that broader US manufacturing indexes would be affected by any significant skips in the record.
Idealists sometimes say that Western nations should withdraw from providing arms / military fortitude to the Middle East entirely. The point of the idea is understood by all, make no mistake. But it can’t work, because there is intense international competition for weapons dollars in the Middle East, and the market in every industry these days is in fact global.
Therefore, as the UK minister of defense equipment recently pointed out, simply withdrawing form markets is not an option because others will just fill the vacuum (AW&ST, Feb. 28, 2011).
Who’s buying and selling. The US and Russia are the top exporters of defense equipment to the Middle East market. Germany, France and the U.K. are in the second strata of providers.
On March 2, 2011, an article on msnbc.com noted that the outlook for US arm sales to Mideast region was murky. Amid unrest in the region, US seems unlikely to be pushing new arms deals, said the article.
Here are a few data points for perspective:
In recent years, Arab countries and Israel have been big buyers of US warplanes, missile defense equipment and other equipment.
Last September, the US announced another arms deal with Saudi Arabia that could be worth up to $60 billion
From 2006-2009, the US signed arms transfer agreements worth $47.3 billion with Saudi Arabia, the United Arab Emirates, Egypt, Iraq and other countries in the region (Congressional Research Service via msnbc).
In 2011, Egypt alone is expected to receive $1.3 billion in foreign military aid from the US.
There’s a lot of acquisition money coming from the region, specifically from the UAE followed by Saudi Arabia.
In one deal, the UAE bought 80 American-made F-16 fighter jets in late 2009, as recorded by the Washington Post. The UAE has long been negotiating the purchase of an estimated 60 French Rafale fighter jets, but Boeing and Lockheed haven’t been entirely ruled out of the deal. If we could bring those jobs and that payroll to our country, wouldn’t we?
But wait – there’s more: nuclear. It’s worth noting that the UAE, with US support, recently signed deals to build its first nuclear power reactors. Among other countries taking or considering similar steps are Egypt, Saudi Arabia, Turkey, Kuwait, Jordan and Yemen. This is another equipment-sale opportunity to some.
This sort of equipment trading is yet another issue for the United Nations.
The UN meets towards improved arms treaty. On Feb. 28, the second round of negotiations to establish an international arms trade treaty (ATT) began at the United Nations headquarters in New York. These negotiations could not be timelier, according the the U.K. Guardian. Collective regulation would be good for national security, troops safety and the promotion of human rights, argue authors Jeremy Browne and Nick Harvey.
Some say that unrest in the Middle East is good for business in the long run, the thinking there is that if all were peaceful then there wouldn’t be billion dollar checks for defense/offense equipment. That may be.
Bird’s eye view on manufacturing
However, as long as nations are poised to write billion dollar checks, any manufacturing company in the world wants to produce into those accounts. Given the nature of manufacturing and supply, demand and all the loopholes that exist for military manufacturing, it seems unlikely that any trade suppression or significant regulation would happen now. The unrest in the Middle East, and any pause in spending as a result, may just be the Middle East market correcting itself for its relative extravagance of the past five years, suggested one analyst.
But more likely the pause is merely a short breath between notes of a long, familiar song.
Whatever happens in the Middle East over the next six months, these are key events on the global manufacturing and supply chain stage. To the best of our ability we’ll alert you to critical turns here.
