The Silver Lining of COVID-19: A Call for U.S. Manufacturing

Posted on June 7, 2020

1


June 4, 2020

Jon Kirkegaard, SCB Contributor  

https://www.supplychainbrain.com/authors/7119-jon-kirkegaard-scb-contributor

scb pic

There’s an old consulting adage: If you want to know where the rocks are in the stream, lower the water. This was true in the 2008 financial crisis, as the lowered “water” of depressed economic activity revealed unsustainable amounts of financial leverage and fraud in mortgage securities.

The 2020 COVID-19 outbreak has exposed deficiencies in the U.S.-China manufacturing relationship. The consequences have been long lead times of supply, and an inability to respond to the need for essential medical equipment and pharmaceuticals.

The silver lining in this crisis is the realization by nearly all businesses today of the need for more agile, responsive and self-reliant manufacturing and supply chains. The Chinese manufacturing model has been, and continues to be, a dangerous trap door through which our way of life could fall. In many situations, China has ripped the intellectual capital from western companies, selling goods of similar quality to U.S. domestic products for less then the cost of the raw materials. In addition, U.S. companies lured to China by cheap labor have had to give up 51% of ownership to a Chinese entity that has full access to the businesses’ intellectual property, including manufacturing systems, designs, and patents. The Chinese government has targeted key industries such as steel, telecommunications equipment and, more recently, pharmaceutical and medical protective products The cost is mostly underwritten by Chinese government subsidies. As a result, U.S. producers can no longer afford to be in business.

COVID-19 offers the biggest wakeup call for American manufacturers since World War II. They are coming to a number of key realizations, including:

  • Long lead times in manufacturing supply chains constitute a severe handicap. Products in constant demand, such as mobile phones, have short lifecycles that require active response measurement and careful balancing of supply.
  • I.P. that took decades to develop was shipped to China in hopes that the country would eventually democratize, a failed strategy.
  • In a world of non-linear demand, total cost, not just the price of labor, is what matters.

It’s time to bring manufacturing back to the U.S. The solution lies in postponed manufacturing, also known as deferred assembly, driven by a fully engineered sales and operations planning capability. S&OP-based thinking and engineering can create a process whereby companies keep demand and supply in balance, while fully meeting customer requirements.

Start with a policy and design approach that’s defined by an S&OP-generated bill of material. Under this model, final assembly of product is done within the U.S. It provides massive benefits in the form of American jobs, opportunities for mentorship of manufacturing skills, I.P. protection, and agility in demand and supply matching, while still delivering products at low cost where appropriate.

Here’s an illustration from the growing business of home cooking. Kim wants to take her 10 best Italian recipes and produce them in quantity as a commercial venture. For years, family and friends have raved over her collection of Northern Italian recipes, each of which seems unique. Kim knows, however, that nearly all of her “secret” ingredients are the same or similar among the various dishes. What she doesn’t know is which of them will sell the most. As a wise business person, Kim wants the market (her customers) to decide.

Kim’s son Sam, who just graduated with an engineering degree and marketing minor, suggests a technique he was taught in one of his manufacturing-planning classes. Under that plan, Kim will wait to do the final cooking and mixing until orders come in for the week. She’ll hold the ingredients, which are 90% the same, in semi-finished form. The result will be dishes that are fresher, for which she can charge more than for pre-built products. By keeping a limited number of materials on hand, she can purchase fewer raw ingredients and achieve shorter lead times, ordering perishable meats when orders are finalized for the week.

In short, Kim can fulfill more orders, charge a premium for freshness, and cut down on raw-materials waste. Her approach also produces a large environmental benefit, in the form of reduced CO2 generation and less stale or obsolete product to be disposed of.

This postponed-manufacturing model could be the operational shot in the arm for American industry, the solution to a problem it didn’t realize it had prior to the COVID-19 pandemic. It applies to nearly any product that has real value — especially those that require relatively minor adjustments to meet customer needs. Whether it’s food, auto parts, medical products, furniture or telecom equipment, American producers can configure their supply chains to perform final assembly in the U.S.

This capability can be deployed immediately, and with top-down federal government support could give the U.S. the upper hand in the next phase of what has become the equivalent of a 3D chess game with China. Potential benefits include:

  • A drop of 50% or more in working capital, while simultaneously increasing sales and fill rates;
  • Protection of intellectual capital, including proprietary designs and manufacturing processes;
  • Ability to introduce products with minimal waste and better manage them through end of life;
  • Improved agility of the overall supply chain, with better matching of demand and supply;
  • Improved national security, with guaranteed access to medical supplies, protective gear and other types of sensitive or essential military equipment;
  • Reduction in environmental waste and pollution, and
  • More efficient use of ports, logistics, shipping and packaging.

Business leaders, citizens, consumers and political leaders need to act on this message now. There’s no loser in this approach, but it does require thinking, planning and a much higher level of synchronization between independent entities in production and distribution throughout the supply chain network.

The U.S. can continue to enjoy properly designed, outsourced manufacturing, but do so in a manner that creates American jobs, careers, wealth creation and products that are better tailored to consumer needs. We hold all the cards: the demand, source of consumption, and ideas for new products. But we’ve failed in encouraging an operational model that protects our interests.

Additionally, government officials can embrace free enterprise, but provide the basis for secure middle-class jobs. With proper government incentives, postponed manufacturing can beat predatory nation states at their own game.

Jon Kirkegaard is founder and president of DCRA Inc. and DCRA Technologies, a provider of sales and operations planning and supply-chain consulting. Contact 214 352 0869 info@dcrasolutions.com

June 4, 2020

Jon Kirkegaard, SCB Contributor

Source: Bloomberg

There’s an old consulting adage: If you want to know where the rocks are in the stream, lower the water. This was true in the 2008 financial crisis, as the lowered “water” of depressed economic activity revealed unsustainable amounts of financial leverage and fraud in mortgage securities.

The 2020 COVID-19 outbreak has exposed deficiencies in the U.S.-China manufacturing relationship. The consequences have been long lead times of supply, and an inability to respond to the need for essential medical equipment and pharmaceuticals.

The silver lining in this crisis is the realization by nearly all businesses today of the need for more agile, responsive and self-reliant manufacturing and supply chains. The Chinese manufacturing model has been, and continues to be, a dangerous trap door through which our way of life could fall. In many situations, China has ripped the intellectual capital from western companies, selling goods of similar quality to U.S. domestic products for less then the cost of the raw materials. In addition, U.S. companies lured to China by cheap labor have had to give up 51% of ownership to a Chinese entity that has full access to the businesses’ intellectual property, including manufacturing systems, designs, and patents. The Chinese government has targeted key industries such as steel, telecommunications equipment and, more recently, pharmaceutical and medical protective products The cost is mostly underwritten by Chinese government subsidies. As a result, U.S. producers can no longer afford to be in business.

COVID-19 offers the biggest wakeup call for American manufacturers since World War II. They are coming to a number of key realizations, including:

  • Long lead times in manufacturing supply chains constitute a severe handicap. Products in constant demand, such as mobile phones, have short lifecycles that require active response measurement and careful balancing of supply.
  • I.P. that took decades to develop was shipped to China in hopes that the country would eventually democratize, a failed strategy.
  • In a world of non-linear demand, total cost, not just the price of labor, is what matters.

It’s time to bring manufacturing back to the U.S. The solution lies in postponed manufacturing, also known as deferred assembly, driven by a fully engineered sales and operations planning capability. S&OP-based thinking and engineering can create a process whereby companies keep demand and supply in balance, while fully meeting customer requirements.

Start with a policy and design approach that’s defined by an S&OP-generated bill of material. Under this model, final assembly of product is done within the U.S. It provides massive benefits in the form of American jobs, opportunities for mentorship of manufacturing skills, I.P. protection, and agility in demand and supply matching, while still delivering products at low cost where appropriate.

Here’s an illustration from the growing business of home cooking. Kim wants to take her 10 best Italian recipes and produce them in quantity as a commercial venture. For years, family and friends have raved over her collection of Northern Italian recipes, each of which seems unique. Kim knows, however, that nearly all of her “secret” ingredients are the same or similar among the various dishes. What she doesn’t know is which of them will sell the most. As a wise business person, Kim wants the market (her customers) to decide.

Kim’s son Sam, who just graduated with an engineering degree and marketing minor, suggests a technique he was taught in one of his manufacturing-planning classes. Under that plan, Kim will wait to do the final cooking and mixing until orders come in for the week. She’ll hold the ingredients, which are 90% the same, in semi-finished form. The result will be dishes that are fresher, for which she can charge more than for pre-built products. By keeping a limited number of materials on hand, she can purchase fewer raw ingredients and achieve shorter lead times, ordering perishable meats when orders are finalized for the week.

In short, Kim can fulfill more orders, charge a premium for freshness, and cut down on raw-materials waste. Her approach also produces a large environmental benefit, in the form of reduced CO2 generation and less stale or obsolete product to be disposed of.

This postponed-manufacturing model could be the operational shot in the arm for American industry, the solution to a problem it didn’t realize it had prior to the COVID-19 pandemic. It applies to nearly any product that has real value — especially those that require relatively minor adjustments to meet customer needs. Whether it’s food, auto parts, medical products, furniture or telecom equipment, American producers can configure their supply chains to perform final assembly in the U.S.

This capability can be deployed immediately, and with top-down federal government support could give the U.S. the upper hand in the next phase of what has become the equivalent of a 3D chess game with China. Potential benefits include:

  • A drop of 50% or more in working capital, while simultaneously increasing sales and fill rates;
  • Protection of intellectual capital, including proprietary designs and manufacturing processes;
  • Ability to introduce products with minimal waste and better manage them through end of life;
  • Improved agility of the overall supply chain, with better matching of demand and supply;
  • Improved national security, with guaranteed access to medical supplies, protective gear and other types of sensitive or essential military equipment;
  • Reduction in environmental waste and pollution, and
  • More efficient use of ports, logistics, shipping and packaging.

Business leaders, citizens, consumers and political leaders need to act on this message now. There’s no loser in this approach, but it does require thinking, planning and a much higher level of synchronization between independent entities in production and distribution throughout the supply chain network.

The U.S. can continue to enjoy properly designed, outsourced manufacturing, but do so in a manner that creates American jobs, careers, wealth creation and products that are better tailored to consumer needs. We hold all the cards: the demand, source of consumption, and ideas for new products. But we’ve failed in encouraging an operational model that protects our interests.

Additionally, government officials can embrace free enterprise, but provide the basis for secure middle-class jobs. With proper government incentives, postponed manufacturing can beat predatory nation states at their own game.

Jon Kirkegaard is founder and president of DCRA Inc. and DCRA Technologies, a provider of sales and operations planning and supply-chain consulting. Contact 214 352 0869 info@dcrasolutions.com

 

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