is it time to rethink youris it time to rethink your...

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Is it Time to Rethink YourIs it Time to Rethink Your Manufacturing Strategy?

David Simchi-LeviE-mail: [email protected]@

Professor, Massachusetts Institute of Technology

A Few Observations

• A growing number of US executives are moving some production operations back from overseas. ! In August 2010, Ford announced plans to bring back about

2,200 parts-production jobs.

! Caterpillar is investing $120 million in a new Victoria, TX, plant to make excavator machines—devices formerly made at a Caterpillar plant in Japan.

• Washington policymakers strongly support these moves

Since 1997 the American manufacturing sector has:• Since 1997, the American manufacturing sector has:! Lost six million jobs—a drop of 34%, and

! The number of manufacturing facilities dropped by 17%.

©Copyright 2012 D. Simchi-Levi 2

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What We’ll Cover …

• Business and Supply Chain Challenges

• Changing Demographics ! Changing Role of Emerging Markets! Changing Role of Emerging Markets

• The Impact of Oil Price and Tax Rates! Consumer Packaged Goods Manufacturer

! Manufacturer of Building Materials

• Framework for Regional Strategy! Impact on US Manufacturing ! Impact on US Manufacturing

• Summary

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Today’s Supply Chain Challenges

• Global supply chain with long lead times

• Rising and shifting customer expectations

• Increase in labor costs in developing countriesIncrease in labor costs in developing countries

Country Brazil China Malaysia! Mexico US

The Average Annual Wage Increase between 2003 and 2008in Different Countries

y yAverage!Annual!Wage!Increase 21% 19% 8% 5% 3%


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• Increase in logistics costs


Changes in Logistics Costs between 1984 and 2010

13

14

US!Logistics!Costs!as!Percent!of!GDP

8

9

10

11

12

15% increase

• Truck driver shortage

• Security requirements

• Rising energy prices

• Rail capacity pressure

7

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


4

Total US Logistics Costs 1984 to 2010 ($ Billions)

1400

1600

Total US Logistics Costs in $MMs

52%

Total Cost

600

800

1000

1200

52%

Transportation

47%

62%Inventory

Source: 19th Annual Logistics Report

0

200

400

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Inv Carrying Transportation Admin Total

Admin

7©Copyright 2012 D. Simchi-Levi






• Increase in risks


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Risks in Today’s Supply Chains

• Significant increase in supply chain risk! Outsourcing and off-shoring

! Supply chain is geographically more diverse

! Lean manufacturing! Lean manufacturing

! Just-in-time (JIT) manufacturing and low inventory levels

General Motors truck plant shutting down

General Motors truck plant in Louisiana announced that it

was shutting down

Intel Sales are downGiant blames Thai flood for

$1B drop in sales goals. Toyota, Honda, Goodyear,

Canon, Nikon, Sony… have temporarily for lack of

Japanese-made parts because of the earthquake and tsunami

that had struck Japan.New York Times, 2011

, , ycut production and lowered financial forecasts because of the flooding in Thailand.

The Wall Street Journal, 2011


Risks in Today’s Supply Chains

• Significant increase in supply chain risk! Outsourcing and off-shoring

! Supply chain is geographically more diverse

! Lean manufacturing! Lean manufacturing

! Just-in-time (JIT) manufacturing and low inventory levels

150

200

250

Natural!Disasters!2011!Cost!($B)

0

50

100

Quake/Tsunami Floods Tornadoes Floods

Japan Thailand USA Australia


6

Worldwide!Natural!Disasters!1980"2011!Source:!Munich!Re

Hurricane Katrina, 2005

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• Importance of sustainability

• Unprecedented volatility


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Unprecedented Volatility --- Oil Price

Number!of!Days!Oil!Price!Changed!more!than 5%

Oil Price In the Last 24 Months

+ 125%

051015202530354045

than!5%

2008:!39!days1990:!38!days

Year

In 2008 the price of oil changed 5% or more from its previous closeon 39 days making it the most volatile year since 1990.

Jan 09 Jan 11

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009


Volatile Steel Market

Steel price

2010

2008: 39 days

2000

0 10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

Dol

lars

per

Pou

nd

Iron Busheling Prices

Monthly averages as reported from Ryan's Notes.

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In the steel industry, lead times have decreased from 40-60 weeks in 2004-2006 to 10-15 weeks in 2008-2009 as the economy went into a recession.

0.00

0.05

0.10

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10


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Volatile Copper and Silver Markets

2008: 39 days

Copper Price

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Silver Price©Copyright 2012 D. Simchi-Levi 15







• Importance of sustainability

• Unprecedented volatility R l Th N N l E ti fRule: The New Normal--Executives face competition in an environment that is complex, uncertain, dynamic and chaotic.


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• Summary

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Recent Survey: Collected Data From 287 Companies

Source: Data collected by Accenture; Data analysis conducted by MIT


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Where Does Revenue and Supply Come From?

% Generated in the US

The larger the size of the company, the larger the portion of revenue generated outside the United States. The same holds true for the manufacturing supply side—where components and raw materials are produced.


% of US Plants Closed by Plant Size & Industry (1990-2010)

Size Code 1

Size Code 2

Size Code 3

Size Code 4

Size Code 5

Size Code 6

Size Code 7

Size Code 8

Size Code 9

Losses Over 40% Highlighted in Red

Number of Employees <5 5 - 9 10 to 19 20 to 49 50 to 99 100 to 249 250 to 499 500 to 999 1000 or more

Motor Vehicle Parts 25.0% -13.9% -28.8% -19.3% -13.1% -8.9% -20.8% -27.8% -68.1%

Foundries 10.9% -17.2% -25.6% -38.8% -36.7% -47.9% -41.7% -57.4% -81.0%

Forging & Stamping 0.0% -17.7% -15.5% -13.9% -3.9% -26.2% -37.8% -70.0% 0.0%

Metalworking Machinery -4.9% -33.5% -36.5% -32.3% -38.1% -38.5% -50.7% -84.0% 0.0%

Household Appliances 50.0% 44.4% -4.0% 17.4% 36.4% -17.0% -54.1% -65.0% -42.9%

Computer & Peripheral Equipment 25.0% -24.2% -25.6% -22.4% -44.2% -42.3% -28.4% -67.6% -51.5%

Communications Equipment 48.6% -24.1% -8.6% -23.3% -28.8% -24.6% -32.1% -44.9% -69.8%

Semiconductors & Electronic Components 16.2% -5.9% -7.4% -9.3% -22.2% -30.8% -25.6% -41.6% -41.7%

Total U.S. Manufacturing 7.2% -15.5% -19.1% -21.0% -24.0% -28.5% -36.5% -45.7% -48.3%

Source: Bill Killingsworth MIT Forum for Supply Chain Innovation 20

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Revenue and Supply By Region for Companies Size > $10B

Manufacturing supply by region follows the revenue distribution


Expected Shift in Regional Supply and Revenue

Between 2010 and 2013

Growth in revenue (demand) and manufacturing supply will come from Asia and Latin America, while North America’s and Western Europe’s shares of both demand and supply will decline.

There is a shift from Global Manufacturing strategies to a more Regional strategy


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Expected Shift in Regional Supply and Revenue: By Industry

Between 2010 and 2013

The trend holds for almost all industries except for one: Software


The Power Tool Demand Shifts to Emerging Markets

80%

90%

100%

3% 4%3% 5%

8%

16% 15% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

39%32% 27%

39%44%

41%

4%6%8%

Asia!Pacific

Latin!America

Africa/Middle!East

Europe

North!America

Between 2002 and 2009, share of worldwide demand for power tools grew from 22 percent to 33 percent in emerging markets.

2002 2006 2009


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• Summary


• Manufacturer of consumer packaged goods

• Manufacturing is possible in three locations:

! Philadelphia- Highest production cost

Case Study: The Impact of Oil Price

Philadelphia Highest production cost

! Omaha- Average production cost

! Juarez, Mexico- Lowest production cost

• 60 potential DC locations

• 888 aggregated customers

• Inbound transportation uses commercial TL carriers

! TL averages 40,000 lbs/shipment

• Outbound transportation uses a private fleet

! Private fleet averages 20,000 lbs/shipment©Copyright 2012 D. Simchi-Levi 26

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Case Study - Objectives

• Determine the best number and location of distribution centers, as well assignment of customers to DC’s

• Determine the best allocation of production to their manufacturing locations

• Understand how the optimal network would change as oil prices fluctuate

! Roughly 25% of the supply chain costs are in transportation


Discussion of Tradeoffs

• As crude oil price increases, transportation costs become more important relative to production, inventory and facility fixed costs

• Oil price vs. inventory carrying and facility costs

! Additional DCs are more attractive

!As outbound transportation becomes more expensive, it becomes increasing important to minimize the distance of the final leg.

• Oil price vs. production costs

! Production moves nearer to demand

!Cheaper manufacturing in Mexico is offset by higher transportation costs.


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Oil Price vs. Inventory Carrying and Facility Costs

The Tipping Point

Moving from $125/ barrel to $150/ barrel changes the optimal number of DC’s from 5 to 7. In particular, you can think of Las Vegas being replaced by Los Angeles, Albuquerque, and

Portland.$75/ barrel $200/ barrel


23%

Omaha Plant

Oil Price vs. Production Costs

$75/ barrel $200/ barrel

22%

Philly Plant

23%

54%Philly Plant

Juarez Mexico78%

Juarez Mexico


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• Summary

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What is a Tax Efficient Supply Chain?

• Very simply, a tax efficient supply chain should be focused on maximizing the after-tax profit of the organization.

• A penny saved is a penny earned doesn’t tell the whole story! Depending on where that penny is saved, the company have

significantly different after-tax profits.

• One indicator a company may use to measure its tax efficiency is its corporate Effective Tax Rate (ETR). ! The average ETR for the S&P 500 is ~25%, however some

companies do much better.


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Case Study: Manufacturer of Industrial Materials

• Manufacturer of building materials

• Two grades of product with different sales price! Low grade: $7-$9 per unit

High grade: $12 $14 per unit! High grade: $12-$14 per unit

• Current manufacturing is all done in Akron, OH! Annual fixed cost: $1.25MM

! Variable manufacturing cost: $2.20-$4.50/unit

• Four existing distribution facilities! Pittsburgh

St L i! St. Louis

! Atlanta

! Reno

• Inbound transportation is commercial TL

• Outbound transportation in mix of TL/LTL33©Copyright 2012 D. Simchi-Levi

Baseline: All Manufacturing is US Based


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Potential Changes to Manufacturing Network

• Company was considering moving some or all manufacturing outside of the US

• Two potential manufacturing locations had been identified

M i Cit! Mexico City! Annual fixed cost: $925K


! Tax rate: 28%

! Warsaw, Poland! Annual fixed cost: $975K


! Tax rate: 19%

• Product from Europe would come through Port of Baltimore and incur additional handling charge

• No changes to distribution network were planned35©Copyright 2012 D. Simchi-Levi

Alternate Scenario #1: Minimize Supply Chain Cost

28% increase in total profit 36©Copyright 2012 D. Simchi-Levi

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Does Asia Really Need to be Part of Your Supply Chain Strategy?

• TV manufacturer Sharp has recently started moving manufacturing facilities from Asia to Mexico to serve customers in North and South America.

• This is driven by the need to keep shipping costs low and time to market short.

! Indeed, price of flat TV typically falls fast and thus reducing shipping time from about 40 days, when flat TVs were produced in Asia, to seven days makes a big impact on produced in Asia, to seven days makes a big impact on bottom line.


When to Move from Off-shoring to Near-shoring?

Cost of Moving Infrastructure

III IH

Near-shoringManufacturing

orAssembly

(TV, Refrigerators, Appliances, CarNear-shoring

(F t T )

Off-shoring(Mobile Phone, PC)

II

L H

L

Transportation Impact

pp ,Parts, Furniture)(Footwear, Toys)


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The Impact of the Price of Natural Gas

©Copyright 2012 D. Simchi-Levi

• The price of domestic natural-gas has declined• Provides an advantage to US manufacturers that are heavy users of natural-gas• Examples: manufactures of chemicals, machinery and transportation equipments, and

manufactures of fabricated steel

Recent Survey: Collected Data from 125 Companies

Source: MIT Forum for Supply Chain Innovation 42

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Is Your Company Considering the Return of Any Manufacturing to the US?

T t l L d d C t i ifi tl

Source: MIT Forum for Supply Chain Innovation

Total Landed Cost significantly increased as a result of off-shoring

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• Summary

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Key Observations

• A move to a Regional Manufacturing Strategy! Increase in labor & logistics costs! Increase in risks

Ch i l f i k t• Changing role of emerging markets! Increase in the firm’s revenue from emerging markets ! Requires talent and capability to move as well ! Innovation and Product Design follow manufacturing

• Public Policy makes a difference! Manufacturing investments naturally flow to countries and ! Manufacturing investments naturally flow to countries and

regions where financial incentives are substantial

! Chief among those incentives is a country’s tax policy.


Your Turn!

How to contact me:David Simchi-Levi

[email protected]

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