Off-Shoring, On-Shoring -
SCM As A Core
Competency
APICS Terra Grande District
Houston, TX
March 1, 2012
Bob Forshay, VP
Transformance Advisors Inc.

Learn
Apply
Agenda
Evaluate – Debate
Why We Do This?
Group Exercise
Impacts,
or
Examples
What If?
Call To Action
Summary

Off Shore Impacts?
Pros
Lower Labor Costs
Business Incentives
Lower Materials Costs
Volume Buy Price
Low Unit Cost?

Partial History
Laptop Batteries - Fires
Pet Food Contaminated - Deaths
Lead Paint on Toys - Deaths
Drywall Contaminated – Sickness
Business Lost to Pirating - Revenue
Embedded Security Risks – Security
How do you proactively manage the risks?
What is the real cost?

Business Impacts?
Cons Cons
Lead time Risk
- Greater Inventory Risk?
Information Risk
- Communication?
- Quality Processes?
- Quality Reporting?
- Quality Management?
- Change Management?
Management Risk
- Sourcing Integrity?
- IP stolen w/i 6 months
Transportation Risk
- Logistics Controls?
- Import/Export Costs?
Capacity Risk
- Uncertain Commitment?
- Volume to Justify?
- Cost of Change?
Service & Repair Cost?
- LT to Service?
- Separate Facility/Skills?
Disruption Risk
- Triage & Recovery
- Relocating key personnel?
Economy (foreign) Risk
Exchange Rate Risk
Customer Confidence Risk
Market Risk

Social Impacts?
Subpar Labor Practices








Low compliance to work standards
Fraudulent audits
Child labor est. 4-5%
10-20% turnover/month
12-18 hour shifts
Union worker complaints = reason to fire
Suicides increased - higher than average
Epidemic of chemical poisoning incidence
US Worker

Earning Potential – Standard of Living down

Environmental Impacts?
Substandard air quality
Water supplies cannot sustain natural life
Climate change n –hexane exposure

Teams Compete
RobotRick Enterprise
Control PCBA Outsourced to China
Foreign labor cost 50% of US labor
$50 per ea. from China
$59 per ea. from US
10,000 unit monthly volume
Evaluate Supply Chain Alternatives

What Is The True Cost?
What doesn’t flow to the Purchase Order
Price but is still a cost we are paying?

Supply Chain Digest News
Total Landed Cost Calculation
Key to Supply Chain Optimization
Still Immature Practice, 2010 3PL Study
Finds
Only 45% Report Extensive Use; 41% report Somewhat Use;
Data Capture Challenges - Primary
Obstacle
Oct 2010

Poll – 2010 15 th Annual 3 rd Party
Logistics Study
A.
Data Not available
B.
Do Not Have Right Tools
C.
Insufficient Time for Analysis
D.
Not Sure how to calculate TLC

Least Total Cost the total cost of a landed shipment including purchase price, freight, insurance, and other costs up to the port of destination. In some instances, it may also include the customs duties and other taxes levied on the shipment.
BUT – Is there more to know?

Total Landed Cost Example
Quoted price per board
Export packaging
Ocean freight
Marine insurance
Supplier price
Port of entry handling
Customs duties
Customs brokerage fee
Inland ground transportation
Inventory
Communications
Travel
Administrative
Additional cost
Total Landed Cost
Malaysia
50.00
1.00
2.20
0.26
53.46
(CIF Los Angeles)
0.80
2.14
0.25
1.25
3.12
(8 weeks)
0.16
0.63
0.60
8.95
62.41
USA
59.00
-
-
-
59.00
FOB Origin
-
-
-
0.80
0.86
(2 weeks)
-
-
1.66
60.66
0

Example – Circuit Cards

Circuit Cards Risk
10,000 units produced per quarter,
75% in transit – Boat
25% already arrived
$110 each! $1M
Immediate Engineering Change
Implemented, Rework = 100%

Circuit Cards Risk
Required assy’s to ship product
Takes too long to return
Non Standard Labor
Reassigning allocated skills, stopped other important work
Allocate limited supply of new parts,
Rework in US and New Build in China, costly expediting

Example – Forged steel Parts

Forged steel Parts
Volume Low - weekly demand
Quality Requirement is very high
Lead Time from US = 2-4 weeks
Lead Time from China = 8-16 weeks
Inventory at risk increased 4x

Forged steel Parts
Over half of items outsourced ultimately cost MORE.
Quality problems increased
Significant incidents reduced OTD
Some product returned, added freight
Some reworked locally when possible, added labor

Example – Mechanical Steel Fab

Mechanical Steel Fab
Power Supply designed by US team, manufactured by CM in China
Assy at 2 nd CM in China for Assy & Test
Quality Management System ignored
Defects set aside at Assy CM, piling up in informal “MRB” area.
Assy Contractor ran out of usable PS’s as defect rate from Contract Mfg grew.

Mechanical Steel Fab
“Escapes” found their way to customers.
Production Stopped.
Intransit inventories quarantined
Triage sort & ship process set up in
Bonded Warehouse.
Return majority not usable
Weeks to recover AFTER quality defect root cause identified.

Poll – Results
A.
Data Not available
B.
Do Not Have Right Tools
49%
48%
C.
Insufficient Time for Analysis 31%
D.
Not Sure how to calculate TLC 27%

Too busy working ON the business to work IN the business!
Too busy driving to stop for gas!

What If?

Lean Supply Chains
Supplier
Relationship
Management
Lean
Enterprise
Customer
Relationship
Management
Supply Chain Management is a core competency

On Shoring Instead - 2011
GE Water Heaters

Local collaboration saves cost, US 6% less than China – 400 Jobs returned
Hydraulic Die Cutting process

Custom Order Warranty Cost reduced 90%
Master Lock productivity increased 6x

Returned mfg from overseas

China Labor Cost Rising
Boston Consulting Group Press Release from May 5th, 2011;
“We should expect net labor costs for manufacturing in China and the US to converge by around 2015.”

Daily Supplier Dashboard
Minimize Risk, Minimize Variation!
Manage the Leading Indicators
FPY – First Pass Yield
Inbound Materials Certified
Daily “MRB” resolution, no laggards!
Track / Improve Response Time
Daily Quality Reporting by SN/item
Common Data Base
Timely CARs, Corrective Action Reports

Current
Position
Identify Value
Streams
Promote Education
Lean
Supply
Chain
Create
Flow
Leverage
Pull
Seek
Perfection
Motion
Over production
Defects
Waiting seven types of waste
Movement
Inventory
Poor processing
Specify
Value
Supplier
Relationship
Management
Lean
Enterprise
Customer
Relationship
Management
Supply Chain Management is a core competency

Benefits?

The World Class Imperative
Business
Strategy
Supply
Chain
Capabilities
Market
Leadership
Profit
Advantage
75%
Higher
Profits
*
15.0
10.0
12.2
Total Supply Chain Management Cost
13.1
11.3
10.3
10.9
7.1
6.7
5.8
7.0
6.1
5.0
6.5
Best
Avg
11.5
0.0
C omputers Industrial Telecom C hemicals Packaged
Goods
*Supply Chain Management Review, Survey of 110 companies in five sectors
Overall

Call To Action
List Three Things To Do Next Week
What are you measuring?
TLC as The Metric?
Who Collaborates on data?
Balanced Scorecard & Daily Dashboard

Summary - Key Takeaways
Elements of lean supply chains must include Total Cost view.
Apply 5 principles of lean
Systematic lean leadership =
Participation and Education

End of Presentation

Bob Forshay,
CPIM, CIRM, CSCP, CSCA, CSCM, CLM
VP, Transformance Advisors
Inc.
720-244-0579 c
720-295-LEAN bforshay@emailTA.com