Bring back, Lean out, and Serve: How a Lean transformation, servitization and reshoring creates competitiveness

This blog and it’s sequel are a much shortened version of an article published in the September ’14 edition of the Lean Manufacturing Journal. 

The article explores the reshoring of production out of low labour cost sites to a range of Western countries and introduces the servitization of manufacturing companies to deliver advanced services, one form of servitization.  It is seen as a way to competitively address customer’s needs beyond product purchase and so support business growth. It also explains how we can use lean tools to deliver both changes.

What is Servitization and its link to Lean?

An excellent definition of servitization is provided by Baines and Lightfoot of Aston University in their book Made to Serve “Servitization is a term given to a transformation. It is about manufacturers increasingly offering services integrated with their products. Of these, some manufacturers choose to servitize by offering an extensive portfolio of relatively conventional services, while others move to deliver advanced services.” (ref Made to Serve,  Baines and Lightfoot, Wiley 2013)

The large players that have embraced this in recent years and grabbed the headlines include Rolls Royce, Caterpillar and Alstom. However a number of SMEs have used it as a way to differentiate themselves from their competition.

I see Servitization as requiring a client to really understand their customers needs and maybe even their customers’ customers’ needs and finding the best way to meet them. This is Value Steam Mapping to a level of depth that goes far beyond delivering products and information, further even than providing spares and repairs. (Refer to Investment Stream Mapping in previous blog posts). Starting from that point and deciding how best to deliver what products and services can lead a client to a true transformation. The aims of that transformation are to provide a competitive offering, reduce wasted resources over the cycle of use, and promote growth.

Reshoring the lean way

Reshoring or onshoring is the process of bringing back production to your “home” country, the opposite of offshoring. The drive to move manufacturing to the Far East, China and India in particular, it is argued by some, being reversed in some cases. The motivations for such a phenomenon are many. Let’s look at a few.

First there is the undeniable stretch in the length of the supply chain from production to customers, with all the issues we know that entails. De-bugging product introduction and new technology has often proven to be costly across time zones and adding to the known risks of sharing sensitive Intellectual property.

Second the increase in off shore labour rates and the cost of transporting goods across the oceans and the pressure of green miles have made these remote sites less competitive.

The decision making process to bring back a manufacturing process may in some ways be more complex and challenging than sending it out there.

That new process does not need to match the existing. The phrase “botshoring” has entered the language, recognizing that the return of a process can be combined with automation or robotics to minimize the labour cost element, which is probably why it went east in the first place!

The transformation, there’s that word again, therefore of your manufacturing and supply chain is therefore a set of decisions about not just where you will produce but also how. How might you invest in what type of capital equipment, how will you treat the reduction of supply chain inventory, what might you do with the reduction in headcount required by the new process, and what might you do with the technical and support staff that were liaising with the off shore plants?

That set of decisions, and the process of delivering them should be an ideal workspace for a lean approach, reducing waste, focusing on right first time, reducing packages of work to minimize lead-times of the transfer all come to mind. These will all be relevant whether a company is a Tier 1 or Tier n supplier, Business to Business or Business to consumer.

Next Blogpost: So, Reshore and Servitize?

Next Shoring: Popular, catchy, but old school. Tea and Ketchup history lesson

Next Shoring has entered our Politician's language; it speaks of the return of manufacturing, rebalancing the economy and maybe even more jobs. It appeared in this Blog in 2008 and I can trace it back to at least 2005 in McKinseys thought leadership work.

Next Shoring is defined by McKinsey as "...not about about the shift of manufacturing from one place to another but about adapting to, and preparing for, the changing nature of manufacturing everywhere." Mckinsey next-shoring: a CEOs guide

So CEOs listen up!

But lets put some perspective on this and other revelations about matching local needs & manufacturing opportunities from our own recent history.

Tea was first introduced into India by the British, in an attempt to break the Chinese monopoly on tea. The British used Chinese seeds, plus Chinese planting and cultivating techniques to launch a tea industry by offering land in Assam to any European who agreed to cultivate tea for export.

I used to work for HJ Heinz, and the company history will tell you that from a US beginning in 1869, they exported their new Tomato Ketchup to the UK in 1886, followed by Cream of Tomato Soup in 1910 and Beans and more. A new production site in the UK made thousands of tonnes of product in its first year in the roaring twenties.

Next Shoring, reshoring, offshoring. CEOs think about your business and it's loci, and don't be too in awe of the "very latest thinking"!

GSK Brings some manufacturing into Scotland from India

Some good news for the UK Pharma industry this week, with GSK announcing that it is bringing back some Manufacturing from India and putting it into their Montrose Site in Scotland. Click on the title to see an article about it on Fierce Pharma.

Useful guidelines when off-shoring

For this blog we are grateful to Paul Gagg, a Global Operations Manager, based in the UK but with extensive experience in this field for his business.

"The continuing shift of manufacturing activities away from Developed to Low Cost Countries (LCC’s) shows no sign of abating. Despite well documented stories of organisations “near shoring” or repatriating manufacture, the flow remains overwhelming toward LCC’s. Much of the shift has been driven by the pursuit of cheaper Costs of Goods (COGS) and, in the majority of cases, LCC’s ex works COGS have proven to be considerably cheaper. However, there an increasing awareness of the need to take a holistic view, assessing the true cost to serve and deliver products to the end customer; a realisation that the perceived benefits of moving to LCC’s are less dramatic than initially projected.

Aside from the obvious costs associated with manufacturing further away from the historic centre such as logistics, tariffs and higher inventories, there are other costs to consider. Travel costs (both time and financial) to undertake audits and supplier meetings and the increased risk of loosing brand equity due to IP and trademark infringement are more difficult to capture, but should not be underestimated.

Whilst LCC governments, particularly China, have made concerted efforts over recent years to bring legislation in line with Developed economies, there remains significant scope for improvement in the control and regulation of manufacturing businesses and their interpretation of “legal” business practices. Compliance to World Trade Organisation regulations is at best patchy in countries such as China and it is important to ensure that robust procurement practices are put in place.

Organisations wishing to transfer activities to LCC’s need to ensure that infringement of IP, Know How and Trademarks are mitigated and the impact on COG’s and brand equity minimised. The following should act as useful guidelines throughout the off-shoring process and should help to reduce potential issues surrounding IP and Trademark infringement:

1) Ensure signed Confidentiality/ Non Disclosure Agreements are in place before any detailed information is transferred.
2) Extensive due diligence needs to take place. Visiting facilities is imperative. Developing personal relationships, however difficult given cultural and language barriers, must be done.
3) Employ a local team who can act as the in-country liaison. Managing suppliers in this manner continues to build on the relationship and ensures that policing of the LCC supplier can be carried out regularly.
4) Take a balanced approach to your portfolio. Undertake full cost to serve modelling to ensure that “Material” benefits exist by moving to LCC’s. Once complete weigh against the perceived risk of IP and trademark infringement inherent within the product that you intend to offshore.
5) Ensure commercial contracts are in place. Create separate Trademark and Patent agreements in both English and Chinese and ensure that the Chinese version is registered with the Chinese IP authorities.
6) Do not underestimate the speed with which designs can be transferred into sellable copies and undermine your market share.

Whilst the above list is not exhaustive, it should give some insight into the actions that should be put in place to mitigate the inherent risks in LCC sourcing. Transferring manufacturing to LCC’s clearly has many benefits."

Off-shoring revisited

In a continuation of the debate about off shoring, you may be interested to read the latest report from McKinsey (link: http://www.mckinseyquarterly.com/Operations/Supply_Chain_Logistics/Time_to_rethink_offshoring_2190_abstract), that looks at recent data and trends from the US point of view. In essence it looks again at the impact of oil prices, wage inflation and currency movements.

In a future Blogging we will also have an article that introduces you to a 2008 MSc. research thesis of why some businesses may choose to remain in the UK.

Remember to keep your Supply Chain balanced around your business aims!