Manufacturing’s Secret Shift - Gaining Competitive Advantage by Getting Closer to the Customer

Major new research from Accenture suggests that North American manufacturers are looking at ways to rebalance their manufacturing and supply networks to compete more effectively.

Offshoring is a very common strategy pursued by manufacturers trying to remain cost competitive. However, it is now emerging that offshoring decisions may not have taken all the relevant factors into consideration—and that changing market dynamics and a much more demanding customer base are encouraging the location of supply close to the source of demand. Although offshoring will likely continue to play a role in companies’ supply-location strategies, it will more commonly be evaluated in the context of aligning supply to demand location as companies pursue high performance.

In a bid to remain competitive over the past decade, North American manufacturers have pursued a number of strategies. One of the most popular has been to extend their manufacturing and supply operations to low-cost sources globally. However, new manufacturing strategies are needed to gain the agility that today’s customers demand. Accenture conducted a survey of 287 manufacturing companies to find out what executives are doing to overcome this challenge.

• Sixty-one percent of respondents are currently considering shifting their manufacturing operations closer to customers to provide better service and enable accelerated growth.

• Top issues facing North American companies regarding offshoring are cycle/delivery time (49 percent) and product quality (49 percent). 

• Logistics (57 percent) and supplier/component prices (73 percent) posted the highest percentage increases for manufacturers during 2007 to 2010.

• The most important factors in the decision to offshore are labor costs (74 percent), proximity to the customer/market (67 percent) and workforce skills (61 percent).

One important finding of the research was that most companies traditionally relied too much on direct costs when defining total costs, thus distorting the business case for offshoring. In addition, the components of these direct costs are themselves changing. For example, labor is declining as a percentage of the total cost, while the extreme volatility in transport and energy costs as well as exchange rates are affecting other cost categories.

Respondents acknowledged that in order to compete effectively they need to rebalance their existing supply footprint. It is becoming increasingly clear that the physical location of supply and manufacturing operations can have a significant impact on overall business success. Getting closer to the customer allows for improved flexibility to respond to uncertain demand and unknown customer requests in an agile way with fast delivery times while maintaining high quality and optimized costs. The ability to do this may not always be the lowest-cost approach, but other value drivers that the customer may require, such as also having the ability to supply customized product or customer-specific SKUs in a timely fashion, may be more important.

Challenges to rebalancing are significant and will require years of planning. For nearly half of the survey respondents, workforce availability, production skills and transportation costs were cited as the main obstacles hampering companies from rebalancing production. Other well-known hurdles include access to the appropriate supply base, access to capital to restructure the network and government policies on such things as taxes, incentives, employment law, legal protection and content requirements.

Companies will need new capabilities to address the rebalancing issue, with 61 percent of respondents citing needing the ability to properly conduct a total cost analysis. Given the complexity of the global manufacturing landscape, companies will have to step back and evaluate how to become more agile and so meet the evolving needs of their customers.