It is time to change the manufacturing strategy

Some of this week’s articles talked about the increasing cost of outsourcing and offshoring. However, even though the cost of outsourcing and offshoring is going up, many companies still pay less for outsourcing and offshoring than for manufacturing products in their own countries. Thus, outsourcing and offshoring are still the main methods for companies to cut off cost. Nowadays, since the price of oil keeps growing, when companies do outsourcing and offshoring, they need to consider some strategies in order to obtain the maximum profit.

After reading an article called “Is it time to rethink your manufacturing strategy”, which focused on how manufacturers should choose their factory location and change their production mode facing the fact that oil price is high, I got a deeper understand about it. This article gives readers three cost-optimization realities. They are “regional distribution centers become more attractive” which talked about companies should consider tradeoffs among cost of oil, cost of inventory and cost of production, “Sourcing and production may need to move closer to demand”, which advocates that manufacturers should move their manufacturing facilities in the country where the cost is relatively low and which is near to demand market, for example, some manufacturers move their factories from Asia to Mexico, “Supply chain flexibility becomes more critical”, which indicates that manufacturing companies should abandon the traditional method called dedicated manufacturing.

The third one attracts me because it proposed a theory that I never heard. In the IT industry, manufacturers always use dedicated manufacturing to produce products. For example, an Iphone has about 16 suppliers; each provides a different part of the mobile phone. All these suppliers use dedicated manufacturing to produce these parts. This strategy is useful because manufacturers do not need to switch between different products and can reduce the cost of production. However, since the oil price keeps increasing, dedicated manufacturing will cause long delivery and high transportation fees. There is a chance that the transportation fees may exceeds what the manufacturers save in dedicated manufacturing. Thus, manufacturers need to balance between these costs. A flexible manufacturing strategy, on the contrary, is that a plant can produce all or almost all kinds of products. This strategy requires set-ups to switch between different kinds of products. Of course it will generate some expenditure but it is almost certain to reduce transportation cost. Focusing on the economic environment and world situation, it seems that manufacturers need to change their strategy from dedicated to flexible. Moreover, flexible manufacturing may be optimal for minimizing supply chain disruptions caused by natural disasters such as the April 2010 volcanic eruptions in Iceland, the March 2011 tsunami in Japan and the August 2011 flooding in Thailand.

Finally, although flexible manufacturing strategy seems to be the best option for today’s manufacturers, there is still a problem: what if the nature of the products does not suit for flexible manufacturing. If this is the case, then what other ways can manufacturers use to deduce the growing cost caused by oil price?

Reference:

[1] http://sloanreview.mit.edu/article/is-it-time-to-rethink-your-manufacturing-strategy/