1
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 $120 million in a new Victoria, TX, plant to make excavator machines—devices formerly made at a Caterpillar plant in Japan.
• Washington policymakers strongly support these moves
Since 1997 the American manufacturing sector has:• Since 1997, the American manufacturing sector has:! Lost six million jobs—a drop of 34%, and
! The number of manufacturing facilities dropped by 17%.
©Copyright 2012 D. Simchi-Levi 2
2
What We’ll Cover …
• Business and Supply Chain Challenges
• Changing Demographics ! Changing Role of Emerging Markets! Changing Role of Emerging Markets
• The Impact of Oil Price and Tax Rates! Consumer Packaged Goods Manufacturer
! Manufacturer of Building Materials
• Framework for Regional Strategy! Impact on US Manufacturing ! Impact on US Manufacturing
• Summary
3
Today’s Supply Chain Challenges
• Global supply chain with long lead times
• Rising and shifting customer expectations
• Increase in labor costs in developing countriesIncrease in labor costs in developing countries
Country Brazil China Malaysia! Mexico US
The Average Annual Wage Increase between 2003 and 2008in Different Countries
y yAverage!Annual!Wage!Increase 21% 19% 8% 5% 3%
©Copyright 2012 D. Simchi-Levi 4
3
Today’s Supply Chain Challenges
• Global supply chain with long lead times
• Rising and shifting customer expectations
• Increase in labor costs in developing countriesIncrease in labor costs in developing countries
• Increase in logistics costs
©Copyright 2012 D. Simchi-Levi 5
Changes in Logistics Costs between 1984 and 2010
13
14
US!Logistics!Costs!as!Percent!of!GDP
8
9
10
11
12
15% increase
• Truck driver shortage
• Security requirements
• Rising energy prices
• Rail capacity pressure
7
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
©Copyright 2012 D. Simchi-Levi 6
4
Total US Logistics Costs 1984 to 2010 ($ 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
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
• Increase in logistics costs
• Increase in risks
©Copyright 2012 D. Simchi-Levi 8
5
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
$1B drop in sales goals. Toyota, Honda, Goodyear,
Canon, Nikon, Sony… have temporarily for lack of
Japanese-made parts because of the earthquake and tsunami
that had struck Japan.New York Times, 2011
, , ycut production and lowered financial forecasts because of the flooding in Thailand.
The Wall Street Journal, 2011
9©Copyright 2012 D. Simchi-Levi
Risks in Today’s Supply Chains
• Significant increase in supply chain risk! Outsourcing and off-shoring
! Supply chain is geographically more diverse
! Lean manufacturing! Lean manufacturing
! Just-in-time (JIT) manufacturing and low inventory levels
150
200
250
Natural!Disasters!2011!Cost!($B)
0
50
100
Quake/Tsunami Floods Tornadoes Floods
Japan Thailand USA Australia
10©Copyright 2012 D. Simchi-Levi
6
Worldwide!Natural!Disasters!1980"2011!Source:!Munich!Re
Hurricane Katrina, 2005
11
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
• Increase in logistics costs
• Increase in risks
• Importance of sustainability
• Unprecedented volatility
©Copyright 2012 D. Simchi-Levi 12
7
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
©Copyright 2012 D. Simchi-Levi 13
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.
14
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
©Copyright 2012 D. Simchi-Levi 14
8
Volatile Copper and Silver Markets
2008: 39 days
Copper Price
15
Silver Price©Copyright 2012 D. Simchi-Levi 15
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
• Increase in logistics costs
• Increase in risks
• 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.
©Copyright 2012 D. Simchi-Levi 16
9
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
17
Recent Survey: Collected Data From 287 Companies
Source: Data collected by Accenture; Data analysis conducted by MIT
18©Copyright 2012 D. Simchi-Levi
10
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.
©Copyright 2012 D. Simchi-Levi 19
% 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
11
Revenue and Supply By Region for Companies Size > $10B
Manufacturing supply by region follows the revenue distribution
©Copyright 2012 D. Simchi-Levi 21
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
22©Copyright 2012 D. Simchi-Levi
12
Expected Shift in Regional Supply and Revenue: By Industry
Between 2010 and 2013
The trend holds for almost all industries except for one: Software
©Copyright 2012 D. Simchi-Levi 23
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
©Copyright 2012 D. Simchi-Levi 24
13
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
©Copyright 2012 D. Simchi-Levi 25
• 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
14
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
©Copyright 2012 D. Simchi-Levi 27
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.
©Copyright 2012 D. Simchi-Levi 28
15
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
©Copyright 2012 D. Simchi-Levi 29
23%
Omaha Plant
Oil Price vs. Production Costs
$75/ barrel $200/ barrel
22%
Philly Plant
23%
54%Philly Plant
Juarez Mexico78%
Juarez Mexico
©Copyright 2012 D. Simchi-Levi 30
16
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
31
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.
32©Copyright 2012 D. Simchi-Levi
17
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
34©Copyright 2012 D. Simchi-Levi
18
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
! Variable manufacturing cost: $1.05-$2.15/unit
! Tax rate: 28%
! Warsaw, Poland! Annual fixed cost: $975K
! Variable manufacturing cost: $1.10-$2.25/unit
! 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
19
Alternate Scenario #2: Maximize After-tax Profit
40% increase in total profit 37©Copyright 2012 D. Simchi-Levi
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
38
20
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.
©Copyright 2012 D. Simchi-Levi 39
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)
40©Copyright 2012 D. Simchi-Levi
21
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
22
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
43
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
44
23
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.
©Copyright 2012 D. Simchi-Levi 45
Your Turn!
How to contact me:David Simchi-Levi