I guess you could say the lemmings are coming home to roost, or some such disjointed metaphor. A few weeks ago we told you how high fuel costs are driving some outsourcers to return to North America, where they now have to compete with companies that focused inward and reduced costs to be globally competitive. Now comes another story along similar lines, except the outsourcers are a bit more panicked.
China’s cost advantage is being eroded by soaring oil prices, rising wages and an appreciating currency. Canadian companies that outsource their manufacturing to China are already feeling the pinch and some are even bringing production closer to home.
Levon Afeyan flew to China this week to find out the answer to these questions for his mid-size Montreal company. He’s the president of Seatply Products Inc., a manufacturer of molded plywood for use in commercial seating.
About half of Seatply’s products originate in China and Malaysia and he’s becoming increasingly uneasy about soaring freight costs that have seen the price of a shipping a standard container from China hit as much as $6,000 from $4,000 a year ago.
"People are taking a second look at everything because the costs are becoming prohibitive," said Afeyan, whose company’s efforts to cut costs through lean manufacturing techniques were featured in The Gazette in 2006. "It goes right to the bottom line."
On his trip, Afeyan will try to get price concessions from his Asian suppliers to help cover his rocketing freight costs.
Sorry Mr. Afeyan, I’m not overly sympathetic. I dug up that article from 2006 and it talks about all kinds of lean manufacturing efforts, but all focused on machines and layouts. People are still referred to as "costs" and while you were implementing lean you were laying off and spending decent sums training new people at outsourced operations in Malaysia. Like most companies that try to implement lean, it appears that the second pillar, respect for people, was forgotten. Therefore most of the potential benefit was lost.
Jayson Myers, president of Canadian Manufacturers and Exporters, said the cost of producing goods in China has risen 30 to 40 per cent for many Canadian companies over the last couple of years.
"A lot of Canadian manufacturers are going to have to reassess their outsourcing strategies," Myers said. "What we may be seeing for some industries and companies is a contraction of supply chains back to North America."
But Myers added many companies will just have to find ways of absorbing the cost increases because they have no immediate alternative to Asian factories. That’s a bitter pill to swallow at a time when raw material prices are also soaring and the economy is slowing.
"There’s been a rapid swing in prices around the world," he said. "When you’re a business, you can’t move that quickly."
Which is fundamentally why chasing cheap labor around the world just creates more cost in the long term. Hindsight is 20:20, but still provides a lesson. What would have happened… and what could happen… if you just focus on radically improving existing domestic factories? You might not be in such a pickle.