Quality Focus Helps Reverse Offshoring of U.S. Manufacturing

The repatriation of American manufacturing continues to gain momentum, driven in part by long-term prospects for cheap domestic energy and rising labor costs in China. But don’t underestimate the impact of American workers who deliver quality products that continue to get better.

In a survey of 259 manufacturers by MFG.com, 40 percent indicated they had recouped business that had previously been sent off-shore, often to China, where wages have increased 15-20% each year since 2001. In another survey, by Boston Consulting Group, almost as many manufacturers were planning or actively considering bringing back outsourced production, often because of quality issues. Labor costs were cited by 57 percent, and 41 percent cited quality.

Processing of U.S. food and beverage finished goods was largely exempted from the offshoring that occurred in the early 21st Century, if only because of manufacturing preference to be close to raw-material supplies. But proximity to raw materials doesn’t guarantee finished-goods production. Just ask the U.S. steel industry: we have an abundance of iron ore, but that didn’t prevent the shift of steel production to China. Today, China compensates for shortages of ore by buying scrap metal and shipping raw steel back to America, casting the U.S. in the role of third-world economy beholding to the manufacturing muscle of an advanced society.

As globalization of the food supply chain picks up, the competitive position of North American food processors will hinge on their ability to drive down defects and improve quality outcomes, much as automakers responded to the globalization in their industry in the 1980s.

Domestic food processors got continuous-improvement religion this century, with lean, Six Sigma and other formalized approaches gaining widespread adoption. Their suppliers also are on a continuous-improvement journey, and that should aid food processors in realizing better production outcomes. A case in point is Endress+Hauser, a Switzerland-based firm that supplies in-line measurement devices for flow, pressure and levels. E+H lately is on a roll, thanks largely to the boom in North American oil and gas production. Precise monitoring of pressure and flow is critical to energy producers, and demand for instrumentation that delivers it has boosted E+H’s profitability. The firm’s U.S. operations rang up sales of $218 million last year, and sales have increased an average of 17 percent in each of the last five years..

When E+H entered the U.S. in the early 1970s, people wore analogue watches and the expression “runs like a Swiss watch” was high praise, denoting precision and exceptional performance. After the Nixon administration unilaterally cancelled the direct convertibility of the U.S. dollar to gold in the early 1970s, the so-called Nixon Shock effectively doubled E+H’s costs to import instruments made in Switzerland and sold in the U.S., E+H executives recalled last week at a ceremony commemorating a new customer service center, the latest expansion at the firm’s U.S. headquarters in Indianapolis. E+H began building U.S. manufacturing capacity, on the condition that there could be no compromise on quality.

Forty years later, E+H lean initiatives continue. Last year alone, U.S. operations realized a 50 percent reduction in product defects in the sensors it shipped to American clients, noted Klaus Enders, E+H’s retired CEO who continues to chair the board of directors. Better quality outcomes require committed workers who are rewarded for their efforts, he emphasized: “Low labor cost is not what I’m after,” said Enders. He also pointedly emphasized another principle not often made in today’s business environment: “We don’t mind paying taxes in the U.S.”

At a time when tax avoidance sometimes appears to be the top priority at many U.S. corporations, it was a refreshing Old World acknowledgement of a seldom-mentioned aspect of sustainability: somebody has to maintain the infrastructure that enables economic growth and success. E+H came to the U.S. because it was and remains the world’s largest industrial market. E+H didn’t build that market, but it recognizes an obligation to help maintain it.