Line transfer: An alternative to offshore manufacturing

Oct. 7, 2004
Many factors driving U.S. companies to take manufacturing overseas center on cost containment.

Michael Lehman President Flinchbaugh Engineering York, Pa.

Labor, capital equipment expenditures, needs for new technology, and quality issues are but a few. Accelerating costs have simply outstripped manufacturers' ability to raise prices. The road to profitability has become littered with carcasses of companies that couldn't manage their costs and began making changes too late.

According to a recent study by the nonprofit group The Conference Board, the decline in manufacturing jobs in the U.S. shows no signs of slowing. The sector has been particularly hard hit, dropping 7 to 8%, a decline three times greater than the 2.2% dip during the two-year period following the recession of 1990-1991. Further, the decline in manufacturing jobs was well underway in the 1980s, the study shows. Job destruction at that time averaged 10.3% while job creation was only 9.1%. The 1.2% difference, according to the report, signaled the continuing decline in manufacturing jobs that persists today.

Given this background, it is no wonder that offshore manufacturing has become so widespread. With promises of savings to the tune of 40%, the arrangement looks enticing. But any deal that looks too good to be true probably is and offshore manufacturing is no exception. A recent study done by CFO magazine shows that the actual savings are much less. Only 22% of the study participants said they save over 25% in manufacturing costs while 10% report experiencing no savings at all.

Enter a new alternative to offshore manufacturing: onshore or stateside manufacturing. This emerging trend sees larger companies transferring otherwise unprofitable operations to small, nimble companies. The advantages of using a small, stateside manufacturer include lower shipping and start-up costs, faster turnaround time, less management time/hassle, and greater production efficiency. Such line transfers let large manufacturers leverage their investment in capital equipment while cutting costs.

Here's how it works: A large company evaluating a huge investment in capital equipment, or looking for an overseas replacement for a production line deemed "too old" to be competitive, instead contracts a small stateside company. The small company acquires the production line and transfers it to its plant location. They build the larger company's exact same product for up to 45% less. How?

Small, entrepreneurial companies obviously have lower overhead than their larger counterparts. And they are more likely to have the expertise in-house to take "old" equipment from a Fortune 500 company and "smart engineer" it to boost its productivity. Moreover, lean, smaller companies typically have a cross-trained workforce that can quickly adapt to changes in product lines.

Today's market is tough, but the U.S. is still the most entrepreneurial country in the world. The bad news: Offshore manufacturing isn't going away any time soon. The good news: It presents an opportunity for small manufacturing businesses such as ours. Look around; there's probably a line transfer happening right down the street.

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