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Q&A: The Answers to Your Questions on Manufacturing Relocation

August 4, 2023

 by David Collins III

outside of a factory building

We covered a lot of different aspects of manufacturing relocation during our AMA event last month. Please see our previous blog to read about the key takeaways from the event. 

Before the event, we asked you to give us some questions you wanted to be answered. The following are a few that were not addressed during the AMA event.

Q: What are the most commonly seen issues in shifting manufacturing locations within China and out of China?

Shifting Within China:

  • Labor Availability: Depending on the region, labor costs and availability vary widely within China. Urban areas may offer a more skilled workforce but at a higher price, while rural areas might present challenges in skill levels and training needs. Understanding the specific labor market in the targeted location and developing a strategic hiring plan can address this issue.
  • Rising Costs: Costs can include not only labor but also real estate, utilities, taxes, and other operational expenses. Assessing and planning for these costs, possibly through a detailed feasibility study and budgeting process, will be vital.
  • Regulatory Compliance: Different regions within China may have varying regulations, including environmental standards, local taxes, and business licensing requirements. Engaging local experts who understand these regulations and can navigate the 

Moving Out of China:

  • Supply Chain Disruptions: Shifting manufacturing out of China may disrupt supplier relationships and logistical arrangements. Careful planning, new supplier sourcing, and restructuring logistics networks will be necessary to manage this transition.

  • Longer Supply Chains: Depending on the new location, the supply chain may become more complex and extended, affecting lead times and costs. Analyzing the entire supply chain, including transportation, warehousing, customs, and other factors, and finding ways to optimize it will be a crucial challenge.

  • Potential Increases in Costs: While some costs might decrease (such as labor in certain regions), others might increase, including transportation, compliance with different regulatory standards, and potential tariffs or duties. A comprehensive cost analysis, including both short-term transition costs and long-term operational costs, will be critical to understand and manage this aspect.

 

Q: How do we account for longer supply chains and higher costs when most raw materials and components still ship from China?

  • Optimize Logistics: This involves carefully analyzing and improving your supply chain's transportation, warehousing, and distribution aspects. Consider leveraging modern supply chain management tools and analytics to identify bottlenecks and inefficiencies. Working with logistics providers with experience in the Chinese and destination markets can also provide valuable insights like location-specific import/export regulations.
  • Implement Risk Management Strategies: Longer supply chains often mean increased exposure to risks such as transportation delays, currency fluctuations, or political instability. Develop a comprehensive risk management strategy that includes identifying potential risks, assessing their likelihood and impact, and establishing mitigation plans. This strategy can include tools like hedging or contractual agreements with suppliers.

Q: What cost considerations should our company consider when moving a factory?

  • Equipment Transportation: This involves the cost of moving heavy machinery and equipment and the potential need for specialized transport vehicles, insurance, and regulatory compliance. An in-depth assessment of the types and requirements of the equipment, as well as collaboration with specialized transportation providers, will be vital to managing these costs.
  • Potential Downtime: Any interruption in production during the move can result in lost revenue. Planning the move to minimize downtime, possibly through phased transitions or temporary arrangements, can mitigate this cost. A detailed project plan, risk assessment, and collaboration with experienced project managers are essential here.
  • Labor Expenses: This includes the cost of relocating existing employees, hiring new staff, training, and potentially severance or compensation for those not moving. Consideration of local labor laws, wage levels, and skill availability will be crucial in planning these expenses. Additionally, temporary staff may be needed to cover the transition period.

 

Q: How to reduce the risk of losing tribal knowledge with existing China factory partners during the relocation process?

  • Document Standard Operating Procedures (SOPs): Ensuring that all critical processes, techniques, and insights are documented in clear, accessible SOPs will make the knowledge more resilient to personnel changes. Consider creating detailed guides, videos, or even interactive training modules that capture the nuances of the operations. Regularly review and update these documents to keep them relevant.
  • Promote Cross-Training Between Teams: Encourage team members to learn different aspects of the operation, including those outside their regular responsibilities. This not only preserves knowledge but also creates streamlined cross-functional teams. Consider implementing a mentorship program where experienced staff can train others in their areas of expertise.

 

Q: What are the relocation risks and opportunities of moving a factory from China to Mexico?

Opportunities:

  • Proximity to the U.S. Market: Mexico's closeness to the U.S. offers logistical advantages, reducing transportation time and costs. This can translate to faster delivery times and increased competitiveness in the U.S. market.
  • Lower Labor Costs Compared to the U.S: Mexico often provides a more cost-effective labor force than the U.S., potentially enhancing profit margins. However, this must be balanced with considerations of skill levels and training requirements.
  • USMCA Free Trade Agreement Between Mexico, U.S., and Canada: This trade agreement can provide specific benefits such as reduced tariffs and facilitated customs procedures, boosting trade efficiency. Understanding the particular provisions that apply to your industry will be vital to maximizing these benefits.

Risks:

  • Potential Cultural and Language Barriers: Adapting to a new cultural environment might require training and orientation for staff. Language differences can pose communication challenges within the organization and with local suppliers or authorities. Specific strategies such as hiring local intermediaries or investing in language training can mitigate these risks.

  • Regulatory Differences: Understanding and complying with local laws and regulations can be complex, especially concerning labor laws, safety standards, environmental compliance, and taxation. Engaging local legal and regulatory experts is crucial to navigating these differences smoothly.

 

Q: When relocating, how do we ensure the equipment is made to the relevant country specifications?

  • Understand Local Rules and Work with Local Experts: Get to know the specific rules and standards of the country you're moving to. These can be about safety, the environment, and more. Working with local experts, like engineers or legal consultants, can help you understand and follow these rules correctly.

  • Choose the Right Equipment Suppliers and Stay in Touch: Pick suppliers who know the country's standards and can provide the right equipment. Keep communicating with them throughout the process, from choosing the equipment to setting it up to ensure everything meets the required specifications. 

 

Our AMA event on factory relocation shed light on key lessons and takeaways for organizations embarking on this transformative journey. Many considerations come into play for successful factory relocation. From effective project planning to meticulous cost considerations, factories can successfully relocate when they manage these aspects well. If you require CMC’s expertise, you can contact us to learn more about how we can help you.


Watch the AMA event now

Topics: Plant Relocation

David Collins III

David Collins III

David was a Senior Strategy Consultant for Deloitte, served in Iraq as a Special Operations Civil Affairs soldier, and as a Governance Advisor to the Afghan Government with the Department of State. At CMC, David advises clients on strategy and investments.

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