Factory relocation is a complex endeavor requiring many steps, from meticulous planning to cross-functional collaboration. We recently hosted our first Ask-Me-Anything (AMA) event on factory relocation, featuring CMC’s CEO David Collins III and MTG Partner Bob Mallard, who shared invaluable insights and experiences. In this blog, we will delve into the 4 key takeaways of the AMA event.
The 4 Key Takeaways
1. Common Issues in Shifting Manufacturing Locations
One of the most prevalent challenges in shifting manufacturing locations is underestimation. This can manifest in various ways, but commonly, companies underestimate the amount of effort, planning, and resources required to relocate a factory, particularly when moving out of China to another location.
Three critical aspects are often overlooked during this process:
i) Lack of Detailed Understanding of Current Operations
Companies frequently assume they have a comprehensive understanding of their existing manufacturing processes. This can lead to a failure to recognize the complexity of transferring these processes to a new location. Such misunderstanding can result in unnecessary alterations or improvements, potentially causing delays and unexpected expenses.
ii) Inaccurate Feasibility Study and Cost Evaluation
A thorough and precise feasibility study is crucial before initiating a relocation process. This includes understanding the costs involved, from equipment transportation to adaptation to new regulations and standards. For example, relocating from China to North America may require modifications to motors, valves, and other equipment to meet CSA and UL standards, significantly adding to the overall cost.
iii) Inadequate Cross-Functional Planning
The complexity of factory relocation involves various departments and areas of expertise. From environmental considerations to electrical setup, construction, human resources, and legal concerns, many companies underestimate the need for a cross-functional team with a thorough understanding of all these aspects. Moreover, companies are often not adequately prepared for the physical changes a new building may require, such as reinforcing factory floors to accommodate specific types of machinery.
Companies should refrain from underestimating their capabilities and overestimating what they can do to avoid stumbling blocks during factory relocation. It's critical to conduct a comprehensive study, which includes understanding the current state, documentation, layouts, and potential advantages the new location offers. Relocating provides an opportunity for improvement and modernization, and these potential benefits should be thoroughly explored during the planning stage.
2. Strategy for De-risking Supply Chains
When it comes to de-risking supply chains, the first step should be finding competitive suppliers outside of high-risk areas like China. The goal is to secure a reliable and cost-effective supply chain resilient to unforeseen circumstances like a global pandemic.
If locating suppliers outside high-risk areas proves challenging, companies must ensure they have individuals with expertise in import-export rules, duties, and customs. These experts will help manage the supply chain logistics, which is vital in maintaining a robust pipeline and mitigating risks, such as inflated shipping costs or bidding wars for containers.
Supply chain management should also consider the potential for onshoring in North America. The objective would be to find the most economical supplier within the region. It's noteworthy that support industries often build up around manufacturing industries. Therefore, as more reshoring occurs, suppliers and subsuppliers will begin to emerge, facilitating a smoother transition period.
As companies consider reshoring their factories, productivity improvements should be factored in to offset the potentially higher North American costs. Such improvements can maintain or even increase profitability despite the higher operational costs associated with North American locations. Implementing advanced manufacturing techniques, lean management principles, and automation can be crucial in this process. In addition to reshoring, companies should enhance their operational efficiency to achieve a successful transition and a more resilient supply chain.
3. Expectations for Reshoring Productive Capacity to North America
When contemplating reshoring productive capacity to North America, several key considerations and expectations must be addressed. The first is establishing a clear understanding of the scope and objectives of the reshoring effort. This involves defining the business plan that includes the future capacity needs, growth prospects, and detailed operational plans.
It's also essential to analyze and compare costs, not just in terms of labor but across the entire value chain. For instance, while labor rates in locations such as Mexico might be slightly higher than in China, this increase can often be offset by reductions in other costs. By eliminating expenses associated with transportation, duties, and other logistics-related costs, reshoring may present an economically sound decision.
The trend of reshoring has already been embraced by numerous businesses, which has led to a boom in the industrial sector in countries such as Mexico. However, this influx of businesses reshoring their operations has increased demand for manufacturing facilities, making it increasingly challenging to find ready-built factories for lease. This tightening market may lead to an increase in costs.
4. Market Considerations for Relocation
The strategy for relocating production depends heavily on the market the company is trying to serve. For instance, if a company's target market is in Asia, it might make sense to relocate production to a country in the region like Vietnam, despite potential infrastructure challenges and high transportation costs. The reduced distance to the target market often offsets these drawbacks.
Maintaining facilities in different locations to serve various markets is another strategy some businesses employ. It might benefit a company to keep certain facilities in China to serve the local market while having other facilities outside of China to cater to Western markets. This diversification of locations allows companies to leverage cost advantages for lower-grade products in places like China while simultaneously reducing risks such as political or financial instability.
Assessing the current state of the company and envisioning its future state can provide valuable insights for relocation planning. This involves starting with a clean slate and rebuilding the strategy, considering the whole value chain and supply, the needs of the clients, and internal requirements.
It's also worth noting that the domestic markets of countries traditionally viewed as production hubs are also growing. Mexico and China, for example, have increasingly large consumer bases, making them attractive markets in their own right, not just places to produce for American, Canadian, or European markets.
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.
