ChinaShipping2-772536We have talked the technical side of plastic production and the chemical makeup of polymers for the last few articles; maybe it is time to interlace business, marketing and production strategies.  

Each business is driven by external influences whether they are government regulations, economic trends, or simply customer preferences.  Companies invest in equipment and employees as the market expands and trim any excesses as the market declines.  Those heavily vested in employees can quickly react by re-sizing their workforce.  Those heavily invested in automation struggle with extensive debt structure in a weak market, but are capable of responding to rapid up swings where the demand matches their equipment.  Products, all products have a life cycle which reflects the interest of the buyer and the stratagies companies should use to drop, maintain or improve a product.  Decsion; decisions that influence company strategies, tactics, goals and objectives.  It all spins around costs, sales, debts, assets and profits; even the most efficient companies struggles to balance an all to complicated act. 

We start with this article on one of industy’s favorites, potential savings from off shore production.

Domestic versus overseas parts production has always be a controversial struggle for buyers. Overseas touts lower prices and over the years quality and the language barrier have both improved.  But, how do you determine which is truly more cost effective.  Domestic producers claim they can develop products at or below those of China and other foreign alternatives. With additional embedded labor costs, health and safety issues, and more stringent labor laws in the US how is this possible? 

Plastics manufacturing requires a heavy investment in capital for mammoth machines.  Under ideal conditions once a job is set up it should run with minimal intervention.  The potential for low labor skills to monitor the parts as they are expelled from the machines seems a reasonable option and where better to find in-expensive labor than in 3rd world countries.  The rates are often very attractive, the machines and molds do most of the work.  Once designed the mold will consistently spit out the same part everytime; or at least that is the ideal situation. 

The work and the machines can be transferred overseas.  We can assume the skill to manage and run the machines is there.  Whether it is or not depends on the company you are working with, some are not so good and others are excellent.  Higher quality even in China may come closer to our rates by the time you include the extras for transport and delays.  Looking for deep discounts, you may be harvesting disaster as you dig for the lowest bidder.   The same can be said for American manufactures in not just the plastic industry, but all industries, we also have our great and not so fantastic manufacturers.  Cheap or quality, you can have one or the other, it is hard to find cheap quality.  On the other hand may not, what we do know is quality is not cheap, there is a relative price to be paid for time and effort invested to derive the desired result.

The enticement

Buying overseas has always fascinated those looking to trim costs and squeeze the last penny out of operating costs. With sufficient differences in labor rates, often fueled by the lower safety, weaker health concerns, missing employee benefits and shabby work standards in second and third world countries savings are possible.

Why production costs are lower

Even today, Blue jeans are produced at a rate of $4 per pair at the China docks. Many employees work in sub-standard conditions for long hours and minimal pay. In typical sweat shops work can run 18 hour days and longer often 6 and 7 days a week with barely enough income to support meager food for the month. Company provided 8 beds to a room housing helps bleed the employee’s income and subsidize the companies operation. While the owners of these companies make impressive salaries, there is little real regulation on labor and employee rights. The minimum age for workers is often overlooked and unfounded fines and penalties are levied against employees to minimize payroll payments, which don’t always come on time. Tours of plants often reflect a happy, clean environment where employees feign happiness under the careful eye of their employer. With plenty of people waiting at the door for a job and few enough jobs to go around feigning happiness is a small consolation.  Sure there are plants  in China with high-end technical jobs that are labratory clean and provide more acceptable conditions and salaries, but those are not where you will find the dramatic savings.  With any foreign production savings must be great enough to cover the added transportation costs and delays, as well as any potential risk from labor or political upheval.  Publicity can be a nightmare if the media decide to focus on working conditions at the plant servicing you.

After the recent massive labor strike in China wages were raised.  Employees are now enraged as they find raises were a mere manipulation that often left workers with less than before.  The unrest is not over.  Slow downs are more common now than ever.  If history is a predictor unions will form.  Efforts to establish labor unions among strong resistance are already taking place.  More strikes seem the trend and rebellious plants will close for longer periods in attempts to manage labor and costs. 

Illegal aliens from Cambodia and Vietnam stream into the country and work for $5 a day holding labor rates down according to  a recent article (Bogus wage rises fuel anger among Chinese workers, By John Chan, WSWS.org,
10 July 2010).  Will China see illegal alien workers as a problem that strips away opportunities for their people, a burden on the state resources and a missing opportunity for taxation.  Over night labor rates could climb as illegal aliens are sent home.  Political unrest is not necessarily a dramatic uprising, but a minor shift in policy that can have a major impact.

The decision driving factors

Regardless of the conditions of the plant and treatment of the workers, it is the cost savings driving decisions for industrial giants. Markets of almost every venue are battling for position as competitors vie for sales from the end customer in an all to thin economy. High quality, abundant features, attractive packaging, extended support and prices that signal real bargains are what customers demand. Large chain stores, wholesale buying clubs and buying over the internet often challenge markup through volume purchases. With less room for profits and looming investments needed for re-tooling, expansion and numerous other company activities thin profit margins have to be fattened to sustain growth, profitability, and maintain the interest of debt holders and share holders.

Growing Trends Abroad

International trade with finished goods from countries including second and third world countries can undermine reasonable pricing models as they sell products at substantially lower prices.  Mature industrialized nations must deal with this competitive impact as well.  Differences in banking standards and regulations relating to monopolist behavior in second and third world countries are much different and provide significant economic advantages. Loan rates can be much lower and can be backed by the government as these country ply for more trade, higher employment rates and a growing tax base to grow the country from a third world to leading industrialized nation.

Growth for most leading industrialized nations happened over several hundred years and now third world countries jump this hurdle with ease in a couple of decades. Infusion of capital from eager foreign corporate giants or debt secured by the nation allow non-existent companies to blossom overnight.  As industrialization takes hold living standards improve which fuel competition and the demand for higher salaries. 

At best, second and third world countires may be narrow windows of opportunity where labor rate advantages disappear more quickly with each developing nation.  The attraction for low labor rates is world-wide with companies from numerous countries vieing for the lowest rates.  Now even countries once seen as a source for low labor rates compete in this outsourcing battle.  Foreign investments in plant, equipment and other resources may no longer be recovered as quickly.  Labor rates can quickly rise beyond megar tolerances as other outsourceing competition targets and plys developed talent away their advisories.  For those early entrants profits may be found, if they can over come the risk.  Later entrants will struggle to sustain investments in a maturing market where labor rates ar the highest commodity, constantly being bid higher. 

Hidden and Rising Costs

Are labor rates the only cost?  How long can companies ride this wave where labor rates are low enough to offset country and company stability issues, monetary fluxuations, shipping charges and delays, as well as communication challenges. What are the determining factors that will keep production abroad or return it to domestic sources for manufacturing?

According to a 2009 Business Week article, 2005 rates for the production of aluminum auto parts were: China $17, Mexico $18 and the US $24.  Just 4 years later these rates shift to China $25, Mexico $20 and the US $29. China is now more expensive than Mexico and there is labor unrest in 2010 with demands for higher pay. “There are significant hidden costs to having supply lines that extend to China,” says Heegan, whose company manufactures auto parts in the U.S. and Mexico. (So Much for the Cheap China Price, By Pete Engardio , BloomBerg BusinessWeek).

Containing Costs

Containers in greater numbers arrive in Asian countries empty to provide for outgoing product to Europe and the US.  Empty containercontainers without goods create an added cost that must be borne by those using the transport.  Not the ship, not the foreign manufacture, but the buyer of goods.  All expenses are driven to the host outsourcing company allowing overseas manufacturers to retain profitable operations where little enough profit is seen despite crude cost cutting efforts.  In 2009 container prices rose by 50% and expectations see higher prices yet. 

Even container companies are staggering under the weight of demand and its shift.  2009 reported a shortage of containers which would drive leasing prices up.  Other years there is a surplus and excess containers are sold on other markets for homes and storage units.  Currently, there is a prediction of a short fall of 4 million containers, making them a valued commodity where rates can easily rise adjusting to supply and demand.  One might wonder, why build more containers deluting the market; dropping the rising price of containers at present.  Price decline in the future may not occur unless competition enters the container market.  Cost control now suggests, shorter leasing of containers whether abroad or domestic.  Time in shipment and storage may become a more critcal factor in realising cost controls and profits.

The Unending Search

container-shipAs company’s chase the holy grail looking for a true low cost, stable production options they often ignore legal differences among countries, import/export issues, political unrest or corruption within governments. Shipping costs, the added delay in shipping and the recent labor strike in China suggest growing difficulties in not just manufacturing abroad, but the shipping industry. Container ships are growing to mammoth sizes in eContainers On Dockfforts to lower costs.  Underutilized, these ships will need to delay disembarking until sufficiently filled or suffer huge losses during transport.  Rates will then have to increase to cover overhead. Larger ships mean fewer ships on the water and possibly less frequent deliveries making the current six weeks seem fast.  New docks are becoming even larger to handle this beasts and the confusion over which container goes where and when by which ground transport just got more confusing. To maintain operating costs current cargo ships expect to be completely unloaded and reloaded in 24 hours, it is a battle shipping docks fight with only minutes to spare.

With rising labor and production costs abroad, rising shipping rates narrow the margin between domestic and foreign production even further. With 6 week delay in shipping and possibly longer, potential strikes or work slow downs, shifts in political policies and communications problems there is the potential for less profitability abroad.  The savings and confidence in on-time delivery may well have turned back to the domestic quarters.

North American Options

Local shipping across the US, significantly lowers shipping costs and delivery times. It also minimizes the amount of material in inventory and lowers capital to sustain inventory in transit. Legal recourse is a tactical nightmare when dealing with foreign courts and sympathy does not always fare well for the foreign industrialist. Delays are an even greater risk when materials arrive that are out of spec and not acceptable. Corrections and replacement shipments that would otherwise be amiable, are subject to a second six-week or longer delay beyond the minimal needs to manufacture the product.  Throughout the process container leases continue to erode differences between foreign and domestic prices. 

Countries on our own continent such as Mexico can generate increased risk by simply visiting their plants. Such visits can entail hiring guards to protect managers from kidnap for ransom or potential hijacking employees who are then required to empty their ATM before being returned to safety after a life threatening experience.   Crimminal unrest appears blatant and out of control.  Canada our northern neighbor has similar laws and regulations as ours and cannot always be more cost competitive than domestic operations since extended transport drives cost upward.

Unrealized Gold

What can be found domestically is an underutilized gold mine in the US. Companies located in smaller communities throughout the Midwest can operate at lower tax rates due to lower cost for land, plant construction and labor rates. Old-fashioned work ethics and a strong commitment to satisfy and retain business make these companies domestic winners that are easier to work with and can be much more satisfying.  Surprising to many the production cost may be cheaper than going overseas when melded with the savings in lower shipping costs and lower investments due to smaller lots being ordered on shorter frequency intervals appealing to Just In Time inventory controls and Inventory Turn Over rates.  Additional saving may be seen in robotics offered by some companies  which eliminate labor rates entirely.  The risk in a market on the upswing is minimal with heavy robotics, but is ingrisky in a market slow down.  Balancing robotics to selectively harness the power of automation and still retain the flexibility of a smaller variable labor force may be the best strategy for these domestic companies.

Include Incurred Costs and Potential Losses

broken-shipCapital invested in materials with a much shorter cycle time decreases total capital infusion requirements and lowers annual cash flow needs.

When looking for cost savings, consider the extreme savings that once overshadowed the risk and delays of overseas and foreign production.  Those sources may no longer exist. Lower inventory levels means lower capital requirements, inventory on ships in transit is available cash flows no longer available. For some companies this also means extended debt levels that must be serviced. Even for those companies cash rich, alternative uses of cash must always be considered to appease bankers and astute investment firms.

Container ships are being pushed to thier limits resulting in delays companies may not be able to afford.  Container leases for storage facilities or shipping demands of these much larger shipments are also a cost incurred that are not always realized. In our efforts to aspire to cost savings abroad have we over invested in the machinations that support such endeavors? Are we no better than the homeowner spending thousands of dollars on the latest utility saving device, failing to realize payback willl not occur for the next 100 years?  Equipment owned and shipped to another county like Mexico may automatically become the property of the foreign company.  Such readily transfered ownership without renumeration leaves well meaning buyers bound to foriegn suppliers regardless of quality issues, communications problems, shipping delays of unrealistic price increases.  The buyer in bound to these foreign companies as they try to recover losses in assets; expensive machines transferred as part of what was once a cost saving effort.  Know the applicable laws before you make that move.

The Answer

To use foreign labor or domestic, the answer will vary with each product country and phase that country is going through.  The answer should include all of the ramifications; otherwise companies will be subsidizing their hard earned foreign savings with higher un-realized overhead.  A financial hole yet to be uncovered.  Going overseas or staying domestic should not be a decision based on whether it is the latest trend.  It should be based on  whether it is right from all perspectives and has been judiciously verified as the best move.  More companies are moving material to domestic quarters.  They are also shifting away from a wide array of overtly hungry manufactures found through aggressive bidding practices.  They are selecting manufacturers with winning practices that can provide combined savings across a board spectrum of parts.  Price should come after quality and on-time delivery; after all without a good product on hand their is no sale or profit to be made.  You simply have your production center and distribution centers standing still waiting for those quality parts to arrrive.