Posted by: malstott | April 5, 2016

Trickle-up: A Path to US Manufacturing

fountain2This is not a political post. It is a call to personal reflection and action. Politicians and policies can help change the rules but we are the change agents in our companies. We have gutted our manufacturing prowess here in the US. We can blame trade agreements, tax burdens, short term quarterly reporting or politicians. But we also need to look at executive leadership. I am guilty. I’ve been a manufacturing executive during the biggest downturn in manufacturing…ever. Since the 90’s we have been shuffling manufacturing off-shore at an amazing rate. We have lost over 8M manufacturing jobs since the peak in 1979 with most moving to Asia since 1999. While this trend has slowed and there is some evidence of a reversal (~800K net increase in manufacturing jobs returning since 2010), it isn’t enough and we need to take action. The economics are just about there. What isn’t clearly showing in the numbers yet is the longer term benefit of having a return of the manufacturing base. I call this a trickle-up effect.

Trickle-up is not a new term but is new in this context. The trickle-up effect or fountain effect is an economic theory used to describe the combined demand of middle-class people to drive the economy. The theory is credited to John Maynard Keynes early in this century. Because each manufacturing dollar supports $1.33 in output from other sectors, it creates a trickle of economic value. Manufacturing has the largest multiplier of any other industry sector. Reshoring is a way to multiply jobs and economic value for our country. In addition there are intangible business benefits like increased creativity, faster time to market and increased customer responsiveness.

The late Andy Grove said in a 2010 New York Times essay, that what creates tech employment is scaling. “Scaling is hard work but necessary to make innovation matter.” And now scaling is not happening in the US. The big tech legends like Intel, Tandem, HP, Sun, Cisco all scaled in the US when they started. Then we shifted manufacturing to Asia. Now, companies like Foxconn and Flextronics build our electronics products with millions of engineers, technicians and managers located in Asia. Let’s tune our innovation engine to include scaling. Tools such as additive manufacturing, collaborative robotics and IC manufacturing equipment are developed here. Let’s use them here.

If we agree that it is best for our country to bring these jobs back, how can we accelerate? We need to examine our decision criteria. In some cases the numbers are in our favor already. In other cases we need to take action as leaders to change the equation. Here are some practical actions to take:

  • Calculate the total cost of manufacturing before deciding where to build. Labor costs have increased in Asia and have decreased in the US. Energy costs are competitive. In some parts of the country the real estate is less expensive and local governments are interested in attracting industry by offering tax breaks. Automation can be used to increase quality and increase efficiency further. The Reshoring Institute has developed a Total Cost of Ownership (TCO) estimator that is free to use.
  • Assign a value to time. Manufacturing close to a development team accelerates time to market. Learning quickly through rapid prototyping and iterating designs based on real manufacturing input will shorten your time to volume manufacturing and that in turn gives you an edge over the competition. If your product goes to market 1-2 months faster, what is that worth?
  • Value Superior products. New technology needs an effective ecosystem in which technology accumulates. This happens between functional areas and between inventors and makers. We are missing an element of the creative process if we don’t include manufacturing in the cycle. It can be done with Asian partners but it often isn’t. Designers often don’t even see their product being built. They don’t interact with the builders of the product and they learn only through second-hand feedback.
  • Consider the cost of quality.  Ideally when there is a failure early in a product launch, it is quickly understood and either the product or the process changes to avoid that failure the next time. Tight feedback between design and build is the key to this rapid improvement process. Proximity matters. It doesn’t guarantee the close interaction between design and build but it takes down an obvious barrier.
  • Lower inventory levels.  Do this by moving manufacturing closer to the demand. This has been called “next-shoring” or “right-shoring”.  Companies can respond to changing demand because there is less inventory on its way. The need to commit to next season’s fashion a year ahead of time goes away. Colors, fabric, quantity, sizes can change as demand is better understood.  Inventory is expensive to store, ship, scrap and obsolete. The money saved by placing build close to demand can be taken to the bottom line. Companies like Nike, GE and Brooks Brothers are working on “next-shoring”.
  • Train. One of the biggest gaps we have is the readiness of our workforce for this strengthening in US manufacturing. As business leaders we should be readying our workforce to take on manufacturing jobs through apprenticeship programs, on-the-job training, internships, partnerships with local colleges and universities and funding for skills training.

Increasing our manufacturing base in the USA will trickle up jobs and prosperity. The jobs are good ones and they are multiplicative. Job creation matters. We have an financial obligation in business to sustain the society and infrastructure on which we depend. It isn’t altruistic. It is a long term fiduciary obligation. Our children will be better off. What kind of world will this be if we only have highly paid professionals designing products and the rest are unemployed or serving those who are highly paid? We need to take action to bring manufacturing jobs back to the US. It is the right thing to do.

Be courageous. I have seen many depressions in business. Always, America has emerged from these stronger and more prosperous. Be brave as your fathers before you. Have faith! Go forward. Thomas Edison

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Responses

  1. […] Measure the costs: Company executives should measure the full, true cost of off-shoring. Doing the math rather than just following the crowd could accelerate the trend to keep manufacturing in the US. […]

  2. […] – What kind of manufacturing is right for this country? Given our higher standard of living we will not find enough workers for […]


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