By Sally Waterston, director of Business and IT Consultancy Waterstons Limited
Everything goes in cycles; fashion, the weather, Information Technology and even manufacturing. It feels sometimes as if we are like a pendulum as a country, racing after the next new thing and piling all our hopes on it in the name of strategy and forward thinking.
When we started this business in 1994 we had a few customers who offshored their production and seemed to be very successful at it. They made consumer goods, particularly fashion, and they understood the supply chain inside out. The main challenge they had was around quality but they accepted the issues and built allowances for it into their fairly sophisticated costing models, ensuring standard costs included an element of quality assurance as well as logistics and manufacture.
The additional cost of remanufacture when quality was an issue was outweighed by the lower costs of labour. They were probably among the leaders in offshoring in this country who were followed by a huge number of companies who rushed to copy their success; including a large number of major retailers who decided that they would source their consumer products in the Far East. The retailers cancelled their contracts with UK manufacturers who often went out of business, closed factories, retrenched and sometimes ended up setting up subcontracted manufacturing overseas themselves in order to survive.
Quality became a major issue. Collaboration throughout the supply chain is critical. With design in the UK; fabric from Italy; buttons from Portugal and manufacture in Bangladesh the shared data becomes of paramount importance. But even with the most sophisticated of Product Development systems and video conferencing can you really check the colour of the buttons without having someone overseas monitoring and checking on quality? So the costs increase.
Then the consumer market started to change. Customers expected more than two fashion seasons a year. They expected new products in the shops on a weekly basis; they could buy online whenever they wanted to and they expected retailers to be more nimble, more responsive and more agile. People were no longer happy to buy winter coats in the summer and summer dresses in January. If it was cold they wanted to be able to go out and buy a jumper or a winter coat. The cold spring of 2012 left Marks and Spencer short of stock.
Britain’s biggest clothing retailer said it had not only been caught short by the cold snap in February which sparked a late run on winter coats and woollens, but had failed to buy enough stock in hot trends such as tribal print fabrics and coloured chinos. Chief executive Marc Bolland said M&S sold 100,000 cardigans and jumpers from its core M&S Woman collection in the fourth quarter – but could have sold three times that number. “That was a miss,” he said, blaming a temporary buying issue. Women’s ballet pumps, he added, could have sold at double the quantity.
Obviously if there has been a failure in forecasting there is not much that a retailer can do about it – but if the product was manufactured locally and if the management information was sufficiently timely then it should be possible to fill the gaps within the product lines in days rather than the weeks which would be required to resupply from overseas.
John Lewis are held up as models in the logistics industry. They have a policy of not offering to customers online product which is a week away from arriving in the UK. This illustrates the issues of transport in the offshored model. They aim to increase UK made goods in the stores by 15% over the next two years.
As consumers demand greater choice and personalisation there is no option to wait six weeks for delivery. At the same time as all of this is happening there is a shift to lower stockholdings. This has to be a positive move; nobody wants to hold masses of obsolete stocks, but obviously this runs counter to the consumer requirement for immediate purchase and is even more at odds with the concept of overseas manufacture.
The Manufacturing Advisory Service (MAS) recently published a survey claiming that almost four times more companies reshored than started to offshore last year in the UK. This follows the United States which has seen a marked trend in reshoring. Henry Moser is the founder of the “Reshoring Initiative,” an effort to help U.S.-based manufacturers understand what he argues are the costs of moving jobs from the United States and the benefits of returning those jobs to the U.S. Interestingly he argues that many companies which have offshored in the past have underestimated the total costs of doing this. This ties in with the experience of our own early customers who understood that it was not a simple costing model. Moser cites the following reasons for companies returning manufacturing to the U.S. :
1. Difficult communication – 48 per cent
2. Rising prices – 48 per cent
3. Long lead times – 40 per cent
4. Poor quality of production – 35 per cent
5. Large minimum order quantities – 32 per cent
All of these can actually be translated into additional cost of sales and we have seen all of them in one form or another affecting our clients with overseas production. They are beginning to negate the original benefits of lower labour costs.
In the United States the reduction in energy costs because of fracking has impacted. If you add to this the increasing costs of transporting goods half way round the world and also the impact which we have seen on supply where natural disasters have occurred then there is a compelling argument for keeping manufacture close at hand.
We know that wages are rising in China and this should and must happen in other low-price economies too. Recent news stories of appalling working conditions in sweatshops in the third world may not be universally applicable but they have made the UK public more aware of the provenance of their consumer goods and also increased the kudos of items manufactured in the UK. We must accept that an embroidered tee shirt cannot be made for less than £10 by an adult earning a living wage and shipped to the UK for retail sale with profits for everyone along the supply chain.
It is not just in the fashion industry that we see manufacturing returning back home. The natural disasters in Japan shook the automotive industry. An OECD report in 2011 stated ‘…with the location of final assembly and motor parts production having become increasingly internationalised over time, disruptions to supply in one country, as in the aftermath of the earthquake and tsunami in Japan this March, can potentially have adverse nearterm effects in others.’2 This has caused a general anxiety about the impact on the supply chain of natural disasters elsewhere in the world and also of political unrest. Larger companies are looking at moving their subcontractors and supply chain closer to them; reducing the impact of the unknown and the known issues.
There are still large companies (like Caterpillar) who are starting to offshore but there are even more smaller companies either retaining their manufacturing the UK or actually looking to bring it back where they feel in greater control, where the risks seem fewer and the future seems clearer.
1. Wood, Z. (17 April 2012). M&S admits womenswear stock shortages hit sales. The Guardian, Online.
2. OECD. (2011). OECD 2011 Recent Developments in the automobile industry. OECD Economics Policy Notes No. 7. OECD.