Watch That Basket

For the first time in a long time, I’m reading and hearing reports in the national media expressing concern about the current state of manufacturing in the United States. HELLO—where have they been? But I’m a “glass is half full” kind of person, so any recognition that a) we do manufacturing in this country and b) it’s of some importance to our national economy is for the good.

Moreover, I’m starting to read and hear things that seem to indicate some of the bloom may be coming off the Asian rose. Mark Twain said it well: “If you put all your eggs in one basket, you better watch the basket.” Well, like lemmings to the sea, American manufacturers have flocked in droves to outsource work to China and East Asia with little thought about how they can “watch the basket.”

There have been several recent events that illustrate how vulnerable these trans-Pacific supply lines can be. The West Coast dock strike cost many manufacturers and retailers big bucks. During the strike, assembly plants for several automakers had to shut down within a few days because the necessary parts were riding at anchor in San Diego or Long Beach or Seattle. Doesn’t it seem like there is an incongruity in trying to manage a low or no inventory program that depends on supply lines stretched halfway across the planet?

Although this year’s SARS epidemic didn’t play out as catastrophically as it might have, there was an impact on manufacturing. Two major electronics manufacturers lowered their second quarter earnings-per-share projections because of the interruption to component supplies caused by the SARS outbreak in China.

The World Trade Organization (WTO) is mustering support and putting pressure on China to allow the Chinese Yuan to float. That’s going to impact the cost of manufacturing in China and more than likely, if the currency floats, costs will go up.

The Chinese, of course, are not in favor of this move. They fear a migration of manufacturing from their economy to other even lower-cost producers. We’ll see how this one plays out.

I recently listened to a speaker at the PMPA’s national meeting who spoke to us about U.S. manufacturing and China. Herb Meyer is a former deputy director of the CIA, and he now has a company that provides business intelligence to corporations. He does not believe that China’s economy is sustainable.

He cites several factors that support this view. These include rampant corruption; an unemployed and underemployed population in the hundreds of millions; and the banking system which, like that of Japan, is out of control because of bad loans. He suggests that those who have invested in China should watch that basket very closely, because something bad is going to happen there.

I mention all of this because in many cases, it’s your customers who are taking work overseas. It may be in your best interest is to have discussions with them about the critical nature of secure lines of supply and/or alternative lines of supply. Single sourcing of manufactured components sounds good to an accountant and looks good on paper. However, when that source is vulnerable to political, economic and even weather vagaries, your shop may be in a position to be an alternative source.

Perhaps you’ve already had this conversation with your customers. My suggestion is to revisit the topic now and periodically in the future. Things change quickly, and timing is everything. Manufacturing is migratory and dynamic. Few companies or, more to the point, their managers are going to risk their jobs on shaky supply lines. At the first sign of instability from foreign sources, you want to be there when the customer looks around for an alternative and reliable supplier. It doesn’t matter how inexpensive a component is; if you can’t get your hands on it, it’s no longer cheap—it’s worthless.