The modern business environment was proving exceptionally tough for one of our Fortune 500 customers. Like many companies, they were struggling with being squeezed with both sides of the supply chain. They were experiencing increased material and supplier costs, while also being pressured to lower their pricing to large retail customers in order to stay in business. Because of this, their margins were being compressed down to nearly nothing and the management was considering pulling the plug on the product line. This same type of phenomena is pushing companies out of the running every single day, and our unnamed client was about to end a product that had successfully generated income and satisfied customers for nearly a decade. Luckily for everyone, UPM had a chance to offer a different outcome that saved the product line and strengthened our customer’s margins.
At first sight it seemed unfair. They had done everything that you would expect a smart, well established company to do. They found the cheapest plastic injection molding and component manufacturing overseas and set up their supply chain utilizing the lowest cost suppliers that they found. On the logistics end, they arranged for a container unloading service to handle the logistics of unloading and transporting the overseas shipments, and finally their fully assembled and packaged products would be stored in warehouses until they were shipped out to the retail customers.
Unfortunately that supply chain, which was working well in times of a booming economy, couldn’t adapt to the volatile environment of today. The slower overseas manufacturing resulted in a 10 week order lead time forcing them to rely on sales forecasts to predict demand and store the proper amount of inventory. As the economy suddenly slowed, they weren’t able to quickly shut down the manufacturing pipeline, resulting in millions of square feet in over-inventory, strangling their cash flow while also increasing their expenses. This placed them in a very difficult position with little room to maneuver.
This supply chain issue is plaguing a great number of companies and has already taken some of them out of the running. This strictly-outsourcing trend was established years ago, and it provided competitive advantages in a different market environment. But the now rising costs of overseas manufacturing and value added services has made what was once an advantage provided by outsourcing into a disadvantage.
Insourcing is the new outsourcing.
When the supply chain manager from this company approached us at UPM, the outlook seemed bleak. “Management says that this product is going to be pulled within the next 6 months”, the stern-eyed gentleman explained, “They don’t understand that we need this though, because even though the margins are near nothing right now, [this product] is the cornerstone of our company’s offerings”. Having worked with other companies in a similar position, UPM was able to quickly craft an alternative strategy that wouldn’t result in the destruction of their customers’ favorite product.
Upon reviewing the current expenses and costs with our potential customer, we noticed that there was a huge amount of waste and unnecessary expense in their supply chain. We ran the numbers and it became clear that they would save a large amount of money by continuing the manufacture of some of the smaller components overseas, but bringing the larger injection molded plastic components and assembly back into the US.
After brainstorming and constructing a custom plan of action with our customer, we implemented the following five changes together:
1. Bring back the manufacture of larger injection molded plastic parts into the US.
2. Consolidate large injection molding, container unloading, logistics, inventory management, and product assembly.
3. Develop an effective JIT (Just-in-Time) manufacturing program.
4. Leave the smaller parts to be manufactured overseas where they are cheaper and utilize customer consigned warehousing to bring them into the assembly process.
5. Warehousing and freight forwarding costs were eliminated.
This manufacturing program proved highly successful and reduced our customer’s order lead time from 10 weeks down to just 1 week, and eliminated two 1,000,000 sq. ft. warehouses, improving cash flow by 300%. By removing the vast waste caused by the over-dependence on overseas manufacturing and eliminating the large cost of producing and storing inventory ahead of time based on sales forecasts, we achieved lower landed costs then China which brought the product back to the point of being profitable. This has given our customer a distinct competitive advantage, and with more room to maneuver and negotiate with their retail customers, they have increased business 35%.
This is just one recent example of the kind of advantage that we provide our customers through innovative manufacturing and logistical solutions. Even if your company isn’t in dire straits like this company was, chances are that we may be able to significantly lower your costs and increase your competitive advantage too. If you are interested, don’t hesitate to give us a call so we can chat about your unique situation.
Some people might assume that we are simply against overseas manufacturing. What we at UPM are against is inefficiencies and wasted earnings. Over the last 20 years, outsourcing to China or other low cost countries has commonly been viewed as a silver bullet for lowering costs and increasing profits. Now we are in a different market environment where the over saturation of that strategy has in many cases eliminated the benefits for a lot of companies without them even realizing it yet. To get the best manufacturing solution, a company needs to be innovative and create a strategy that allows both overseas and US manufacturing to synergize, driving costs lower than is possible with just one or the other. That’s just one of the many things we do here at UPM.