Case study

Discipline major Business : Production & Operations Management

A growing number of North American companies are moving their manufacturing back to the United States and Canada.
Refer to one of the recent report on outsourcing and off shoring from The Economist:
Case A: Reshoring Manufacturing: Coming Home
Jan 19th 2013 | The Economist
Source: http://www.economist.com/news/special-report/21569570
IN 2005, A START-UP Company from California called ET Water Systems decided to move its manufacturing
operations to China. At the time there was a general exodus to Asia in search of lower costs, recalls Mark
Coopersmith, the firm’s chief executive. ET Water Systems, which builds sophisticated irrigation devices for
businesses, quickly started losing money, not least because it had so much capital tied up in big shipments of goods
which took weeks to cross the oceans. Innovation suffered from the distance between manufacturing and design,
and quality became a problem too. When five years later, Mr Coopersmith investigated the difference between the
total cost of production in China and America, including the cost of shipping, customs duties and other fees, he was
amazed to find that California was only about 10% more expensive than China. And that was just on the immediate
numbers, without allowing for the intangible benefits of making the devices almost next door. ET Water Systems’
new manufacturing partner, General Electronics Assembly, is in San Jose. As it happens, the firm’s owner has a
Chinese background and a large portion of its employees are of South-East Asian origin.
The number of firms known to have “reshored” manufacturing to America is well under 100. Doubtless many more
are doing so quietly. Examples range from the tiny, such as ET Water Systems, to the enormous, such as General
Electric, which last year moved manufacturing of washing machines, fridges and heaters back from China to a
factory in Kentucky which not long ago had been expected to close. Google has attracted a great deal of attention
for deciding to make its Nexus Q, a new media streamer, in San Jose.
The reshoring movement has to be kept in proportion. Most of the multinationals involved are bringing back only
some of their production destined for the American market. Much of what they had moved over the past few
decades remains overseas. And for many of the biggest firms the amount of work that they are still sending abroad
outweighs the amount that they are bringing back onshore. Caterpillar, for example, is opening a new factory in
Texas to make excavators, but has also just announced that it will expand its R&D activities in China.
According to a survey conducted by Harvard Business School last year, many firms are still deciding against basing
activities in America. Professors Michael Porter and Jan Rivkin asked HBS alumni who were running businesses
about their choices of location and found that many of them were deciding to leave because they thought wages
abroad were lower than at home. Another important reason, though, was to be near customers in big new markets,
which this report does not see as offshoring in the conventional sense. Messrs Porter and Rivkin argue that firms are
now ready to reconsider offshoring. They realise that in many cases they overdid it, and are discovering hidden costs
in moving production a long way from home. But, the authors argue, America’s government is not making the
country’s business environment attractive enough for companies to want to come back.
Given the political pressure, it is natural for companies to want to publicize anything that looks like reshoring.
Lenovo says that its decision to bring back computer-making to North Carolina was a way of looking after the firm’s
reputation as well as bringing direct business benefits. The Chinese firm’s global supply-chain chief, Gerry Smith, says
he has received dozens of telephone calls from former university classmates to congratulate him on the move.
– 2 -But reshoring amounts to much more than public relations. It is being driven by powerful forces and will only get
stronger. In a survey of American manufacturing companies by the Boston Consulting Group (BCG) in April 2012, 37%
of those with annual sales above $1 billion said they were planning or actively considering shifting production
facilities from China to America. Of the very biggest firms, with sales above $10 billion, 48% came out as reshorers.
The most common reason given was higher Chinese labour costs. The Massachusetts Institute of Technology looked
at 108 American manufacturing firms with multinational operations last summer. It found that 14% of them had firm
plans to bring some manufacturing back to America and one-third were actively considering such a move. A study
last year by the Hackett Group, a Florida-based firm that advises companies on offshoring and outsourcing,
produced similar results. It expects the outflow of manufacturing from high- to low-cost countries to slow over the
next two years and the reshoring to double over the previous two years. “The offshoring of manufacturing is now
rapidly moving towards equilibrium [zero net offshoring],” says Michel Janssen, the firm’s head of research.
The crucial change that has taken place over the past decade or so is that wages in low-cost countries have soared.
According to the International Labour Organisation, real wages in Asia between 2000 and 2008 rose by 7.1-7.8% a
year. Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches
or exceeds pay in America and Europe, according to a recent study by the Hay Group, a consulting firm. Pay in
advanced economies, on the other hand, rose by just 0.5% to 0.9% a year between 2000 and 2008, says the McKinsey
Global Institute. In manufacturing, the financial crisis actually reduced pay: real wages in American manufacturing
have declined by 2.2% since 2005.
By contrast, pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005 and
speeded up to 19% a year between 2005 and 2010, according to BCG. The Chinese government has set a target for
annual increases in the minimum wage of 13% until 2015. Strikes are becoming more frequent, and when they
happen, says one executive, the government often tells the plant manager to meet workers’ demands immediately.
Following labour unrest, wages at some factories have gone up steeply. Honda, a Japanese carmaker, gave its
Chinese workers a 47% pay rise after strikes in 2010. Foxconn Technology Group, a subsidiary of Hon Hai Precision
Industries, a Taiwanese firm that does a lot of manufacturing for Apple and other big technology firms, doubled pay
at its factory complex in Shenzhen after a series of suicides. Its labour troubles are still continuing.
The pushmi…
BCG used to argue that companies unwilling to send their manufacturing to lower-cost countries were putting their
very future in jeopardy. Now it says that companies will bring manufacturing back to America from China. As soon as
2015, says Hal Sirkin, a consultant at the firm, it will cost about the same to manufacture goods for the American
market in certain parts of America as in China in many industries, including computers and electronics, machinery,
appliances, electrical equipment and furniture. That calculation takes into account a wide variety of direct costs,
including labour, property and transport, as well as indirect ones such as supply-chain risk.
After decades of complaining about American and European workers’ high pay, cushy conditions and unreasonable
expectations, businesspeople now increasingly moan about Chinese workers. Their aspirations are rising and they
are less willing to work long hours in boring factory jobs. A new labour law introduced in 2008 brought in more
protection for workers, including the right to a permanent contract after a year of employment, and workers are
more aware of their rights. One consultant jokes that it is getting as hard to fire people in China as in France.
“China’s labour market is so overstretched that all the high-quality labour has been exhausted, you have to hire
people with lesser qualifications, and then quality becomes a problem,” says Alain Deurwaerder, who until recently
– 3 -ran a factory in Thailand for Ducati, an Italian motorbike-maker. Another European chief executive complains about
the flightiness of his Chinese workforce: “If someone on the other side of the road offers 5% more pay, they go.”
Lorne Schaefer, the owner of Jenlo Apparel Manufacturing, a Canadian-owned clothing company, opened a factory
in Liuzhou in southern China in 2008 because he could no longer find workers at home; second-generation Chinese
and Vietnamese immigrants in Montreal, he says, no longer want to work in the industry. Now he is having similar
problems in China. The latest generation of workers, thin on the ground because of the country’s one-child policy,
are not keen to toil in factories, nor do they want to work for companies that make goods for export, since the
quality standards are far higher than for domestic consumption. So even in a labour-intensive industry such as
textiles, the cost benefit that China offers is quickly eroding.
“Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or
exceeds pay in America and Europe”
Higher labour costs alone are not enough to prompt companies to leave China. The country has the world’s best
supply chains of components for industry and its infrastructure works well. Firms have already invested heavily in
being there. And companies that initially came for the low labour costs now want to stay because it has become a
huge market in its own right. Nonetheless, “the incremental decision to invest in new production capacity in China
has become tricky,” says Gordon Orr, Asia chairman for McKinsey.
One answer is to invest in other low-cost countries, of which there is no shortage. Myanmar, for instance, is
attracting interest now that the West is lifting economic sanctions. But the scale, skill and productivity of the labour
force there, and in countries such as Vietnam and Cambodia, nowhere near matches China’s, argues Mr Sirkin. And
workers in those countries, too, are demanding better pay and rights.
Mexico, which has the huge advantage of bordering the United States, is increasingly attracting production destined
for the Americas that would formerly have gone to China. Average pay for Mexican manufacturing workers is now
only slightly higher than for Chinese ones, and the time it takes for goods to travel to North America is measured in
days not months. Some firms, such as Chrysler, a car company, are even using Mexico as a base to supply the
Chinese market. The country has become an important production hub for the aerospace industry. But Mexico’s
poor infrastructure and highly publicised drugs-related violence may deter some firms.
Even as pay is rising rapidly in China, costs in America are falling. The successful extraction of natural gas from shale
has dramatically lowered the price of energy. PricewaterhouseCoopers, an accountancy firm, reckons that these
lower American energy prices could result in 1m more manufacturing jobs as firms build new factories. Companies
such as Dow Chemical, a speciality chemicals firm, and Vallourec, a French steel-tubes firm, have announced new
investments in America to take advantage of low gas prices and to supply extraction equipment.
…and the pullyu
Not only have American wages declined or are rising only slightly, BCG points out, but the dollar has been
weakening. The workforce is becoming more flexible and productivity continues to rise. High unemployment has
brought a willingness to work for lower pay, especially in southern states. These are mostly “right to work” states
where individuals are free to decide whether to give financial support to a trade union, so unions are less powerful
there. The very threat that jobs will be outsourced will also have played a role in keeping wages down.
– 4 -Alabama, one such state, received a big boost last year when Airbus, a European aeroplane manufacturer, said it
would open a big new factory. Airbus also plans to expand its production in Asia beyond its main factory in Tianjin,
China, to be close to fast-growing new markets. Fabrice Brégier, the firm’s chief executive, says that for skilled
workers, “China is no longer a low-cost country.”
Big unions in America have sometimes been willing to let wages fall to keep jobs at home. In 2007 the United Auto
Workers union (UAW) accepted a two-tier wage structure under which some new blue-collar workers are paid only
half as much as longer-serving ones. In 2011, after the government had bailed out part of the motor industry, the Big
Three carmakers employed more second-tier workers, reducing their overall labour costs. Ford has brought back
production from China and Mexico to Ohio and Michigan, thanks to a new agreement with the UAW.
As the example of ET Water Systems showed, transport costs are playing a big part in reshoring. Rising shipping, rail
and road costs are most damaging for companies that make goods with relatively low “value-density”, such as
consumer goods, appliances and furniture, according to a recent McKinsey report on global manufacturing. That
makes reshoring or nearshoring more attractive. Emerson, an electrical-equipment maker, has moved factories from
Asia to Mexico and North America to be closer to its customers. IKEA, a Swedish firm that makes products for the
home, has opened its first factory in North America as a way to cut delivery costs, and Desa, a power-tools firm, has
returned production from China to America because savings on transport and raw materials offset the higher labour
costs.
In the longer term reshoring will be boosted by the use of advanced manufacturing techniques that promise to alter
the economics of production, making it a far less labour-intensive process. 3-D printing, a process in which individual
machines build products by depositing layer upon layer of material, is already being used in research departments
and factories. Disney is developing 3-D printed lighting for interactive toys, and says that in future the interactive
devices inside such toys may be printed rather than assembled by hand. Additive manufacturing machines can be
left alone to print day and night. For now they are used mainly for prototyping and for complex parts, but in future
they will increasingly make final products too.
Robots are already making a difference to the share of labour in total costs. Cheaper, more user-friendly and more
dextrous robots are currently spreading into factories around the world, and they cost just the same in America as
they do in China. Relative to the cost of labour, average robot prices since 1990 have fallen by 40-50% in many
advanced economies, according to McKinsey. Baxter, a new generation of robot made by Rethink Robotics, an
American firm, costs $22,000 apiece and is so safe and simple that it can be taught by an unskilled worker and
operate right next to real people.
Baxter and his ilk may mean there will be fewer manufacturing jobs overall, but those that remain can stay close to a
firm’s domestic headquarters. And even if the manufacturing activity itself does not employ many people, the supply
chains that spring up around it will create new work.
Q A1: If you are the Chief Supply Chain Officer (CSCO) of a manufacturing company,
what are the three major factors that you would argue to convince the Board of
Directors in support of moving manufacturing back to Canada? Justify your answer.
[400-500 words]
– 5 -If you have been to one of the emergency department in hospitals, it is inevitable that you have encountered
the problem of long wait times to see the doctor. Here is what a National Post journalist has to say about this
problem:
Case B: Hospitals turn to Internet to fight emergency room wait times
Tom Blackwell | 12/04/17
Hospitals turn to Internet to fight emergency room wait times
Patients who log on to the website for Calgary’s hospitals are offered a surprising choice these days: wait times for
four emergency departments across the city, posted automatically, 24/7 in “real time.”
A hospital in the Southern Ontario city of Kitchener has just become the first in that province to launch its own,
enhanced version of the same idea, amid predictions the consumer-oriented service will soon spread throughout the
health-care system. A smartphone app for the Kitchener facility is coming soon.
Administrators argue the online information should help patients better decide where to seek out medical aid, spur
staff to improve service — and one day even fuel competition between hospitals under new, demand-based funding
models.
“Having our wait times out there, warts and all, is certainly a motivator,” said Don Shilton, president of St. Mary’s
General Hospital in Kitchener. “What we’re trying to do is to inform consumers. … Our view is information is power.”
Critics question, however, whether an idea born in the competitive world of American for-profit hospitals will be
useful in Canada’s publicly funded system, or might even have unintended, harmful effects.
Emergency physicians stress that treating patients more quickly is an essential goal. But they worry about doctors
and nurses cutting corners to speed up the Internet clock, and critically ill patients staying clear of their local hospital
because of long queues that might not even apply to them.
“It leads to the commercialization of the care we provide in emergency departments,” said Dr. Peter Toth, president
of the Canadian Association of Emergency Physicians. “It’s a marketing strategy, perhaps. I’m not sure how it really
adds to the overall quality of the experience.”
The idea of publicly advertising emergency wait times emerged a few years ago in the United States, where some
private hospitals display the number on billboards, using the promptness of their service as a marketing tool.
Alberta Health Services, which administers much of the province’s health-care system, introduced its version last
July in four Calgary hospitals, as well as two “urgent-care” clinics in the city that are suggested as alternatives. St.
Mary’s General Hospital in Kitchener followed suit last week, posting wait times that are updated every 20 minutes,
as well as statistics on the number of patients waiting and being treated at any given time. It projects wait times for
the next six hours, as well, and lists alternative clinics in the area.
The wait times are calculated electronically by computer algorithms that combine such factors as number of patients
and the size of the medical staff on duty. Calgary’s times are for people who fall in the middle of the five-stage
illness-severity scale recognized by emergency medicine, meaning some would be seen faster, some less so.
Kitchener’s are for those in the three least-severe levels.
For patients not critically ill, the combination of information should make it easier to decide where and when they
ought to seek treatment, said Mr. Shilton.
– 6 -St. Mary’s is already fielding inquiries from other hospitals about its system. Mr. Shilton sees more applications as
the idea spreads and Ontario moves to so-called patient-based funding of hospitals, where the province pays
hospitals per patient treated, rather than handing over money in annual lump sums.
Better posted wait times could attract more patients, and mean more funding for a hospital, he said.
In Calgary, officials noticed a curious phenomenon after the online wait times were introduced; it appeared patients
were moving from urgent-care centres to the emergency departments, said Dr. Grant Innes, chief of emergency
medicine for the city.
Earlier reductions in emergency crowding may have made the departments more appealing to patients than clinics,
he said. Meanwhile, Dr. Innes said it seems people are still largely choosing the hospital nearest them, not
necessarily the one with the shortest wait time.
For the staff working in emergency departments, though, the online postings could have unwanted effects, pushing
them to give short shrift to some patients to improve the numbers and satisfy superiors, said Dr. Brian Goldman, a
Toronto emergency physician and host of the CBC-Radio show White Coat, Black Art.
He also worries about patients choosing the hospital that posts the shortest wait times, potentially meaning a
longer trip that could prove fatal for someone suffering a heart attack.
“We’re the safety net for the health-care system,” said Dr. Toth. “The last thing we would want is people making a
decision not to present to the emergency department because of fears of long waits.”
Dr. Innes said that concern seems unfounded, while he does not believe any staff would take shortcuts to speed up
service and improve the real-time wait number. If the public alerts add a little pressure, however, that would not be
a bad thing, he said.
“I think a much greater danger is that we have sick people having to wait so long in emergency departments,” said
the Calgary physician. “I think we need to feel a great deal of pressure to reduce our wait times, in order to improve
patient safety.”
Q B1: Discuss the major reasons for long wait times in emergency departments
compared to other departments in hospitals? [300-400 words]
Q B2: Do you agree that internet can help reduce long wait times in emergency
departments? Describe and comment on some of the remedial measures that you
would recommend to deal with the problem of long waiting times in emergency
departments? [300-400 words]

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