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October 8, 2011

It Takes a Village to Raise a Factory

by mikediliberto

These days there is a great deal of debate raging around the topic of manufacturing, with many former and aspiring manufacturing centers looking to attract factory investment from the worlds multinational corporations.

At this very moment I am in a hotel in Bangkok, which is seemingly the only place in town where one can escape the barrage of stakeholders extolling the advantages of opening a factory in Thailand. Their reasoning is not unfounded, and it does not take much looking around to see the fertile ground where upon the next global manufacturing powerhouse may arise.

I have been thinking quite a bit lately as to what that magic set of ingredients might be. Where is the interesection of favorable trade rules, tax incentives, labor costs, and infrastructure, and how might a country create the ideal environment in which manufacturing might thrive?

Regular readers of my column know that I run a factory in China, and as an American citizen who has chosen to build a business overseas, I have had no shortage of opinions thrust upon me at countless cocktail parties. What I have spent a long time explaining is the reasons that we are here, for they are never as simple or clear cut as popular rhetoric or sound bites may lead you to believe.

We are not in China because of the low cost, and in fact, having set up and run a company here for the past few years, I can say unoquivicably that the cost advantage that we once enjoyed is fast vanishing. There are cheaper countries in which one can set up shop, and even now local factory owners are beginning to entertain the option of opening new facilities in other, lower cost locations.

The reason we are here is because this location is extremely well equipped to support manufacturing. China has become a center of excellence for many products, from simple items like stamped steel to high tech items like the iPhone that I am using to write this article.

In my business, retail fixtures, we build products from wood, metal, and plastic, and often integrate electronics like lighting or speakers and video screens.

In retail, as with many other industries, speed to market can make or break a company. Although we have a talented team of in house designers, we rely on our vendors to give us design feedback and help us sourcing the correct components. It is the proximity of these vendors and suppliers that make China the most valuable location for so many manufacturers today, ourselves included.

For all of the high tech collaboration and networking technology that we can deploy today, design and manufacturing is still a very hands-on business. Regardless of how perfect we can make a 3d computer model, once we make a prototype there are always changes that need to be made. Showing a prototype sheet metal shelf to one of my suppliers inevitably leads to a conversation about what I wanted to accomplish, and usually several new suggestions from that supplier about how we might bring that vision to life. The same process repeats itself for our plastics suppliers and electronics vendors. The proximity of so many qualified sub contractors, and their willingness to change their output to match our needs is what a true manufacturing advantage is made of.

And so it seems that the way to enrich the soil to drive manufacturing growth is to ensure the growth of all of the ancillary and supporting factors needed. A factory cannot survive as an island unto itself, it truely takes a village to support it’s growth.

Nokia recently aquiesed to this reality as their worsening financials forced them to close their factory in Romania. As Nokia put it in the official statement, the drive to gain efficiency has forced Nokia to “Focus its feature phone manufacturing on those locations with optimal proximity to suppliers and key markets…. Nokia’s high-volume Asian factories provide greater scale and proximity benefits.”

I am reluctant to blame their current economic situation for these cuts, as it simply is the most sensible thing to do. The invisible hand of the markets pushes us to produce our goods for the lowest cost possible at a given quality level; only by moving our manufacturing operations to areas that have a robust support network can we be assured of maximizing our efficiency.

You don’t have to be Nokia to realize the benefit of a robust network of suppliers in close proximity to your factory, and in fact, it is the smal to medium size manufacturers that stand to gain the most from these regional business relationships. I make lots of parts from injection moulded plastic, however I can not afford to purchase and run a complete moulding line.  Having a supplier nearby gives me the advantage of their scale at a price that allows me to be competitive.

It is not all doom and gloom however, but rather a new set of considerations that we must take into account. I have met some great manufacturers in the USA that ensured their survival by simply bringing more competencies in house. If your metal vendor closes up shop, perhaps the best option is to bring metalwork into your own factory.

Regardless of what it is that you make, understanding not just your role, but rather the entire ecosystem is necessary to ensure that you make the right decisions, whether it is a decision to relocate existing factories across the ocean or to add more competencies by expanding those facilities.

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