Home sweet home

Jun. 16, 2015 – As overseas labour costs continue to rise — and long supply chains grow more expensive — the once-popular trend of offshoring is on its way out in many sectors. Rather than searching for the cheapest labour to manufacture their goods, companies are finding that true financial value lies in better servicing local markets. For many, this means bringing manufacturing operations back to the home of their prime customer base — North America.

“When you run the numbers, we’re at a tipping point in quite a few sectors,” says Nigel Southway, chair of the Toronto chapter of the Society of Manufacturing Engineers. “When you consider transportation costs, support costs — such as surveillance, communication, and infrastructure — it becomes obvious that, while labour might still be cheaper than in North America, there are a lot of hidden costs associated with manufacturing offshore.”

On the surface, this appears to be great news for the North American manufacturing sector which has taken a series of hits in recent years. The problem is, these new reshoring efforts aren’t coming back to the traditional manufacturing regions — such as Ontario, or the U.S. ‘rust belt’ — but instead are gravitating toward Mexico and the southern United States.

Between Mexico’s cheap labour and burgeoning economy, and the southern United States’ Right to Work legislation and geographical proximity to Mexico, it’s difficult for Canada to compete. It also doesn’t help that many of these markets are offering tempting tax incentives for businesses choosing to bring their manufacturing efforts back to North American soil.

“If you’re a car manufacturer and you have capital to spend on another plant, you’re going to look at where the customers are,” says Southway. “Most of the new customers are in Mexico, because that’s the quickest growing market. Being close to the customer, you’ll go to Mexico for three reasons — the labour is cheaper, Mexico is supporting you with tax breaks, plus you’re closer to a desirable growth market. It’s a very hard case to tell someone to build their plant in Canada.”

Quality over quantity
Despite the deck being stacked against it, there are advantages to manufacturing in Canada — Kevin Merritt, president of Superior Radiant Products, can attest to that. After attempting to manufacture one of his company’s higher-end products in China — a commercial-grade, luxury patio heater — he eventually decided to bring it back to the company’s Stoney Creek, Ont. facility.

“In China, the lead times were getting longer, the minimum order quantity was getting higher, and the quality was getting unreliable,” Merritt says. “We would have to pay upfront for three container loads before it shipped, and when it came to us, it got to the point where we had to open every box because there were so many inconsistencies. We were trying to make a high-end, luxury product and it just wasn’t acceptable.”

Canada’s labour may not have been cheaper, but it offered better quality, without the mandatory large batch requirements and shipping costs. Manufacturing the product close to home also allowed the company to acquire inventory as it needed it, in a much more efficient manner. And while Superior Radiant could have produced the product at its U.S. location — with cheaper labour — it opted to come back to Canada.

“In our case, coming back to Canada made more sense. There are lower corporate tax rates — U.S. corporate tax rates are much higher — and because we do a lot of R&D, the R&D credits here are very good for us,” he says. “For large mass production, maybe Canada isn’t as good as other markets because the cost of labour and set-up is very high. But for us it made sense.”

Competing wisely
Merritt is convinced that other smaller companies, like SRP, are coming to the same reshoring decision and moving back to Canada — he’s heard of a higher-end patio furniture manufacturer, for example, who is doing just that.

These reshoring efforts are flying under the radar, however, because little companies don’t attract the same media attention as the big multinationals, he says.  But they’re exactly the type of manufacturing stories Canada should be pursuing in that they speak to our manufacturing strengths, according to Hoda ElMaraghy, professor of Industrial and Manufacturing Systems Engineering at the University of Windsor.

“We can’t compete on wages,” says ElMaraghy. “We can compete on quality, on innovation. Companies are coming back to manufacture locally because they find the quality is better here.”

ElMaraghy says Canadian manufacturers can differentiate themselves by making smarter products, in a smarter way. This means employing new manufacturing practices such as flexible manufacturing, reconfigurable manufacturing and adaptable manufacturing — concepts on which she consults and studies at the Centre for Intelligent Manufacturing Systems at the university.

“We can’t only be part of the supply chain. We have to own our designs. We need innovation — not just in the products we produce, but in how we make things,” she says.

Many companies that ElMaraghy has collaborated with through the university have seen great success from these strategies — particularly reconfigurable manufacturing, which allows companies to invest in equipment on the shop floor as needed, when needed and if needed. Instead of investing upfront in a large system with many impressive but unnecessary capabilities, a reconfigurable manufacturing system is modular; meaning, it can be expanded as necessary.

“To benefit from reconfigurable manufacturing, companies need to design their initial system so that it’s easy to add machines as needed,” she says.

To illustrate the benefits of such a system, ElMaraghy uses the example of one Windsor-based OEM that had the foresight to implement a reconfigurable manufacturing line that could adapt to production volume changes. It left extra space on its plant floor, and designed the machines, stages and overhead cranes in such a way that all the components could accommodate another line. When the automotive manufacturer eventually needed to produce another engine, despite being at its production capacity, this OEM was able to meet the new demands.

“If they couldn’t add machinery, they couldn’t accommodate the new work. They’d lose that business to another plant somewhere else to make additional engines,” she says. “Because they thought about it ahead of time, and allowed for features to make it practical to add those machines, including leaving physical room for them, they were able to increase production.”

Essentially, Southway says that Canada’s less-than-ideal location and lack of government incentives is a significant roadblock when it comes to attracting returning offshore business, and to overcome it, Canadian manufacturers will have to find new ways to adapt — possibly by partnering with Mexican plants or opening operations closer to Mexico, as well as finding new ways to differentiate themselves. This might mean implementing smarter practices, targeting niche markets, or simply changing the way we’ve always done things.
 
“We should take a look at our traditional industries and add technology to make them competitive. We should find new ways to convert our natural resources into value-added products — shipping them out of the country as finished product will be our export drive,” says Southway. “Manufacturers have to be either very nimble or differentiate themselves on core costs like materials.”

Vanessa Chris is a freelance writer based in Guelph, Ont.

This article originally appeared in the May 2015 issue of Manufacturing AUTOMATION.