The global economy is changing, and for the first time in more than half a century, economic reality is bringing manufacturing back to the United States. Global inflation, coupled with vulnerabilities in the supply chain exposed by the pandemic, makes manufacturing in the United States cheaper and less risky.

Decades ago, the low cost of Chinese labor made offshoring look like such an attractive prospect that many investors jumped on board. But in many ways, it wasn’t always the bargain they were expecting.

Take Kodak, for example. With HP dominating the inkjet printer market and the biggest profit margin in printer supplies, Kodak needed a new angle. They decided to move inkjet printer and cartridge manufacturing to China to cut costs and offer printer ink at a lower price point. However, this move resulted in a number of cost overruns and other issues they clearly did not anticipate.1

It was not uncommon that navigating customs at the time required paying bribes to key officials to keep shipments moving. Unexpected delays in customs left large amounts of chemicals sitting at the ports degrading as Kodak scrambled to make necessary arrangements. Port delays became a major issue again in 2021 when the pandemic slowed shipping to a crawl, and foreign container ships waited for months with no workers to unload cargo. Whole chemical shipments were ruined.

Quality control was another significant issue. Kodak continued to manage everything from its headquarters in Rochester, NY, but this proved impractical. They had sent staffers and management to China to train factory workers in the process and oversee quality. Sending Americans to a foreign country for months several times a year is a challenge — and a test of company culture. It was expensive both in terms of cost and human capital.

Today, companies have a much better grasp of the true cost and risks associated with moving manufacturing overseas. These persistent issues significantly impact the decision to manufacture in the states, or at least between the United States, Mexico, and Canada.

How Fast Is This Shift Happening?

We’re at the beginning of the shift, and part of the problem is that we still haven’t figured out how to be cost competitive. The advent of automation held the promise of cost competitiveness, but the costs of initial investment and learning curve for sophisticated manufacturing robots is in the millions, and only the biggest manufacturers can afford it. As the automation technology matures and expanding use of artificial intelligence (AI) helps improve efficiency, costs will naturally come down.

Realistically, we’re looking at a 20-year timeline. Before AI-driven manufacturing robots can become available to smaller businesses, they’ll need new infrastructure, which will be painful and require investment in tooling, processes, and systems. While some are nervous about AI, it will ultimately play a key role in lowering manufacturing costs and making American manufacturing affordable for small to medium businesses.

On the Horizon

New AI-enhanced ERP programs (enterprise resource planning) hold the promise of providing significantly increased predictive tools to make monitoring, control, and quality processes more robust. As companies grow, ERP becomes more important for mining and analyzing data from increasingly complex integrated systems.

The current problem is the expense. ERP programs are built on a subscription model, and it easily costs six figures. To fund an ERP for a company the size of HP and $50K to $100K per year for a 30–100-person operation, not including training costs, making it a huge investment. They have an extensive learning curve, so training your entire team is a difficult undertaking.

A good ERP tool helps track and control almost every aspect of a manufacturing operation. Such tools help you collect data to give you clear cut KPI’s (key performance indicators). Thoughtful mining of this data can make the difference between being competitive or not.

We can justify making such investments using a historical perspective. For example, during WWII, Germany was essentially bombed to rubble. As they worked to restore their industrial sector, they made investment in the latest tools and technology, and it’s one reason it’s a powerhouse now. The new infrastructure and use of latest technologies positioned it for future growth following the devastating economic blow. That is what the United States needs to do now: innovate and retool for the future.

Machines do heavy lifting, but the ERP programs look at higher level issues to help businesses make informed decisions about the optimal use of the machines. ERP helps you implement strategy and create strategies to streamline processes and lower manufacturing costs. In the long run, this will be a key factor in making American manufacturing a viable industry.

Overcoming Corporate Culture Hurdles

In the beginning of a book written by Dave Packard, he mentioned that the first draft was full of typos. He thanked those helping for correcting them. And then he wrote that any remaining errors were his mistakes, and he was responsible for them. This attitude, shown from the very top of company leadership, is one reason why HP grew as big as they were. Everyone understood that quality wasn’t just for your work. It was also a statement about you.2

But attitudes have changed. The investment community has become focused on shareholder value rather than on establishing and maintaining a company culture of professional and personal quality. CEOs are now paid millions of dollars to deliver profits and measured by short-term gains. It has been demonstrated over and over that when profits take focus over quality, it becomes a race to the bottom.

Boeing, for example, has been all over the news lately for serious quality issues in new planes. They moved the corporate offices to Chicago, far from the manufacturing plant. Former Boeing engineers told Bloomberg that relentless cost-cutting took precedence over safety concerns. The recent failures are related to a company culture obsessed with speed, cost, and, above all, shareholder value. That is not what Boeing used to be based on. That was not the culture that built the company.

Many corporations are all about shareholder value today and only really give lip service to their culture, people, or brand quality. This shift in priorities is largely the fault of investors. They prefer businesses that have a five-year exit plan. Business owners aren’t motivated to build strategic relationships and grow a company over the long haul. Such companies often take on long-term debt, which ultimately leads to the chase for higher profits.

Bringing manufacturing home long term and making these companies globally competitive will require corporate management to take the long view and build companies that last. Such will require investing in people on the understanding that the name on the building will grow to mean something because of their team.

Today, inflation is global, and it drives up costs at every step of the manufacturing process, from raw materials to retail delivery. Cost of labor, quality control issues, logistics, and political threats add risk and expense to offshoring.

Dave Packard and Bill Hewlett invested in their team and built their company to last. It only took Wall Street a short time to break HP’s culture in pursuit of corporate profits. American businesses have a golden opportunity to change and take on the model of the HP Way. Not by honoring the CEOs that seek short-term profits but by building companies to last.

It can’t happen fast enough.

References

  1. J. Lauer, “The Rise and Fall of Eastman Kodak,” The Atlantic, September 2015.
  2. D. Packard, The HP Way: How Bill Hewlett and I Built Our Company, 2006: Collins Business Essentials.

This article was written by Robert Kay, founder of Elite Engineering, a firm that has solved some of the most complex challenges for clients ranging from individual inventors all the way up to giants like HP, Kodak, and NASA. For more information, contact him at This email address is being protected from spambots. You need JavaScript enabled to view it. or visit here .