A recent article in the Engineering and Technology Magazine of the Institute of Engineering and Technology was devoted to discussing the cost of failure. Of particular relevance was a discussion on Wedgewood, a British pottery firm that failed early this year. The article cites the companies manufacturing and supply chain director discussing what made them move production to China. The opening statement was 'we didn't know what we were talking about.' The 2003 decision to move production to China was based on gut feel. All Wedgwood management knew was that the free-on-board cost of a china made plate was US$0.70 cents compared to USD $3.00 (at today’s exchange rate). However the cost did not include the costs for goods inward inspection, storage and handling, extra inventory incurred on the 43 day voyage from China to the UK , handling at ports, working capital, administrative costs, duties, quotas and the additional bureaucracy required to mange the process. Chinas yield was two-thirds the UK production plants yield of 96%. The UK was far more responsive and could put right incomplete orders or wrong quantities in hours, but because of the extended supply chain the cost estimate to put things right cost the company USD $100,000 a year. The result - the cost of production doubled within 6 months of starting production in China. On 5th January 2009 the company was placed into receivership. Since then parts of the company has been acquired and a plan put in place to move the company back to profitability.
What is important to learn from this story is the need to consider the entire supply chain, all the processes involved in making that chain work, and the possible exceptions that might arise. I have heard many other stories of companies who have purely looked at the cost of production when moving manufacturing to Asia but have not considered the total landed costs - and then there is the issue of responsiveness, as in the Wedgwood example - how fast can an order be rectified. If your supply chain stretches around the world - it is not something that can be rectified in a few hours...With these decisions requiring input the use of computer simulation models is a good way to start. The whole process of building the model requires that the supply chain be mapped and will give valuable insight into all the various steps of the process. The opportunity to then try various 'what-if' scenarios can also give valuable insight into where to place manufacturing plants....Obviously the simulation will give you an idea for decision making, when you set up the plant there will be more issues to consider as 'no plan survives contact with reality' but at least there will be some basis for the decision that were made and that you know what you are talking about.