Reshoring is on the rise; how smart is your factory?

Manufacturing investments are viable it they provide a productivity boost over Asia’s labor cost advantage

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Disruption has become a constant fixture for anyone in business leadership, particularly those in manufacturing. Supply chain kinks, global inflation, rising geopolitical tension, chip shortages, tight labor conditions – it all adds up to a giant dose of uncertainty.

One major strategy under wide consideration is reshoring. In its most recent report, the Reshoring Initiative estimated that reshoring and foreign direct investment hit an all-time high in the third quarter of 2022. Hundreds of thousands of newly created U.S. jobs will likely be available due to decisions made over the year.

Other research indicates that more than 80% of businesses are likely to reshore, as employing a build-where-we-sell philosophy is a key way to address instability. We estimate that more than $85 billion in investment was committed to North American manufacturing in 2022.

As executives install new North American capacity, they must subject these investments to an I.Q. test. Ask yourself two questions: How smart is our factory? How smart can our factory become?

While money should not be spent on technology for technology’s sake, each dollar committed should be analyzed through the lens of principles that have been popularized by Manufacturing 4.0 and Industry 4.0 strategies.

When it comes to reshoring, manufacturing investments can be financially viable only if they include a plan to make North American workers three-to-five times as productive as workers located in Asia. This is due to the sustained labor cost advantage Asia enjoys – an advantage that has been enhanced by a strong U.S. dollar. A smart factory helps level the playing field, providing a practical way to combine people, processes, and technology to achieve desired productivity levels.

Most practitioners define smart factory either through the lens of software technologies or intelligent hardware. Software includes AI, machine learning, computer vision, and systems that coordinate manufacturing execution (MES) and warehouse management (WMS). Hardware can include the Internet of Things, robotics, automation, and programmable logic controllers.

In our experience, no matter the scale and sophistication of the tools that enable a smart factory, they need to be deployed with a profit-and-loss (P&L) centric approach. Pragmatism is required for success on the plant floor.

Manufacturing is capital-intensive, with a low tolerance for inefficiency. Return on assets (RoA) is one of the key measures for capital-intensive manufacturing companies. For those with existing North American manufacturing facilities, an effective smart factory approach can improve RoA from a mediocre 2% to a respectable 6-8% range within a year. When done right, we’ve seen companies improve RoA to an industry-leading 10-12% long-term.

Meanwhile, for companies that are reshoring, a smart factory approach can preserve RoA even after moving to locations with higher-cost assets.

Sensible Implementation

We have seen several examples of relatively efficient ways to employ next-generation technology in a manufacturing setting that represents practical implementation rather than a whiz-bang approach. For instance:

  • Computer vision installed at a food manufacturer enabled the company to “hack” into video feeds from security cameras to reduce waste by 25%
  • An IOT-enabled bread counting device—costing just $200—led to a 10% improvement in production output.
  • Natural language processing (NLP) enabled text alerts with actionable insights to line supervisors, reducing overtime by 50%.
  • Powerless energy sensors, costing $150, reduced an operation’s carbon footprint by roughly two metric tons.

Practical, targeted focus; immediate, comprehensive impact

A practical smart factory approach delivers P&L impact with nearly real-time speed. Success begins with identifying controllable cost and profit drivers across P&L categories, including fixed costs, materials, labor, and utilities.

For example, a food manufacturer identified scrap, over-weight, overtime, and energy usage as controllable cost drivers. The company set out to deploy digital tools (both hardware and software) that directly addressed these cost drivers, turning an unprofitable plant into a profitable one within six months.

Under a traditional approach, it takes 12 to 18 months to deploy IoT and other digital tools before generating output and results. That can be reduced to two-to-three months using pilot plants and reduced to 12 months for a network-wide rollout.

Misplaced priorities are also costly. Focus on Overall Equipment Effectiveness (OEE) and “cool” visualization only address 20% of factory cost. Relentless focus on cost drivers—including labor, utilities, material, and scrap—addresses 100% of factory costs.

Importantly, the better approach values flexibility, resourcefulness, and experience.

The traditional smart factory approach relies on a monolithic digital platform that replaces existing plant assets with new investments, but it lacks practical considerations. A flexible smart factory platform, on the other hand, leverages existing plant assets—such as the security cameras mentioned above—to build practical, implementable solutions.

Also, traditional smart factory strategies are implemented by a technologist with minimal knowledge of manufacturing or practical business experience. Instead, experienced professionals with significant manufacturing and digital expertise are needed to interpret the results and guide implementable recommendations.

Key tenants of a smart factory program

 

Start this project with people. Secure a spokesperson for operations who is passionate and really understands how operations run. This person can serve as a bridge connecting management, the human workforce, and the technology being employed.

Also, look past shiny objects. Strike a delicate balance between enjoying the power of innovation and passion that comes with startups, and the ballast that comes with risk management and mitigation.

You should also go beyond the business case. Hard-core planning details and acumen should be mixed with your own gut feeling about how adequate the technology is to support a commitment to scale with confidence.

Finally, prepare for adversity. Be patient and communicate with resisters and nay-sayers to bring them along. This is done by truly sharing what the technology set will do for operations, including the people.

Manufacturing has never followed a one-size-fits-all model, and reshoring takes on several different forms. It’s wise to take a broad and objective look at how the smart factory approach can be implemented for near-term improvements and long-term viability. Regardless of whether you’re looking to improve existing plants or bring manufacturing back to the U.S., smart factory principles can be applied to increase RoA.

It’s been 110 years since Henry Ford began operating a moving assembly line. What’s often overlooked is the fact that his first iteration relied on old-fashioned mechanisms—ropes—to introduce an entirely new concept. Only over time did his car company work together to refine and upgrade the assembly line’s tooling and, in turn, streamline the process.

A century later, we need to remember that a smart factory strategy is only as effective as the underlying implementation plan. Trying to do too much at once can lead to wasted investment and leave a bad taste in everyone’s mouth. Waiting for the optimal moment to initiate such a program, meanwhile, will lead to missed opportunities.

About the authors

Abhinav Agrawal is a partner and managing director of AlixPartners. He has more than 20 years of experience delivering large scale digitally enabled business transformation for clients in consumer products industry. Agrawal can be reached at [email protected].

Rob Sterner is a partner and managing director of AlixPartners. He leads whole-company improvement and turnaround programs that focus on both growth and cost reduction. He can be reached at [email protected].

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