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Regional Manufacturing: From Philosophy to Practice

Moving supply chains closer to end customers for cost savings and customer responsiveness is one of Craig Carlson's passionate philosophies.

Though many other supply-chain managers have regional-manufacturing philosophies, they've candidly admitted that they 1) fear broaching to their executives alternatives to China, or 2) have achieved little movement of their company's overall supply chains.

Carlson has been the director commodity management at Outerwall (formerly Coinstar) for the past three years. While Outerwall has always used North American contract manufacturers to build its coin counting kiosks for predominantly North American customers, eight years ago the company started sourcing labor-intensive sheet metal sub-assemblies, cables, and plastics fromChina to take advantage of lower labor costs there. Today, Outerwall's supply chain for these parts is dominantly in North America. From this regional-manufacturing strategy, the company reduced lead times without increasing costs.

Craig Carlson, Outerwall

Craig Carlson, Outerwall

I decided to sit down with Carlson to find out how Outerwall accomplished this successful move.

TFI's Pamela J. Gordon:  You started at Outerwall, headquartered in Bellevue, Washington, in 2012. How much of the labor-intensive supply chain has Outerwall since brought back to North America for North American customers?

Outerwall's Craig Carlson: We've moved approximately 60% (sheet metal, cables, and thermo-formed plastics so far) and are in the process of awarding another wave or parts here in 2015.

For example, in mid-2012 we began to evaluate 10 sheet metal suppliers here on the West Coast, then narrowed the list to five. We then initiated a request for quotation (RFQ) for the sheet-metal parts we needed, and awarded the business based on a weighted matrix of cost, lead-time, quality-audit results, the level of sophistication and compliance with the suppliers' own Quality Management System, perceived management strength, and environmental issues. We chose one supplier and were surprised to find our winning supplier to be less expensive than China on four of the first five high-labor content parts.

In Asia, labor costs have continued to climb while North American suppliers have gotten more competitive, and of course the lead times are much shorter due largely to transportation.

Gordon:  What advice would you give to peers who likewise want to position supply chains close to end customers?

 Carlson: Always be open to thinking differently and focus on what makes the most sense to you in each specific situation. Prove what your intuition is telling you by running the numbers, first, then set up a meeting with your direct manager to try to sell the idea.

This process can be initiated with an internal white paper, spreadsheet, or slide deck. However, if your proposal conflicts with the existing direction, start by lobbying your direct manager (and perhaps one level up) behind closed doors to test the waters. If you get your immediate managers in your corner, they will be there to help you sell your idea up the decision-making ladder.

One white paper I wrote received a positive response from my manager, who requested more details and a PowerPoint presentation. I included financials and graphs and made the case compelling enough that I was granted an audience with my senior director and corporate vice president, to whom I made a three-hour presentation one evening after hours. Though I didn't change opinions that evening, my presentation laid the groundwork for future proposals. It's important, as well as respectful, to make such proposals behind closed doors and win the favor of your immediate manager, first, and then his/her manager. Even if the decision made is not to follow your recommendation, still you will be seen as a thinker and an initiator whose ideas warrant future consideration.

One key that has helped me in the past is to collaborate with a trusted and respected analyst in the finance department, who tests my numbers, or better yet, runs the numbers him/herself.

Gordon:  What are some of the financial points you proved?

Carlson: Costs are now much more competitive here in the USA than they were 5-10 years ago, while lead-time and quality are much easier to manage. Further, China's and Mexico's labor rates are now much closer than they were in the early 2000s.

The financial benefits I cited were on the revenue side as well. As Yogi Berra (New York Yankees) is quoted as saying, “It's tough to make predictions, especially about the future.” The forecast is likely going to be wrong and bluebird orders are a real blessing if you have a supply chain that is agile and can respond quickly.

Gordon:  Your approach to responding well to unforecast customer demand is to compress the supply chain as much as possible. How do you coach your team in doing so?

Carlson: Our leadership was already teaching Lean principles to our greater organization, making things much easier here. I developed and taught a course on Lean Manufacturing and supply chain titled “Manufacturing 475,” and gave brown-bag talks on the elimination of non-value-added process steps for rapid response to demand.

I regularly tell our supply-chain professionals that “the best supply chain in the world is right here at Outerwall.” Though we know we've not achieved perfection, our goal is having our internal and external customers tell us that we're the best; I believe that saying it often enough creates a self-fulfilling prophecy.

Gordon:  What else is needed to achieve competitive, local supply chains?

Carlson: I believe that with any kind of change you must be able to “sell the vision.” President Kennedy cast a vision to put a man on the moon within a decade; it was so compelling that it energized the nation. I have a passionate vision for local, customer-responsive supply chains that can pivot immediately without carrying much inventory.

To do this you must get rid of the safety nets, but without being reckless. In other words, strive to eliminate redundancy, including test and inspection, but first build a statistical case for it. Make the operators themselves responsible for quality and the last line of defense for the customers.

Gordon:  Finally, how do you get the best from the local suppliers?

Carlson: Don't be shy about engaging your local suppliers and telling them exactly what you desire of them, even though they may not be eager to hear about your need for greater cost competitiveness and responsiveness.

Drive your suppliers to reduce their minimum order quantities by addressing set-up and changeover times. In exchange, strive to make these cooperative suppliers captive vendors who will be rewarded with 100% of your business, within reason. Develop a Certified Supplier Program. For example, if a supplier can deliver on time (not early) and without a single lot rejection for one year, eliminate your own incoming inspection. Have suppliers submit a Certificate of Conformance guaranteeing that every part meets the spec, that it is the exact quantity ordered, and that these parts can go directly from the suppliers' trucks to point of use on the production line.

1 comment on “Regional Manufacturing: From Philosophy to Practice

  1. apek
    March 24, 2015

    Thank You. As long as local customers become a priority, not only will manufacturing make a come back to US but it would also enable that consumer purchasing power would grow. Thank You for sharing and I agree with localized supply chains.

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