Onshoring: Are we ready for the return of manufacturing?

With increases in transport costs, rising wages in China and a more competitive exchange rate, the prognosis is good for the return of manufacturing to the UK, but the question remains whether we have sufficient skilled labour to take advantage of the opportunity.

Despite unemployment levels of around 8% (2.5 million people) in the first half of 2012, apprenticeship places remain unfilled and the level of skilled workers in many manufacturing facilities is still well below that required.  There is a particular demand for good quality engineers.  Dutton Engineering in Bedfordshire had two apprenticeship positions open for over two years, which they were unable to fill until they pro-actively developed a relationship with a nearby school. Andrew Read the company’s Managing Director, said “We have had to go to extraordinary measures simply to fill these positions, which is remarkable given the current market and scarcity of good, well paid positions.”

Manufacturing production in the UK fell in May 2012 by 1.7% over last year according to the Office of National Statistics, but there are strong indicators that this tide will turn with companies returning to, or expanding production in, the UK.  However, the skills shortage could seriously disrupt any potential growth in the sector and growth will only be achieved if companies have the right people in the right jobs.

Maintenance is an area of particular concern.  Derek Hill of Advanced Technology Services (“ATS”), a provider of maintenance services to companies such as Caterpillar and Eaton commented, “We have an ageing population, and retiring baby boomers will be leaving en masse over the coming years. Unfortunately many of our younger workers lack the skills for the positions which needs to be rectified, but more importantly we need to work on the perception of manufacturing and in particular engineering and maintenance as a positive and fulfilling career path.”

The ATS approach to addressing the skills shortage for their customers is to create a compelling opportunity for career progression and training. Hill noted that “By  transforming perceptions of traditional maintenance roles we are attracting the right people from outside the sector”.  In the US and indeed more recently in the UK, ATS have focused on ex-services personnel as they have the mix of competencies, the drive and project management skills which suit the available roles. They have been successful in this approach and with the imminent redundancy of a large number of services personnel in the UK over the coming years, there is potentially a pool of very strong applicants.

The drive to move business back to the UK is not just about labour costs, companies such as BT and Santander have returned their call centres to the UK – because ultimately the customer demanded it. Some claim that the decision to onshore was not because of falling customer standards but because there were now more competitive and cost effective solutions in the UK.

In manufacturing circles, Toyota, the benchmark for world class manufacturing produce their new hybrid engine at the UK plant in Deeside and then ship this back to Japan for installation into the vehicles.

This says production should not only be where it is most cost effective but also where you can guarantee the standard of production or delivery required by your customer.

In 2000, multinationals cut their labour costs by 77% using factories in China instead of the UK. But, as most manufacturers will attest, salaries are only a small factor in the overall cost of production.  The increasing cost of raw materials, transportation and the complexity of supply chains are also major considerations.

It has taken harsh lessons in reality to educate companies that when considering offshoring the fully loaded cost, not just the unit cost, has to be identified. Aside from the increasing costs already mentioned there have always been “hidden” costs associated with offshoring that, when considered, paint a slightly different picture.

For instance, it is almost always necessary to engage the services of a local agent to act as an inter-face with the supplier, so there’s an added cost. There are long lead times, and minimum order quantities which necessitate holding more stock, affecting cash flow and increasing the danger of obsolescence of stock. There is the added cost, and inconvenience, of traveling to and from the supplier as is necessary in any customer/supplier relationship. As well as the difficulty in communicating with the supplier due to language and time-zone differences.

As David Kilroy of Insights-Training points out, “I remember one small company in West Sussex which transferred its raw material source to China. They hadn’t fully understood the added costs associated with what appeared to be a very attractive unit cost. Because of long lead times and minimum order quantities they actually had to lease another unit to hold the stock. This, along with tying money up in the stock, not only eroded the unit cost benefits but almost drove them out of business.

He added “Another, larger, company I visited in East Sussex, also had a very painful experience. They received a very large shipment of parts from their offshore supplier. All of which had a quality defect.

The supplier accepted full responsibility and agreed to replace the shipment at no cost. No problem there then, except the supplier said it would take 2-3 months to replace the shipment, leaving the customer with no stock. Transportation costs, distance and other commitments meant they couldn’t, or wouldn’t, commit to drip-feeding the replacement parts, as might be possible with a local supplier, leaving the company unable to fulfil orders for their customers”.

The US has seen a shift to onshoring already with companies such as Caterpillar opting to relocate their new plants in the US. The driving force for this was simply that increased shipping costs, supply chain complexity and inconsistent quality meant that the offshore plants were just not competitive.

There is also the question of protecting products from being copied and the market being flooded with fakes. Anyone who plays golf will tell you how many fake golf clubs (a multi-million pound industry in itself) are out there after many U.S. club manufacturers switched their production to places like China. The double whammy here is some of the copies, having been made to the same specification, are of comparable quality and go unnoticed by the end user, whilst others are of poor quality, damaging the company image and potentially losing future customers. Either way the industry is haemorrhaging millions of pounds.   (It’s true but is it relevant?)

Abstract and complex monetary policy tends to hog the spotlight when it comes to ways of boosting employment. Inflation remains muted but it’s difficult to see what more easing can do to really dent unemployment. Some economists rightly argue that focused measures to retool workers in potential growth industries would go much further.

Manufacturing is quite rightly back in the spotlight, but it needs a concerted investment in training, and a ‘make-over’ to ensure that it attracts the right candidates, so that it can once again serve as the catalyst for prosperity. The sector spurs demand for everything from raw materials and intermediate components to software and services of all kinds. Studies and statistics show that manufacturing significantly impacts the widespread creation of jobs-and wealth.

So why is manufacturing facing such a remarkable problem? A confluence of factors is at work. First, there is no doubt that manufacturing has an image problem, especially among younger people. Unfortunately, the old stereotypes of backbreaking labour and grimy working conditions persist. Ask people today what they think of manufacturing, and most will probably describe dirty, dangerous work that requires little thinking or skill and offers minimal opportunity for personal growth or career advancement. This is totally inaccurate.

Today’s manufacturing jobs are “cool” and appealing. Workers are now required to be experts and operate the most sophisticated equipment in the world. They can cut steel with lasers, water jets and plasma cutters and can program robots to paint, package and palletize products. Computer programming and other high-tech skills are needed, which dovetails precisely with what younger people love these days; these jobs can be more fun and ultimately more satisfying than many service-sector jobs.

Reinforcing this mind-set is a general disinterest in the manual arts. Adults now avoid major household repairs, opting to hire a handyman, enlist a relative or contact a property manager.  Young people essentially have no role models when it comes to repairing things themselves or taking pride in building something useful. It’s no wonder that so many teens dismiss the idea of a career in manufacturing.

To be fair, the government has made steps to address this with campaigns such as ‘See Inside Manufacturing’ and ‘Make It in Great Britain’ but much more needs to be done to ensure we capitalise on the opportunity presented and ensure the multinationals see the UK as the most viable option in terms of quality, cost and delivery for their manufacturing plants.

Written by Ailsa Kaye, Onsite Insights