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Will manufacturing move out of China?

Written by bfsmanu on January 19, 2022. Posted in General.

Companies are leaving China in droves. A Gartner survey of supply chain leaders showed that 33% have plans to move at least a portion of their manufacturing out of China and away from Chinese companies in favor of other countries by 2023.

The list of companies rethinking their subcontracting strategy includes everyone from Apple and Dell to the toymaker Hasbro.

The WTO

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to ensure that trade flows as smoothly, predictably, and freely as possible.

Chinese Manufacturing

When China joined the World Trade Organization (WTO) in 2001, it was a minor player on the global manufacturing stage. But after years of reforming its economy around being the world’s factory for global companies, its formal entrance to the WTO helped its production capacity soar.

In the years since it has become the low labor costs global stage. So why are American companies and multinational companies moving production out of China’s manufacturing hub?

Supply Chains

A supply chain disruption is a breakdown in the manufacturing flow of goods and their delivery to customers.

Supply Chains and the Pandemic

The pandemic has disrupted nearly every aspect of the global supply chain. From raw materials to manufacturing facilities, Chinese exports have been greatly affected by more than just the US/China trade war.

Scarcity

Scarcity, driven by the supply chain slow down has caused the prices of many things to go higher. The world’s electronics factory in places like China and those utilizing the South China Sea was hit hard by the spread of coronavirus cases in the same period.

Many factories were shut down by the Chinese government or were forced to reduce output at production facilities. In response, shipping companies cut their schedules in anticipation of a drop in the value chain for goods moving out of China and around the world.

Trade War

A trade war is when a nation imposes tariffs or quotas on imports and foreign countries retaliate with similar forms of trade protectionism. As it escalates, a trade war reduces international trade.

Why Trade Wars are started

A trade war starts when a nation attempts to protect its domestic industry and create jobs. Tariffs are can give a competitive advantage to domestic producers of a product by creating lower prices.

As a result, they would receive more orders from local customers. As their businesses grow, they would add jobs.

But in the long run, a trade war can cost jobs. It depresses economic growth for all countries involved. It also triggers inflation when tariffs increase the prices of imports.

How the Trade War has effected China

China’s manufacturing sector slowed for the sixth month in a row last October and experienced weaker consumer demand activity in the world’s second-largest economy.

The slump mirrored a drop in retail sales growth back to a near 16-year trough and the weakest growth in investment in new plant and machinery on record.

Analysts said uncertainty about a possible pact between Beijing and Washington over a “first stage” trade deal dampened business and consumer confidence.

China was hit by a slowdown in GDP growth to 6% in the third quarter, from 6.2% in the second quarter, its lowest level in 30 years. Analysts said the latest data pointed to a further slowdown in growth in the fourth quarter.

China’s steel output fell to a seven-month low in October, while the cement production contracted for the first time in more than a year.

Global Supply Chain Leaders

Global supply chains are networks that can span across multiple continents and countries for the purpose of sourcing and supplying goods and services, such as electronics manufacturing. Global supply chains involve the flow of information, processes, and resources across the globe.

Global vs Local Supply Chain

A global supply chain utilises low-cost country sourcing and refers to the procurement of products and services from countries with lower labor rates and reduced production costs than that of the home country.

A global supply chain will usually flow from your own organisation in your home country as a buyer across your supplier tiers; it is these suppliers who will be located in other areas of the globe.

“Home Grown” Suppliers

A local supply chain will look to optimize suppliers who are regional to your own organization, in some instances organizations will look to leverage “homegrown” supply routes, manufacturing imports so that all suppliers feeding into your supply chain will be located within the country in which your organization is based.

This way, the supply chain can be even closer in to your organization and may even be within the same state/city/district, which often gives clearer visibility of the whole supply chain from raw material through to the consumer.

However, there are both positives and negatives with global supply chains and the total landed cost or total cost of ownership should always be factored into the true costs.

What Are the Disadvantages of Globally Sourced Goods?

Longer lead times – While the production time can be quite quick the lead time can often be much longer as the goods will require shipping which can add to the lad time, this means that forward planning can be a challenge.
Reputational risks – Risk exposure to modern slavery, brand and financial risk exposure can all be increased.
Fluctuations in Exchange rates – Global markets are more susceptible to regional influences that can impact trading markets.
Challenges in communication – There needs to be careful consideration of terminology and the type of communication methods used to interface with a global supplier to ensure information is interpreted correctly.
Increased risk exposure based on STEEPLED factors – As the supply chain spans over multiple countries there are increased risks of unrest in other countries having a direct impact on your supply chain activities.
Loss of control – Due to the distance in the working relationship it can be difficult to manage communications and oversee technical aspects of the production process. Quality issues can also be complex to manage.

For the reasons outlined above, a significant number of companies are leaving China as their manufacturing base in favor of more local industries.

Manufacturing in Mexico

Location

Especially for U.S. companies, Mexico’s location offers huge advantages. It’s easy for managers at U.S. companies to visit facilities in Mexico on a regular basis—you could even get there and back in a day, unlike spending at least half a day just to get to China. Travel to Mexico doesn’t require as much advance planning.

Your Mexican facility will likely be in your time zone, or no more than three hours ahead or behind, so communication will be simpler as well.

Quality

Mexico is now known for having a diverse, highly-skilled workforce—many of whom are at least partly bilingual. Mexico’s labor force is also relatively young, while China’s is aging and declining due to its family planning policies.

When quality issues occur, it’s relatively easy to address them when production is in Mexico. Products can be returned to be repaired or replaced, and managers can visit the plant to fix the problem. Quality issues in China are more challenging to fix.

Labor Costs

For years, wages in China were much lower than Mexico. Now, Mexico’s manufacturing labor costs are 20% lower than in China. When adjusted for worker productivity, the gap is even wider. Mexico also offers steadier wages, so companies can more easily predict labor costs. Exchange rates between the dollar and the yuan and peso also contribute to this change.

Trade Agreements

Mexico has 12 multilateral trade agreements that provide preferential trade access to 44 countries, making it one of the most open countries in the world for international trade. USMCA in particular has helped transform Mexico’s economy into one driven by manufacturing and exporting.

While Mexico has a strong trade relationship with the U.S., as evidenced by the USMCA, The China-U.S. relationship suffers from battles over import duties and tariffs. Additionally, there is an ongoing geopolitical struggle between the U.S. and China that often impacts businesses operating in both countries.

Overhead & Transportation Costs

Overhead and transportation costs are much lower in Mexico than they are in China. When you manufacture in Mexico instead of China, you can expect to save approximately:

4% in energy costs
60% in natural gas costs
40% in lease rates

Intellectual Property

Mexico has a strong reputation for protecting intellectual property rights. By contrast, China frequently has problems with counterfeits, and courts are slow to enforce or recognize intellectual property rights.

BF&S Manufacturing

Founded in 1988, BF&S has decades of experience manufacturing in Mexico, with over 500 employees in the state of Sonora. Our warehousing and corporate offices are located in Douglas and we are incorporated in the state of Arizona.

The BF&S executive team was born and raised in the United States and runs our organization with U.S management standards and practices.

Learn more by continuing to explore our website.

When Should Your Company Develop Its Own Software?

Written by bfsmanu on December 22, 2021. Posted in General.

Every company needs and uses software, and some is a significant driver of business success. But as small companies grow to midsize, software performance gaps can emerge. Finding new software solutions can fix problems and inefficiencies and help teams develop innovative products and services. But midsize company CEOs often face a difficult choice: whether to upgrade through a vendor or develop (a.k.a. “roll”) their own code.

It’s widely understood that software upgrades are always expensive and often disruptive. Sometimes they fail completely, or they don’t deliver on their original promise. That means little or no return on money spent. But sometimes, there’s simply no off-the-shelf software available to address a business’s unique problem.

For small companies, it’s usually easier (and almost always cheaper) to do manual workarounds when their operating software isn’t up to the task. But midsize companies can lose a great deal of money and stunt their growth due to the inefficiencies that inevitably spring from such workarounds. And those tortured manual processes can prevent companies from seizing opportunities in a timely manner. For those companies, custom coding is a viable option. (Large businesses with deep pockets can build software development teams and often have the talent on board to do so.)

Most midsize companies have a “super user” who’s good at helping everyone with the capabilities already built into their software (like report writers, dashboards, etc.). And most modern enterprise resource planning (ERP) software has layers that allow for customization — often a layer where value-added resellers (VARs) can make changes and a customer layer for customer customizations. If a midsize company can get what it needs from that, fantastic. But what if it can’t?

Many midsize companies get stuck trying to decide whether to buy new software or attempt to write their own code, even if that just means connecting disparate systems. Others try to outsource the problem to a software firm. While outsourcing code creation may be part of a solution, doing so successfully requires rigorous project management — a capability not all midsize businesses have.

Meanwhile, the clock is always ticking. Efficiencies that could be realized with software aren’t retrieved, eating away at margins. Market opportunities are lost to competitors. How can midsize business leaders determine when it makes sense to build their own software?

When to Roll Your Own Code

It’s inefficient to develop custom programs for core business functions like accounting, payroll, sales tax, inventory, and customer relationship management (CRM), and so many options are readily available. But if there’s no software that does what you need it to do, you may have no choice but to roll your own, especially if there’s a high-value opportunity to seize or a significant efficiency to gain. (Creating your own code is only worthwhile if there’s a big payoff; without a strong ROI, forget about it.)

For example, in 2007, BF&S Manufacturing was gaining steam as a contract manufacturer for complex, low-volume — but critical — components for aerospace, military, medical, and industrial verticals. Its customers wanted to oversee the work, but BF&S was based in Mexico, and many of its customers didn’t want to invest the time and money to travel and stay there.

BF&S depended on a close relationship with its customers, often turning to their engineers to solve production problems. But distance and a border were making that ever more difficult. Screen-sharing and cameras alone weren’t going to be enough for its customers, and BF&S feared losing them to more closely based manufacturers, even if those businesses charged more. BF&S needed to be able to port valuable production data from its core ERP system into a format its customers could use.

BF&S CEO Carlos Fernandez looked around but couldn’t find a solution to buy. Instead, he says, “We embarked on a software program that would provide 24/7 real-time data” on the company’s product builds. It started with their “computer guy,” as Fernandez calls him, just out of college, building a tool to track raw materials, work-in-progress, and finished goods inventories and provide visibility internally and externally.

It was completed and first used in 2010. Customers loved it. Fernandez began to grow the software development team in Mexico, supporting four facilities in the state of Sonora with a combined headcount of 500. Customers could now see video of the workstations, their products’ progress at each step, BF&S’s raw and finished goods inventories, who was working on their job, and all the product stories and specs.

This custom coding required a keen understanding of both the company’s business and its customers’ needs. Originally headed by Fernandez, the team of engineers and operations leaders now plan and manage the ongoing support and development of the tool.

Today, although Fernandez won’t claim that his company’s home-built code is a huge competitive differentiator, he believes it gives his customers want they want and what he couldn’t provide through off-the-shelf software: transparency into and a measure of control over the production of their products.

The Journey and the Costs

Rolling your own code is neither simple nor cheap. Software engineers are highly paid. In the United States, that means six-figure salaries. The costs of finding and hiring engineers often involves search firms, which charge 15% to 30% of the first year’s salary, and for the past several years, even they’ve been struggling to find good candidates. On top of sourcing costs, you must interview and assess candidates for technical skills, train and onboard new hires, and provide a digital environment for development and testing.

And then you have to manage the code development tasks, making sure they’re productive. As the development department surpasses five or six engineers, you’ll need a DevOps executive to supervise it — if programmers are undermanaged, days and weeks can be lost while productivity plummets.

And you can’t just hire developers and managers and expect the magic to happen. Engineers make what the business tells them to make. They thrive on clarity. So, you’re going to need to spend time getting your arms around your business’s opportunities and needs to be able to describe the features, functions, and options you want. That software roadmap must be completed before your engineers start coding. Fail to do all this well and on time, and you’ll have very expensive talent sitting on their hands, likely looking for other places to work.

Finally, when you develop custom code, you need to maintain it. Software breaks down all the time. Hackers continually find new attack vectors. New needs pop up and users demand modifications. Even programming languages age, so every five to 10 years, software may need to be rewritten. The costs keep coming.

However, while custom coding is challenging, it can be a pivotal factor and well worth the trouble for some companies that are innovating solutions for their customers.

Corefact (a Mastering Midsized client) is a full-service marketing services provider for the real estate and mortgage industries. In 2005, the company came up with a fresh idea. If a realtor could send a postcard to a potential client with a unique URL that would take the client to a website with their own home at its center, that could be hugely appealing, and a possible game-changer. Corefact’s customers, realtors, were excited, not only by the potential appeal to their clients, but also by all the data this kind of engagement would supply them with.

Corefact couldn’t buy software to do this — it was new. Corefact’s founder and CEO Chris Burnley had always been a technologist. Prior to Corefact, he started several technology-driven companies. Thanks to this technological competency, the company found a way to print variable data — unique URLs — on postcards and then move them on to web servers that would wait for a homeowner to type in the URL, after which a new, unique website would be created instantly. By 2006, the software was launched with a single engineer.

Today the engineering team has grown to 10, located in the U.S. and abroad. They’ve created custom code that’s not only customer facing, but that also efficiently brings together thousands of daily orders through order entry, graphics, and pre-press and automates the efficient flow of work onto presses and through finishing.

Burnley says, “Our original concept put us on a fast ramp for growth, but our ability to innovate with technology continues to propel us. Of course, the investment in engineers is huge and ongoing, but the list of opportunities is long.”

But they don’t build every piece of software they use. When it came to upgrading their ERP, they chose a standard product by Netsuite, into which they’re connecting their self-made order-handling systems. Similarly, they’ve recently dropped a self-made CRM in favor of Salesforce, keeping their development team focused on creating software they can’t buy.

The Three Competencies You Need to Roll Your Own

The examples I’ve discussed require different amounts of the following three competencies, depending on how complex your custom code requirements are:

Translating business needs into software projects.

Identifying business needs — and their solutions — is a necessarily iterative process, keeping in mind the limitations of existing software, as well as your resources and available data. This is neither software development nor business management; it’s a form of engineering where one leg stands in the business and the other in a thorough understanding of how your current software systems work.

This competency could be held by one executive in a smaller midsize company, or by a small team as the organization grows. What goes in is a problem or opportunity, what comes out is a series of detailed steps to create and maintain code: exactly what data is to be used and what logic or processes should be used to produce a solution. Without all these steps, endeavoring to create custom code makes no sense.

Code development.

Depending on the circumstances, a midsize business could have one programmer or a full engineering department. For example, at my prior company, we had Dave, a young warehouse employee who coded as a hobby, come upstairs now and then for small coding projects. For bigger opportunities, code development can grow into a series of engineering teams with different skills and focuses working in a complete DevOps department, led by a VP or chief technology officer.

Software operations.

The operations side of managing custom applications is expensive — you need to maintain the health of the custom code and make sure your processes, people, and tools are kept up to date. Elements of operations include user support/help desks, training, security risk management, bug fixing, ongoing additional customization, uptime and performance attributes, and more.

Leveraging homegrown software to bring innovation to your market or to create more efficient operations can be a strong growth driver. But the buy-it vs. build-it decision is a critical one. If buying the software you need just isn’t possible, building it may make sense. But there’s no denying that’s a difficult path, and only worth it if the upside is big. Before you build, make sure you understand the real costs to succeed over the long term, and only embark on those code-writing efforts you’re sure your business is capable of.

by Robert Sher

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BF&S Succeeds in Providing COVID Vaccine to Employees Internationally

Written by bfsmanu on September 20, 2021. Posted in General.

BF&S is a manufacturing contractor providing products used in the aerospace, defense, medical, industrial, and commercial industries. Founded in 1988, BF&S has decades of experience manufacturing in Mexico, with over 500 employees in the state of Sonora.

As the Covid-19 vaccine became widely available in the United States, many individuals across the border in Mexico were kept waiting for a life-saving dose. As an organization that cares deeply for its employees and works closely across border lines, BF&S was dedicated to keeping their operators safe by providing access to vaccination.
The Mexican Consulate has been working in partnership with the University of Arizona to roll out vaccines to first responders and employees working in manufacturing. Thanks to the committed negotiations between BF&S’s Director of Operations Robert Fernandez and their human relations team, and the Mexican Consulate, six busses carrying 170 BF&S operators recently traveled across the border to receive the single dose Johnson & Johnson vaccine. Departing from Cumpas, Sonora at 1:30am to make the 3.5 hour trip across the border and through US customs, the BF&S fleet was lined up and waiting in the cargo area to receive their vaccinations by 6:00am.

“It was a big company expense,” said CEO Carlos Fernandez, “Chartering 6 buses, providing meals for 170 employees, as well as the lost revenue for the two days we closed the facility to allow our team to travel as well as recover from vaccine reactions. It was one of the easiest decisions I ever made, our employees’ health is always our number one priority.”

“It was a good day to be a BF&S employee,” said VP Robert Fernandez, “It was seamless. I give credit to our people for being so professional. A special Thank you to H.R. manager Fatima Cabrera for the incredible coordination it took to pull this off and Miria Montano for her support.”

As Covid-19 vaccine availability continues to be uncertain in Mexico, BF&S has gone above and beyond to provide their employees with their best line of defense against the ongoing pandemic.