Saturday, October 9, 2010

Could better logistics revive American factories?

Could logistics help revive American manufacturing? I have been thinking about this question since my latest meeting with Bill, a Canadian inventor. I'll keep his full name out of this for now, but the basic outline of his story is simple: A couple years ago, Bill invented a new kind of shower head. He had hoped to have it manufactured in the US, but all the factories he spoke to insisted Bill pay up front the tooling costs to build a prototype.

Through a personal connection, Bill found his way to Sichuan province, China. A giant factory there was happy to cover tooling costs and make him a prototype. Soon, though, it became clear that there were some parts of the shower head that the Sichuan plan couldn't produce. Bill shopped around, exclusively in China at first. Nobody could do it. For all their strengths, Chinese factories are not always kind to small inventors - they're all about volume, and often about the quick win rather than building a long-term relationship. (This is a chicken-and-egg problem, it seems to me, since Western companies have also churned through their factories quickly. Who was teaching whom to think short term?)

Bill ended up buying the two components he needed from American factories, both in Pennsylvania. American factories are still competitive - hooray! But the final assembly was still going to be done in Sichuan. These two components - both rubber, very light and small - were going to need to be shipped by air to China. The factories suggested FedEx or UPS. Bill did a cost analysis and realized that FedEx and its brethren were going to eat up any profit he made from his shower head. FedEx was asking 75 cents per item. The US Postal Service, by contrast, was only charging 30 cents. Plus, the USPS offered the same tracking number system that FedEx and other express carriers did. For Bill, it was a no-brainer. He chose the postal service. "America has got an untapped resource, and that is its postal service," he told me recently in Hong Kong.

This all sounds hopeful, right? American factories, American services have a crucial role to play in global supply chains. Without those two parts, Bill would not have a shower head.

But that's when things started to break down. Both of the US factories he was buying from refused to ship by the US Postal Service. Part of the problem appeared to be concern about reliability; another was a fairly off-the-wall worry that the USPS, as part of the government, was evil. In the grim, shrinking world of small US manufacturers, managers are still willing to impale their businesses on these kinds of opinions.

Bill now has a friend physically pick up his components and hand-deliver them to the post office in Pennsylvania. He hasn't had a single problem with delivery to Sichuan. He thinks this is because government services - the US Postal Service and China Post - design their schedules to fit well together.

It sounds far fetched, I'll admit, but it did get me thinking. I asked a friend in the US, a very sharp veteran board member in tech and other sectors, and he asked some of his colleagues what they used to ship out of the US. They preferred DHL, and used the other services selectively by region, depending on their network. "The USPS. . .that got a head scratch," he wrote, describing his conversation with his logistics colleagues. "'If we were sending letters,' my logistics friend said, 'we might look. But anything with any size--it's hard to think the Post Office would be competitive.'" In short, the USPS is missing a trick. Nobody trusts them.

My friend feels the problem goes even deeper. He wrote: "From my own perspective, the USPS feels like it's running under 20th-century rules. Their revenues and market share are falling so they are raising rates and cutting services. 25 years of technology marketing should have convinced them that protecting share is all about lowering prices and adding services."

Talking to someone in the furniture industry this past week, he said nothing short of a major terrorist attack in a port or $250 oil would shift manufacturing back to the US. The Planet Money podcast in the link above describes 70-employee high-tech, R&D-intensive factories in New York as the model for prosperous American manufacturing. They are better than nothing, but they don't seem to be, in and of themselves, very big job creators.

A lot of American industries have simply lost the capability to make things they used to produce. A friend here in Hong Kong just raised his prices 25% for Chinese-made building materials and got no pushback from his US customers. Why? Because the US customer had nowhere else to go. They couldn't bring production of that component back in-house because they had sold the machines, closed that line, fired those workers. And who, in this environment, was going to invest in restarting manufacture of a low value-added product?