Expected and unexpected benefits from keeping production local

Here’s a fun thing to think about: What are the supply chain benefits of keeping production in-house — and, in particular, close by? That is the topic of a recent post on the company blog at Voltaic Systems (What and Why Voltaic Insources, Feb 16). Voltaic makes solar-powered backpacks. Wonder just why one would want a solar-powered backpack? Check out this IBM podcast (from May 2009) with Jeff Crystal, the author of the blog post.

In any event, Voltaic does final assembly of their bags in the US. The original rationale for this was basically to avoid paying the US government. Apparently the US charges a 17% tariff on imported backpacks and since solar panels make a Voltaic bag a premium item, these would add up. The real interesting parts of the posts are the description of the expected and unexpected additional benefits Voltaic has received from doing assembly in the US.

Secondary Benefit 1 – Better Inventory Management
We share components across a number of our product lines. A 2 Watt orange panel can appear in 5 different models plus is available as a standalone product. By decoupling the components from the bag, we can keep a lower amount of total inventory and have less likelihood of stocking out of a SKU. …

Secondary Benefit 2 – More Quality Control
We work hard on our supplier relationships and think we have some great partners, but no one is going to know our products as well as we do. Since we feel the pain when we get a customer return, we’re pretty motivated to send out good quality systems.

Unexpected Benefit 1 – New Lines of Business in Components
When we started our business, we had one product, a solar backpack. At some point, when there was a gap in new product introductions, we decided to start marketing our panels as a product for DIY-ers and this has become a great and fun business for us.

Unexpected Benefit 2 – A physical connection to our product
I was in software long time ago and one of the things I like about Voltaic is that we make physical things that people use and are hopefully useful. After spending several days in front of a computer and phone, it is nice to be able to get into the warehouse and get my hands working building something valuable.

This is just a beautiful story. He lays out the benefits so nicely and so clearly you would think that Crystal has a Kellogg MBA (turns out, he does) or perhaps a sibling who teaches this stuff (turns out, he does).

The inventory saving are something that one usually expect. Delaying differentiation is a classic supply chain strategy. The unexpected benefits, however, are pretty intriguing. As one of my colleagues noted, it raises the question of whether there is a higher option value (as in going into the component business) when you do more in-house. That may be true if one focuses on the option of finding new lines of business. However, if one has to deal with big swings in volume, I suspect that outsourcing might have a higher option value to scale up or down with demand.