Chris Anderson, the former editor of Wired and current 3D printing cheerleader, has an intriguing piece in the New York Times (Mexico: The New China, Jan 27). it deals with his experience running 3D Robotics, a maker of civilian drone aircraft. 3D Robotics competes with firms that sourcing their production in China and hence they have had to find a way to take on competitors with low labor costs. Their answer? Tiajuna, Mexico. 3D is based in San Diego so engineering is done on the north side of the border but assembly is done on the south. Labor costs may higher than in China (but, as the article notes, the gap is closing as Chinese wages rise) but Anderson sees many advantages in his firm’s “quicksourcing” model that depends as much on speed as cheap hands.
First, a shorter supply chain means that a company can make things when it wants to, instead of solely when it has to. Strange as it may seem, many small manufacturers don’t have that option. When we started 3D, we produced everything in China and needed to order in units of thousands to get good pricing. That meant that we had to write big checks to make big batches of goods — money we wouldn’t see again until all those products sold, sometimes a year or more later. Now that we carry out our production locally, we’re able to make only what we need that week.
This point obviously depends on owning one’s own facility in Mexico or having a very tight relationship with the Mexican supplier. If a small buyer doesn’t have much negotiating power with a supplier it will still likely face large minimum purchase quantities when buying from Mexico. Still it is an interesting observation and suggests that some start ups may be making ill-advised trade offs between cost savings and flexibility.
Second, there’s less risk. If we make an error in a design, we’ve wasted at most a few days’ worth of production. If there’s something wrong in the production process itself, we can spot it fast. We control the component inventory, so we can see what’s going into our goods and know that we’re not being ripped off with used or pirated parts. And if we want to protect our intellectual property, we can do so without having to trust that other companies will uphold our interests above all others. And that’s saying nothing about political risk, environmental risk or P.R. risk, all of which companies like Apple and Walmart have learned about in China the hard way.
These are the factors that in some ways I was expecting when I started reading the article. Indeed, some of these don’t even need any kind of outsourcing story to hold. Greater flexibility in dealing with design changes, for example, is often trumpeted as one of the benefits of lean operations. That is, lots of inventory slows you down and creates problems whether it is sitting on your floor, your supplier’s floor, or the Pacific ocean.
Third, it’s simply faster. We still order some parts from China, and even though we use FedEx, it always seems to take weeks, and sometimes months, longer than we’d planned. That’s not a criticism of China; it’s merely intrinsic to any arm’s-length relationship between small buyers and big makers. If we were Apple, we’d get overnight service. But we’re not, so we wait.
This is much like the first point. Tighter integration — whether by moving closer to headquarters or doing everything in-house — allows for your priorities to hold through the whole process.
Finally, a short supply chain is an incentive to innovate. If you’re outsourcing the manufacturing of huge parcels of a product, you can’t change that product until you’ve sold all the ones you’ve already made (at least not if you want to stay in business). So that often means sitting on your hands, waiting for Version 1 to sell out before starting to make Version 2. But when you’re doing just-in-time manufacturing, you can change the product every day if you want — whether to take advantage of some better or cheaper component or to improve the design.
This is the observation that I find most interesting. Here lack of speed kills. The ability to run with low inventories — and hence little cash tied up — means that it is easier to do the next thing. As I said above, there is then the question of how younger firms should approach this tradeoff. A large initial purchase ties up cash and enforces delay even if it can be done at a low cost. Less inventory means less time. Even if each unit costs more, the firm gets that cash back sooner so it can move on to the next project.