OEMs Say Quality, Reliability Are Key Reasons to Source Domestically

As more companies consider the total costs of offshoring, some of U.S. manufacturing's most notable strength--quality, reliability, and close customer relationships--are playing a decisive role in their decisions to source stateside.

By Mark Shortt
Editorial Director, Design-2-Part Magazine

Considering how many U.S. companies have sent their manufacturing operations overseas, it's easy to lose sight of the fact that the U.S. remains first in manufacturing output and is still the acknowledged leader in technologically advanced, high-end manufacturing. U.S. manufacturing also is responsible for about $1.6 trillion, or 12 percent, of the nation's Gross Domestic Product (GDP), according to The Alliance for American Manufacturing (www.americanmanufacturing.org).

Since the 1960s, however, manufacturing's percentage of the GDP has steadily declined, from 28% in 1965 to 12% in 2006, according to Michele Nash-Hoff, author of Can American Manufacturing Be Saved? Why We Should and How We Can (2009, MM Bernard Publications, La Mesa, Calif.; www.savingusmanufacturing.com). "We've lost 70% of our PCB companies to overseas competitors," Nash-Hoff told Design-2-Part in a phone interview. How did we get to this point? "Government policy," she replied, referring to loopholes in tax laws that went into effect in the early 1980s and have not been repealed since. "We actually have tax incentives that encourage companies to set up operations in lower cost nations."

Nash-Hoff believes that outsourcing offshore will continue for the foreseeable future, especially for the multinational companies "that have products to sell within the countries in which they set up manufacturing operations," she writes in her book. "The challenge for America is to keep as many companies as possible growing and prospering within the United States."

Total Cost of Ownership (TCO) is Key to Estimating Outsourcing Costs

One of the challenges for companies deciding whether to source contract-manufactured parts and services in the U.S. or abroad is the difficulty of getting a realistic estimate of the true costs of offshoring. More than a few outsourcers, including those who were focused mainly on their quoted price, have been saddled with an array of "hidden" costs that added significantly to their total cost of going offshore. Reasons for these unanticipated costs range from poor quality to the impact of oil price increases on the cost of overseas shipping; difficulties in communicating design and engineering changes; fluctuation of currency exchange rates; and intellectual property infringement, to name a few.

More manufacturing can be maintained in the states, Nash-Hoff believes, if more companies factor these hidden costs into the "total cost of ownership" (TCO) of the part, component, subassembly, assembly, or product to be manufactured. By thoroughly analyzing TCO, a concept originated by the Gartner Group, product manufacturers can arrive at a much more realistic estimate of the true costs of outsourcing operations offshore.

Nash-Hoff defines "total cost of ownership" as "an estimate of the direct and indirect costs and benefits related to the purchase of any part, subassembly, assembly, or product." The price paid to the supplier for the purchase of the goods is but one element of the total cost, which should take into account "all of the other costs associated with the purchase of the goods," including geographical location; transportation alternatives; inventory costs and control; quality controls; reserve capacity; responsiveness; and technological depth. At a time when many of these costs are subject to the swings and uncertainties of a volatile world economy, the concept of TCO appears to be resonating with U.S. product manufacturers.

"There is more business coming back from China because the cost savings of outsourcing to China are eroding," said Nash-Hoff. Part of this is due, she said, to the Asian giant's rising labor costs. But even more daunting are the high costs of transporting goods overseas, a situation that isn't expected to improve anytime soon. "The shipping companies are in real financial trouble worldwide," she cautioned. "Right now, the cost savings of doing business offshore are diminishing and will, in all likelihood, continue to diminish over the years. So I think we're going to get more manufacturing coming back to the U.S. than I originally thought."

LA Aluminum Casting Company (www.laaluminum.com), a permanent mold aluminum foundry and machine shop in Hayden, Idaho, receives "probably three requests per month" from companies looking to bring manufacturing back to the U.S. from either Mexico or Asia because of problems they've encountered with offshoring, according to Michelle Richter, the company's sales and marketing manager. These companies say they're returning because of "shipping delays, poor quality, and difficulties in solving problems, whether it be a design issue, a quality issue, or a material issue," according to Richter. "We've actually brought more work back into the U.S. than we have lost to companies overseas," she says.

Richter says that LA Aluminum's customers are more concerned about costs resulting from delays, such as when a shipment isn't delivered on-time or can't be used because of quality issues. "That's where LA Aluminum saves money," she says. "Every single one of our customers would say on-time delivery and quality are their number one and number two concerns. Price is a distant third." The company's combination of "quality, on-time delivery, and personal service" is something that overseas suppliers can't match, according to Richter, who calls the company's relationships with customers its greatest strength. "If a customer has a problem, we are available immediately," she says.

LA Aluminum worked with a customer recently to re-engineer a product that had been in use for more than 100 years. By integrating two parts into one, the casting company saved the customer over $150 per assembly. "The new design came from knowing the customer's needs and requirements," says Richter. "It's difficult to replicate this type of relationship over thousands of miles. We went into production from mold design, to prototypes, within six weeks, and we did that on all 50 tools we built last year."

In another case, LA Aluminum teamed up with its customer's engineers to design unique castings that solved a part failure issue inside a 210,000-gallon fuel tank. According to Richter, LA Aluminum is the only company that uses custom-designed, threaded steel inserts that are cast into an aluminum casting. The cast-in threaded inserts replace the use of tapped and threaded holes, reportedly providing greater strength and better material properties to critical sealing surfaces.

Richter says that LA Aluminum had a record-breaking year in 2009, with profit margins higher than ever before, because "Americans will pay for quality they can trust." The company's current success includes two contract awards, announced in January and totaling more than $5 million dollars, to supply castings for the U.S. military. All of the parts are scheduled to ship this year.

The first contract is for towable, collapsible, water and fuel tanks--500-gallon drums that are used to transport drinking water and fuel to the vehicles of U.S. soldiers in Iraq and the Afghani mountains. "These tanks can be pulled behind a jeep or a truck, or they can be dropped from helicopters right onto the front lines," Richter told Design-2-Part in a phone interview. "They can also be used for humanitarian efforts. We make the gaskets for both ends of the tanks--aluminum fittings that weigh about 12 pounds each."

The second contract, reported to be worth about $2.5 million in the first year, also calls for the company to produce tank fittings--in this case, for huge, 210,000-gallon stationary fuel tanks that function as "gas stations" for the military. The fittings are aluminum rings, known as nut rings, which are manufactured using a permanent mold casting process with cast-in, threaded steel inserts. "We cast stainless steel, threaded inserts right into the aluminum, so we pour the aluminum around the inserts," says Richter. "As far as I know, no one else has done it this way for this type of ring.

"The nut rings give you a stronger, more secure connection with the threads on the bolts," she continues. "A lot of these parts were previously made with sand castings, so the permanent mold makes it a stronger fitting. The price is actually less expensive--about 50 percent less in cost per part--than it would be if you tapped and threaded the hole and put a HeliCoil^® in it. This is a huge savings! The cost depends on the part; some are simple and some are very complex."

Another part that the company makes is an integrated manway, said to be more than 50 percent cheaper than the previous part that was made with 6061 aluminum plate.

Clean Energy Manufacturer Finds U.S. Sources for Solar Trackers

One OEM that sees advantages in U.S. manufacturing is Shelton, Conn.-based OPEL Solar, Inc., a wholly-owned subsidiary of Toronto-based OPEL, Inc., and a global developer and supplier of high concentration photovoltaic (HCPV) and other solar products, including ground-based and rooftop tracker systems. When OPEL introduced its large scale TF-500 dual axis tracker last May, the company announced that it was being manufactured by Charles J. Dickgiesser & Co., Inc., a Derby, Conn.-based contract manufacturer that produces machined parts, welded assemblies, and custom-made machinery to its clients' specifications.

Dickgiesser is a family-owned and operated business that offers CNC milling and drilling, punching, turning, and threading. The firm also uses multiple MIG and TIG welding machines and a variety of bending and forming equipment, cutting and shearing machines, and finishing equipment.

"They (Dickgiesser & Co.) worked very closely with us," said OPEL Solar Director of Engineering Ed Linke, in a phone interview with Design-2-Part. "We were able to bounce a lot of designs off of them--including ways to improve the design and to reduce the cost of the design. We typically try to do that with all of our manufacturers, but they were right in our backyard and were very willing to come into our office, and we were willing to go there. It was just an easy way to develop and build the product, and it also met the cost objectives."

OPEL (www.opelsolar.com) has numerous sources throughout the U.S. and the world that employ various manufacturing processes--including roll forming, metal cutting, and welding--to produce parts for its trackers. On the other side of its solar products business, the company has formed relationships with contract manufacturers that make parts such as aluminum extrusions, insulated wire and connectors, and a variety of plastic, optical, and semiconductor parts for the company's HCPV solar panels.

 "The parts we are more likely to outsource offshore are usually more labor-intensive and are generally on the smaller side," said Linke. "The shipping volume is a concern; if it's a big volume piece, you have to think about how many you can get in a shipping container. We're shipping those products around the world too; they're not all coming to the United States. We're building systems in Spain and other countries. But when it comes to the tracker business, we're primarily focused here in the U.S. In most cases, these are very heavy and large pieces that we're dealing with; we're talking tons and trailer loads of metal pieces. So shipping cost and shipping time become very important.

"In many cases, we could have most or all of this built in Asia or even in Europe," Linke continues. "However, the delays in shipping and the cost of goods on the water all add into the cost of the product. We find that in most cases, the U.S. manufacturers are more competitive, and the cost of shipping is much less. With all that rolled together, the cost of goods is less."

What does OPEL look for--and value the most--in a domestic supplier? Linke says that quality and reliability are high on the list. "We value the working relationship with our U.S. suppliers," he says. "Generally, it's easier to work with them because they're local, maybe only two or three time zones away, and communication is the easiest with them. Language is not a barrier, so terminology and drawing conventions are easily understood. We have to maintain pricing too. I think the greatest strength of U.S. contract manufacturers is that most of them are fairly innovative, and they will work with you easily."

Specialty Metal Fabricator Helps Get Hydrogen Generator to Market

Another OEM that recognizes the benefits of sourcing locally is Philadelphia, Pa.-based AlumiFuel Power, Inc. (API), an alternative energy company established to commercialize intellectual property for high-demand military and commercial applications. After two years of what it called "intense engineering development" by its technical staff, API made available in January its first production-unit hydrogen generator--the Portable Balloon Inflation System (PBIS-1000)--for purchase by military and meteorological service customers. Manufactured to API's specifications by APEX Piping Systems, a specialty metal fabricator in nearby Newport, Delaware, the PBIS-1000 was designed and developed for lift gas operations based on feedback from an undisclosed military customer.

Although API's hydrogen generator was initially designed for the remote inflation of weather balloons, the company says that the quality of hydrogen generated by the reactor is easily adaptable to fuel cells and other systems requiring remote/portable hydrogen. Instead of using heavy, highly-pressurized, steel "K-Cylinders" to transport and deliver hydrogen, the PBIS unit relies on small, unpressurized cartridges of aluminum powder and "any available water source" to reduce the cost and danger of transporting hydrogen, thereby making it available to previously inaccessible locations. The unit reportedly meets Mil Spec requirements for vibration, as well as environmental and drop test requirements.

When API (www.alumifuelpowerinc.com) took delivery of its first production-unit hydrogen generator in late December, API's Director of Engineering, Sean McIntosh, credited its local manufacturing partner for "having a very robust and agile manufacturing system in place to quickly and easily ramp up production in a very cost-effective manner." API's Chief Technology Officer, John Boyle, also gave credit to Apex Piping Systems (www.apexpiping.com).

"In an age of frequent international outsourcing, we have kept the production of nearly all of our generator components very local," said Boyle. "While beneficial to the U.S. economy at large, keeping our production local was driven by one very practical concern: quality of components. When it comes to the kind of high-quality components needed in any system involving hydrogen, the U.S. is still the world leader. And many of the best U.S. manufacturers are found right here on the East Coast."