Lead times drive onshoring policy for power-supply maker
TDK-Lambda puts forward the reasons for keeping manufacturing in the UK and why offshoring is likely to go into decline.
Figures released late last week by the EEF showed the UK has clambered back into the top ten of nations ranked by manufacturing output. The UK is now ninth though that situation may change for the worse within a few years if the hard-Brexiteers get their way: eight out of the top ten export targets are in the EU single market. Default World Trade Organisation tariffs are not going to be massively helpful there.
The practice of bringing manufacturing back from the Far East has helped the process as companies realise, though labour costs might be low, there are other costs they have to incur. In some high-mix environments, the manufacturing never went away. Fifty years ago, the power-supply company that is now TDK-Lambda moved from Reading – and a council that at the time did not want more industry – to the Devon fishing town of Ilfracombe.
For those 50 years, TDK-Lambda has maintained a manufacturing base there in the face of stiff competition from the Far East. And general manager Phil Scotcher sees the cost differentials on labour reducing over time. Taking the QM modular power supply launched last week as an example, he argues: "Could QM be made in a low labour-cost country? Yes, of course. But the question is does it really make sense? If you look at the way that the unit goes together, the make versus buy [from an offshore supplier] can be pretty marginal from a cost perspective."
Scotcher adds: "We manufacture in the UK and we’ve been using Far East low labor-cost partners for over 20 years. We have a really good understanding of low labour costs and what the cost drivers are. It has allowed us to develop very robust make-versus-buy processes.
"It's something that is easy to get wrong, especially when the decisions are based on assumptions and not understanding the true costs of outsourcing overseas. With a high-mix environment you have to bring that into the equation when deciding on make versus buy. We do use low labour-cost areas for things like plastic mouldings and winding magnetics. We focus that on what you might call 'the neck of the BOM' [bill of materials] before it spreads out.
"In a high-mix environment, there are lead times, cost of inventory, and freight cost to consider. It takes a long time to bring stuff in by sea. But it costs a lot to bring in stuff by air: it's five times more expensive to put things in the air than on a boat," Scotcher explains.
The lead times for component delivery are crucial. The company needs to have sufficient local inventory in place to support changes in demand is important to meet production demand on top of prototyping. "Many of our customers need to be delivering on short lead times themselves. It's often four weeks for themselves," Scotcher says.
"The modular power supply was invented by Lambda in 1979. We became experts in mass customisation before it became a fashionable term. Everything is built to order and configured to order. Those 600 billion combinations are made up of a set of building blocks. We hold the inventory for them at the lowest-risk level. On the previous generation we held inventory mainly at the component level. But we need to be fairly confident we can ship within a given time. So to get the next level of responsiveness we needed to go up a level," Scotcher says, leading to a decision to hold more assembled modules in stock rather than making most of them on a just-in-time basis.
Each order is associated with a barcode that is used to control how automated equipment handles its sub-modules. Software that guides manual picking and assembly for non surface-mount components also uses the barcode to determine what information to show the operator. Typically, the top side of the PCB contains the components that cannot be mounted by machine; the underside contains the bulk of the surface-mount devices.
"The number of minutes that it takes to put it together [manually] isn't very many: it takes less than two-and-a-half minutes to assemble a module." Scotcher explains, and is easily outweighed by the shipping time for a similar unit assembled thousands of miles away in a contractor's plant. "Many of our orders are one to five units. The average batch is 15. That’s not how mass manufacturing in China works.
"If you assume raw material costs are global, in the long run that’s sort of true though over the short term you do find regional variations. But capital costs tend to be the same wherever you are in the world. So, the difference in direct costs are labor and some overhead.
"With good design for manufacturing the savings of moving to the Far East are lower than many expect. We see single percentage point prime cost savings for mid-level assembly and the savings are getting less obvious," Scotcher concludes.