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In this interview, the McKinsey director explains next-shoring and why dramatic changes in demand and technology, as well as in energy and labor costs, are forcing manufacturers to rethink production and distribution strategies.
JANUARY 2014
It is both an exciting and confusing time for manufacturers. Radical changes in demand in
emerging and developed markets coupled with advances in technology and a growing appetite for variety and flexibility are not only allowing but compelling companies to rethink where they manufacture. Its not simply a matter of bringing back manufacturing from low-cost locations: companies must instead take a next-shoring approachdeciding which products should be manufactured close to demand and which should be produced near an innovative supply base. In this video interview, McKinsey director Katy George explains how next-shoring can push effectiveness and efficiency, and why companies must view their manufacturing process as an ecosystem that needs to be optimized from the supply base to the consumer. An edited transcript of her remarks follows.
which means that theres a real premium on shortening supply chains like never before. And finally, we see dramatic changes in manufacturing technology. Advanced robotics, 3-D printing, digitized manufacturingall of these create new challenges but also great new opportunities for manufacturers. And this is where theres been a lot of confusion. A lot of the discussion is, Should we bring back manufacturing? Should we reshore from a developing country like China to a developed country like the United States? But in fact, only a very small part of manufacturing value added is driven by labor cost. And energy costs also are driving some segments very specifically and very fundamentally but not other segments. What were finding is that manufacturers need to think about whats next. And so we urge them to think about what were calling next-shoring, which is about how do you think about understanding which segments need to be manufactured near demand and which segments need to be manufactured near innovative supply bases. We see these two things (proximity to demand and proximity to innovation) as the primary drivers for manufacturing-location decisions across most manufacturing sectors.
I think companies really need to understand how important proximity to demand is and realize that more and more companies are successfully finding hybrid models of manufacturing, both in developed economies near developed-market demand and in developing economies near the exploding demand in those emerging economies.
Now, however, theres real opportunity from process innovation as well. It will require clients and companies to really develop the capability of scanning the world for new technology advances and understanding where those can be applicable to their supply chains, to their manufacturingand how to access those technologies, either through developing capabilities internally or, more often, with partnering. Another capability that companies will need to have in order to successfully take advantage of these trends and opportunities in manufacturing is the ability to cultivate their supply base and to really develop it beyond probably what they have done before. But also really thinking about how they are the centers of a whole ecosystem that has the right kind of skill sets, the right kind of technology innovation and investment, and the right kind of joint development of new technologies for manufacturing in order to truly take advantage of the opportunities at hand. Katy George is a director in McKinseys New Jersey office and is the global coleader of the manufacturing group within McKinseys operations practice. Copyright 2014 McKinsey & Company. All rights reserved.