Should You Review Where You Source Your
Parts?
The 2020 Pandemic has shed a spotlight on many issues across various industries, including those in supply chain management. One of these issues is how reliant North American companies are on Asian manufacturing suppliers and, in particular, those in China. In some cases, there is no Western alternative to replace these Asian manufacturing suppliers. For many, learning of this reliance on China as a supplier has come as somewhat of a revelation. So how did this issue come about?
What influences your choice of suppliers?
There are several obvious factors that influence a buying decision, however, the most influential for many organizations is likely the price. Manufacturing suppliers based in China can offer extremely competitive pricing. There is no better example of this phenomenon in North America than that of Walmart, from where many shoppers supply their entire homes, now even including their groceries.
Why are goods from China so much cheaper? Typically, Chinese workers are paid significantly less than their Western counterparts since the country is not consistently regulated and does not have the same minimum wage standards and often offer no overtime premiums and no benefits.
By comparison, North American manufacturers must comply with federal and local HS&E regulations, labour laws, emissions controls, waste disposal regulations, etc. All these factors add costs to production, lower profit margins and as a result, Western products typically cost more than equivalent Chinese products.
What are the advantages of using North American suppliers?
The Pandemic has demonstrated the dangers of depending entirely on overseas suppliers. By outsourcing manufacturing production almost completely overseas, Western countries face a loss of the associated manufacturing skills and supply chain.
Personal Protective Equipment is a classic example. Six months into the health crisis caused by COVID-19 the lack of readily available PPE remains an ongoing headache for Western countries. In a health crisis such as this where lives are at stake, the cost is no longer as significant because the product is considered essential. In this example, both the US and Canada have since recognized that total dependency on China as a supplier is not always a good thing as quality is just as important as the price.
Early in the development of Fourmost, there was internal discussion about where to source component parts from for the company’s products. It was evident that many of the parts we needed were readily available and at the lowest cost from Asian suppliers. Coincidentally, Fourmost became engaged in identifying and solving reliability issues for various service providers. We learned that the lower cost parts did not always perform as advertised, in fact, some were simply poor quality.
At the time, several of our clients were providing service in the US Haynesville shale play, one of the more challenging downhole environments in North America, where operating temperatures often reach
a sustained 200°C. The reliability of downhole measurement technology was being tested to the limit. This resulted in Fourmost designing and building our own assemblies as drop-in replacements for OEM equipment using, as much as possible, the most rugged components sourced only from the UK and North America. The sourcing exception being circuit board components, which are typically manufactured in China even if they are purchased from North American suppliers.
As a result of the decision to focus on optimizing reliability, Fourmost’s products could not be the lowest cost. In reality that was not our goal since we had a discerning client base who valued performance over price.
It is a fact that in the harsh operating environment experienced by the oil industry you typically get what you pay for. Over the course of 13 years and thousands of manufactured assemblies, Fourmost has had zero confirmed manufacturing defects to date. In our view, this justifies our original supply chain strategy.
Fast forward to 2020, the oil and gas industry has been decimated to a large extent over the last couple of years due to low commodity prices. What remains of this once-thriving North American industry is under severe duress. Oil and gas spending for 2020 in Canada is now predicted to drop at least another 30%. This is a level that we have not seen since 2006.
Because of these lower commodity prices, oil and gas companies will tightly control what expenditures they make, often allowing accountants to make these decisions for them. The endless pursuit of lower costs makes selecting the best quality components a difficult choice to make. The backdrop to this challenge is the increased awareness that the Western world is now heavily dependent on Asian suppliers and in particular, China, for many everyday goods.
Looking to the future: 2021 and Beyond
Our overall consciousness of the effect of foreign manufacturing dependence is now more prevalent than ever. The question is maybe whether the North American industry can accept even slimmer profit margins to maintain control of its supply chain? For many companies, the pressure of the so-called ‘bottom line’ will continue to drive buying decisions.
The loss of manufacturing expertise and dependence on a supply chain in China are issues that will take time to solve. Inevitably, items manufactured in North America cost more to make because typically, domestic manufacturers pay their workers a living wage, strive to provide a safe and healthy work environment, and manufacture goods in highly regulated facilities.
Has this pandemic caused North America to awaken to the value of domestic manufacturing and supply chain management or is this simply a passing ‘second thought’ before we simply continue the steady trend to a purely service-based economy? Only time will tell.