Keep Business in Your Backyard

See How Local Manufacturers are “Insourcing” New Business and Opportunities

By Evan Pattak, Contributing Writer

In 1986, Flinchbaugh Engineering, Inc. of York devised an innovative way to grow its business. It transferred a customer’s complete production line to Flinchbaugh’s plant, purchasing the equipment and becoming, in effect, the contract manufacturing arm for its customer.

Since then, Flinchbaugh has replicated the line transfer for many other customers, including such major players as Mack, Volvo, Caterpillar and Siemens, and more than doubled its revenue over the past four years.

“We didn’t realize what we had at the time, never coined the term ‘line transfer’ until the 1990s,” says Michael D. Lehman, Flinchbaugh’s President and CEO. “By the ’90s when we had done a bunch of them, people started to say, ‘This is unique.’”

Even before terminology caught up with practice, Flinchbaugh was pioneering a phenomenon known as “insourcing,” a trend that is heating up in manufacturing — and other sectors. For years, of course, jobs and business have flowed the other way as manufacturers outsourced many aspects of their operations to reduce costs. Outsourced business often flowed to offshore companies whose cost structures allowed them to offer prices that domestic manufacturers hardly could match.

Now, however, manufacturers and others are rethinking the practice and, in some cases, reversing it. What’s behind the rebirth of insourcing? In some cases, manufacturers are finding that the savings promised by outsourced business are illusory.

“Things overseas aren’t as you think they are,” Lehman says. “We usually work with customers who’ve been offshore and who understand the realities of cost savings versus the promise of cost savings. We tend to be very competitive with real cost savings.”

Some manufacturers also are responding to the red tape and unexpected hazards of sourcing abroad.

“With insourcing, you don’t have to worry about a port being closed, back-ups at the port, time needed if you decide to change your order,” Lehman says. “We have the physics of the location.”

Insourcing is spreading so rapidly that a single definition no longer encompasses the term. Some say insourcing occurs when a foreign-based company establishes a U.S. operation for the production of goods to be shipped home. More broadly, though, companies that insource are reclaiming aspects of their operations that they farmed out, whether to domestic or foreign providers.

However you define it, insourcing is growing, inside and outside manufacturing. In a 2006 survey about IT outsourcing sponsored by the consulting firm DiamondCluster International, 47 percent of respondents said they “abnormally” ended at least one outsourcing arrangement in the past year. In a similar survey in 2004, that number was 21 percent, as reported by CIO Insight.

Insourcing also has penetrated the groves of academe, where Brandeis University, under pressure from student groups and others, recently insourced 22 custodial jobs that had been provided under contract. Government, too, is aboard the bandwagon. Perry Johnson Inc., a Michigan consulting company, recently took insourcing to a new level. Rather than transfer its call center operations overseas, it brought them way indoors to the Snake River Correctional Institution in Oregon where inmates now work as Perry Johnson phone reps — a captive operation, if you will.

Insourcing can bring many benefits, the most prominent of which are the jobs saved or created locally. And that can happen on both sides of the equation, whether you’re a manufacturer insourcing aspects of your business or a supplier of such insourced operations.

Washington County discovered how valuable insourcing can be to a region when Perryman Company, a producer of titanium bars and wire for the automotive and aerospace industries, chose to bring its melting operations back in house as the cornerstone of a vertical integration thrust.

“We saw a global shortage of titanium melting capacity occurring by 2007 or 2008,” says Frank L. Perryman, company partner. “We probably missed it by a year; the shortage started in 2006. Our vision goes all the way out to 2025. Granted, you have to make assumptions. Not everything is science at that point. But the farther you’re looking, the more valid your strategic decisions.”

Over 10 years, the company plans to add 150 jobs at its Washington County campuses in California and Houston. Although Perryman still sources some of its raw materials abroad, the decision to insource much of its production has contributed to workforce expansion of more than 100 percent since 2001.

Thus, the benefits of insourcing can be far-reaching — provided you have a solid blueprint. If you’re developing an insourcing strategy, here are some key components to consider:

FIND THE RIGHT NICHE
That’s what SAY Plastics did when it refashioned its production emphasis to become a successful insource partner. In 2000, the Adams County firm, which relied heavily on the manufacture of thermoformed plastics, faced a crisis when many of its longtime customers dramatically reduced their orders.

“No matter how good a job we did, they didn’t need anything from us,” recalls Ron Staub, SAY Vice President and General Manager. “Our business dropped off. Had we continued in the direction we were going, we would have died on the vine.”

But SAY saw opportunity in a different type of product — blow-molded plastics, which include such goods as large snack food containers. Shifting production over was a make-or-break gamble, especially because the company would require expensive new equipment for the transition. SAY received valuable advice and financing assistance from MANTEC, the State’s Industrial Resource Center in the region, but success was far from certain. Recalls Staub:

“Our guys said, ‘We don’t have the equipment.’ My philosophy was, ‘Let’s get an order first, then we’ll get the equipment.’”

They got that initial order from Utz Quality Foods, Inc., of Hanover, a major snack food supplier to warehouse and club food markets. The key to SAY’s winning bid: Because the companies are virtually neighbors, SAY could reduce costs for Utz by eliminating the need for rail shipments.

At first, SAY loaded trailers of product for pick-up by Utz, then took over delivery itself. But the partnership has worked out so well that SAY now leases space inside the UTZ facility, billing the customer as product is used. Through this evolution, SAY has enabled Utz to wipe out its freight costs entirely, a huge competitive advantage for both businesses.

“We’re working with them as a team,” Staub says, “helping them design new bottles, for instance. They have a large enough pipeline that we can make a new shape and pay for it even if the market doesn’t like it after two years.”

Thanks to its new focus, SAY’s workforce has grown from 10 to nearly 40, and it has been able to revive its thermoforming operations by leveraging some of the new blow-molding assets. Most importantly, SAY has carved out a niche that no offshore competitor is likely to invade.

TRAIN, TRAIN AGAIN, THEN TRAIN SOME MORE
When you reclaim aspects of the business you farmed out years ago, chances are you’ve lost much of the expertise in those areas. That means current staff and new hires must receive thorough training in all insourced operations. Without a comprehensive training program, your insourcing initiative may backfire.

“Training is always the ongoing battle,” Frank Perryman confirms.

Training is no less important on the other side of insource partnerships. When it’s successful in transferring lines to its shop, Flinchbaugh Engineering ends up fashioning many products on many types of equipment. That’s a formula for bottlenecks and poor quality without adequate staff training. Flinchbaugh often schools its workers at customer plants to acclimate them to the new equipment and processes, and it even may hire some of the customers’ staff — with customer approval, of course — to assure a smooth transition. Lehman notes that Flinchbaugh’s Employee Stock Ownership Program (ESOP) makes training a shared goal of all workers.

“Having a plant full of owners makes a world of difference,” he says. “Our whole workforce is dedicated to the customer. It’s a whole lot easier to get our people involved in training.”

GET CREATIVE
Insourcing may be the hot new trend, but that doesn’t mean all companies are in the vanguard. If you encounter resistance when wooing a potential insource partner, get creative.

When it proposes a line transfer, for example, Flinchbaugh may try to funnel its bid to the corporate controller rather than, say, the procurement manager on the theory that the CFO will appreciate the opportunity to prolong the life of company equipment.

“You can have some guy in China reinvent the wheel for you and you’ll save capital,” Lehman says, “but all those years of creating and refining the product, the millions in assets such as equipment, you throw that all out. We make out real well with controllers. They say, ‘Wow, all these assets that we were going to sell for scrap metal can have some value in the future.”

The more creative your approach to insourcing, the greater your likelihood for success. Flinchbaugh discovered that line transfers work best when Flinchbaugh, rather than the customer, owns the production equipment. Now, Flinchbaugh won’t complete a deal unless transfer of the equipment is part of it.

“We need to own the equipment if we’re to take care of it,” Lehman says. “We may pay $1 for it, or the customer can depreciate it while it sits in our factory, but we’ll own it at the end of depreciation. Here’s the reason: Have you ever checked the oil on a rented car? Neither would we.”

Owning the equipment also allows Flinchbaugh to deploy it in off hours for its more traditional customers, creating a nice ancillary revenue stream.

Once you regard insourcing as your primary approach to business, creativity will follow as a natural corollary. Says Ron Staub:

“In industry today, everybody says, ‘Innovate or die.’ That’s absolutely true. If it comes down to price, you can’t sell lower than those guys in China, so you have to come up with a new product, a new service. Once you start to think like that, you see opportunities everywhere. It’s a matter of how much risk you want to take.”

DON’T RELY ON “BUY AMERICAN” PROGRAMS
In some ways, insourcing is a reaction to the shifting of jobs overseas and an attempt to bring them back home.

Laudable and patriotic as this may be, it still makes sense to treat slogans touting domestic sourcing with a healthy degree of skepticism. At the end of the day, your prospective partners will make solid business decisions based on their companies’ best interests. That may mean partnering with you, but it just as easily could mean continuing to outsource their business if you don’t offer a competitive advantage. Don’t count on brownie points because you’re a domestic firm.

“We like to keep things in America as much as possible, but it has to be within reason,” Perryman says. “The American worker has to recognize that, too. When you want to compete globally, you must look at your model and say, ‘What’s wrong with this picture?’ A lot of reflection in the mirror can give you the answers you’re looking for.”