Bringing Business Back
With the dynamics in offshore manufacturing changing, some domestic laboratories are finding reshoring success
It was late 2004 when Olson Dental Laboratory made the strategic business decision that would help preserve the 4th generation family-run laboratory from an alarming reduction in sales.
While dentistry in many parts of the country that year flourished and bathed in the financial windfalls generated by the makeover craze, businesses located in the heart of America’s giant manufacturing cities had already felt the early squeeze of an economy in trouble. Detroit, home of the Big Three automakers, was already in dire straights by the mid-2000s. The city had lost nearly 25% of its manufacturing jobs and would lose another 23% by 2010; unemployment hovered in the 15% range that year but would soar to more than 20% by 20091; and the exodus of people out of the city to the suburbs and beyond reduced the 4th largest city in the United States to the current ranking of 18th.2
“Because of Detroit’s freefalling economy, we were down a half million dollars in sales over a two-year period,” recalls Olson’s president and CEO, Jeffrey Tolksdorf. “People in the city were moving; they didn’t have health benefits; it was a tough place to operate a business and
make a living.”
Most of the cases coming into the 80-employee laboratory were prescriptions for metal-based PFMs. The dental community in Detroit and surroundings had been slow to adopt all-ceramic solutions and were definitely not interested in investing in technology. Although the price for gold had not skyrocketed yet, it had begun its slow climb upward, forcing higher prices for bread-and-butter products. When local dentists panicked over the rising costs, some of Tolksdorf’s competition slashed prices to capture or retain market share. “It became a race to the bottom as laboratories dropped their prices,” he says. “We immediately lost a few of our good accounts in a single year.”
That is when Olson Dental realized it would need to act quickly to stop the bleeding. Olson Dental had, over the years, forged a relationship with an offshore distributor but had resisted moving in that direction until now. “We started our global product, our Evolution line, in May 2005,” he says. “It was, and is, a viable product line for a depressed economy and a city hit hard by the recession.” Tolksdorf and his team took great pains to control the quality of the end product, from demanding that the same porcelain and alloys used stateside be used in the construction of these imported restorations to enforcing equal quality control standards. They also were completely transparent with their clients about the country of origin. In a short time, this segment of Olson’s business was grossing a
million dollars a year. But growing this small but significant segment of the business was hardly their only intent.
“As soon as we started providing an offshore solution for our clients, our next goal was to figure out how to bring the manufacturing of these exported products back onshore.”
The Battle to Reshore
The return of manufacturing to US shores is a popular sentiment felt by many in this country who have watched its rapid decline over the last two decades. And Made in the USA has become the chant du jour echoed lately in TV commercials and media stories of US-based companies bringing offshore manufacturing, most based in China, back home. Apple, GE, and even TapHandles, a small company headquartered in Seattle that produces beer-marketing products, have made news headlines as they announced plans, whether token or real, to return all or part of their production to US-based plants and create US jobs. A survey conducted by Boston Consulting Group in April 2012 found that nearly one-third of US-based manufacturing executives at companies with $1 billion sales plan to bring production of their products back onshore.3
So what factors are tipping the advantage balance beam? It is a complex economic web as global manufacturing continues to shift focus in search of a labor, cost, and logistics edge. Keith Schulz, Jr., now general director of Vilube, a lubricant and chemical manufacturing company located in Ho Chi Minh City, Vietnam, was in charge of RPS Technologies, a Bangkok, Thailand, rubber parts company manufacturing protective parts for brake calipers and the master cylinder as well as wiper blades. All were destined for US-based auto industry assembly plants. The advantages of labor arbitrage and raw material supply kept this largely manual operation in play as workers packed and unpacked rubber molds, trimmed the finished mold flash, and visually inspected each part to keep defect rates at less than 20 per million. “You can’t automate the manufacturing process for rubber parts very well because of the inherent characteristics of the material,” says Schulz. “That’s why the manufacture of anything that requires a high degree of hand labor will continue to stay in countries where there is a cheap labor advantage.”
To that point, Jeff Noles, founder of Sound-Track Inc., a cloud-based business management software company based in Los Angeles and servicing the US dental laboratory industry, believes the majority of dental restorative work being done in China will stay in China for now. “The majority of work going offshore are single unit PFMs, which are labor intensive products and where China still holds an advantage,” he says.
However, China’s low-cost labor advantage may be ebbing. With workers’ wages rising at the rate of 15% to 20% per year,3 manufacturing products in China has become more expensive, and for some industries, that has made offshoring less attractive. The rise in wages has also spurred the rapid growth of a Chinese middle class population, one that is less interested in labor-intensive work than consumerism. For offshore manufacturers in urban areas and selling products to the US, it is becoming more difficult to maintain their price gap advantage. Noles, who lived in China for more than 10 years, helping US businesses set up operation in China and co-founding three technology-focused companies, lends his perspective. “We see the future of manufacturing as still going to China but it won’t be as strong as in the past. The reason is that the Chinese urban population has just passed the 50% threshold, which means there are about 650 million people now living in the cities.” China’s continued progress toward a more economically developed society is resulting in better paying jobs and putting a greater share of the national wealth in the hands of consumers.
In response to higher wage demands and with a slowdown of workers migrating from the countryside, causing a potential labor pool shortage, Chinese manufacturing facilities have invested heavily in technology to mechanize production capabilities and keep pace with the increased speed of manufacturing supply chains. “China has invested heavily in high-priced German-made technologies and in new materials to automate production,” says Schulz. “RPS Technologies was one of the last labor plays in the auto parts industry. With the speed at which the auto supply chain moves, companies still in that market can’t rely on cheap labor and expect to be around in five years. There will always be someone cheaper or better, either because of labor or because of technology.”
This message is not lost on offshore companies manufacturing and selling restorative services to the US dental market. According to Claus Dampmann, general manager of US-based Pro-Lab Solutions, its offshore manufacturing partner in Zhuhai, China, Veden Dental Laboratory, is investing large amounts of capital in new technologies and materials in order to shorten turn-around and provide the all-ceramic services that are in such demand stateside. “In the next two to three years, we believe a significant portion of the restorations manufactured overseas will be CAD/CAM produced,” he projects.
For offshore laboratories, like Veden, where the primary play advantage has been labor-intensive PFM restorations, it’s not just rising wages, the skyrocketing price of gold, or the higher cost of fuel for transportation that is behind the move to mechanize. The real challenge for them has been the rapid adoption in the United States of all-ceramic restorations with fewer and fewer numbers of PFMs arriving for offshore manufacture. “When the cost of a metal-based crown became higher than the same crown milled in zirconia, US dentists began converting patients from PFM to an all-ceramic solution,” says Dampmann. “Those orders for all-ceramic restorations were being serviced by the growing number of domestic milling centers and staying in the US, which was cutting into our opportunity to be a player in that value supply chain.” Although PFM manufacture is still the lion’s share of the restorative work Veden receives and ships to US shores, the China-based facility is gearing up to position itself for a market rapidly transitioning to non-metal-based products that can only be produced using sophisticated technologies.
But adopting production technology in and of itself does not necessarily level the playing field for manufacturers onshore or off Schulz says. Service, communication, and logistics play very large roles in sustainability. “If all the manufacturing players servicing the US restorative market have technology, then it’s going to be customer service, lead time, and communication that capture the market.”
And that is an uphill battle for Dampmann, but not because of lead-time. He believes his operation has that in hand. “If you own, or purchase, a 3Shape scanner and send us an STL file, we can generally have that restoration back in your hands in three business days,” says Dampmann. Where they see the pinch is in price. “The price point between a full-contour zirconia crown milled in the US and one milled in China has narrowed considerably,” says Dampmann. “A year ago there was a definite advantage. But now the increased numbers of milling centers in the US, all competing on price, has narrowed that competitive playing field.” Still, for customers looking for one-stop-shop access to a wide range of competitively priced metal- and now ceramic-based products, Dampmann believes offshore production is still a very viable solution.
Noles is not as sure. He believes that domestic businesses that can offer super-fast logistics, ease of communication, and quick reaction to a changing restorative materials market can offset the advantages of offshore. However he warns, “If technology and logistics can erase the labor arbitrage between Chinese and US-based laboratories, then it just comes down to who runs a better business.”
Reshoring Initiative
And that brings us back to Jeffrey Tolksdorf and Olson Dental. Determined to reshore as much of the offshore-manufactured Evolution product line as possible, Tolksdorf, who has a degree in business administration/accounting, knew he had to rethink his entire business model and retool the laboratory to not only meet the demands of a new economy but also to carefully reposition the business for the next generation of family ownership. To that end, he and his senior technicians strategized a 5-, 10-, and 15-year business plan for the company. Then, they began analyzing the materials they were using for their economical PFM line to find a combination of porcelain and alloy what would give them a more cost-effective, competitive product and then worked with suppliers to get more favorable materials pricing. They analyzed staff, and although heavy with highly paid senior management, Tolksdorf did not want to jettison experience and quality of service for lower cost labor. So they cleaned house, weeding out the less productive and trimming the employee roster from 80 to 60. They shuffled manpower to place lower-paid technicians on lower-priced product lines and cross-trained so they could remain open all 52 weeks of the year to give their clients the service consistency and reliability needed in a responsible business partner.
They invested in milling, scanning, and 3D printing technology, spending close to $400,000 over the next six years to automate production processes and increase production volume while cutting labor costs. The technology also allowed him to tap into new markets by opening the door to the wide range of products and services offered by domestic milling centers. Now his business had the flexibility and agility to react to market changes as well as increase production volume without increasing overhead. “In the last two years, we have been successful in not only bringing back large group accounts that had left us to go offshore, but also in converting some of our Evolution clients to our onshore business segment,” says Tolksdorf. And this, along with attracting new clients to new product offerings, has put his business within sight of recouping the more than half-million dollars in revenue lost during the toughest recessionary years and increasing his staff close to pre-recessionary numbers.
Of course, automating production comes with its own set of problems Tolksdorf admits. Pricing structures for milled products are lower, which means lower profit margins and the necessity to move more cases through the laboratory each week using the same number of people, working the same number of hours. “We were processing 1000 cases a week using conventional manufacturing processes,” says Tolksdorf. “Now we have to process 1200 cases a week to make the same amount of profit and that may have to increase to 1500. We are having to do more without bringing in new people, and the only way we can do that is rely on technology to make us better, faster, and cleaner.” And he is relying heavily on domestic outsourcing to take the overflow in order to increase production even further and grow the business.
With the commodization of milled restorations, Tolksdorf struggles to find the keys that will lock client loyalty to his business rather than have them shop solely on price. His success thus far has been in communicating with clients, educating and selling them on Olson’s services, from faster turn times and better quality to competitive pricing structures. “Better quality, however, is not necessarily compatible with faster turn-around times and lower prices,” says Tolksdorf. “It is a battle we have to fight every day.”
Where We Need to Be
The battle to maintain high quality standards in mechanized production cycles is still hampered by disruptive analog steps that slow down and add cost to the process and end product, not to mention interjecting the potential for human error, needs resolution. Lee Culp, chief technology officer for Dental Technologies Inc. (DTI) is hopeful that soon technologies will be introduced that automate the grinding, deburring, glaze, stain, and hand-finishing steps necessary to get product out the door. “The industry in terms of transitioning to a fully digital workflow is still in its infancy and needs further development in order to get us where we need to be,” he says. However, delivery logistics in a market being driven by an impatient product cycle, he believes, is one area that will be an equalizer to offshore competition, even if offshore facilities transition to digital production strategies. “The fast-paced cycle of innovation in new materials and machinery is constantly changing how we produce product and what we use to produce that product,” says Culp. And shortened product cycles combined with the demand for faster turn-around will challenge the reaction time, delivery logistics, and price competitiveness of far-flung production.
It is not unlike what happened in the automobile industry, where manufacturers figured out that car production in close proximity to the market makes more business sense than building cars offshore and shipping the finished product to distant destinations. “In the global automobile manufacturing industry, companies like GM and Toyota, for example, set up assembly plants in different countries to produce the makes and models of cars popular with that population,” says Schulz. “So GM, together with their Chinese partners, are building cars in China, not to send to the US, but rather manufacturing popular makes and models to sell to the Chinese consumer.”
Manufacturing restorative products closer to the customer for better service may be the winning play as the adoption of digital technologies by both clinicians and laboratories moves forward to enhance the flow of communication, speed the transfer of digital files, and contract delivery times.
It is a transformation in mindset that does not come easily for a 67-year-old company like Olson Dental, but, like Detroit’s Henry Ford, a reality that he and his team now embrace as a strategy needed to survive in the new industrial age of dental technology. “We must realize that times have changed and doing business the way we used to has gone out the window. None of these changes could have happened without the foundation set by our previous generation and insights from our new generation.”
References
1. Homefacts. Detroit Overview. Available at: https://www.homefacts.com/Michigan/Wayne-County/Detroit/communityinfo.html. Updated 2012. Accessed February 3, 2013.
2. Seelye KQ. Detroit Census Confirms a Desertion Like No Other. The New York Times. Available at: https://www.nytimes.com/2011/03/23/us/23detroit.html?_r=0. Updated March 22, 2011. Accessed February 3, 2013.
3. McKinsey Global Economics Intelligence. Insights China: Macroeconomic content. Available at: https://solutions.mckinsey.com/insightschina/default/en-us/about/offering.aspx. Updated April, 2012. Accessed January 29, 2013.
