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In the last couple of decades, the valve manufacturing industry was focused on identifying low-cost manufacturing destinations as ‘Outsourcing’ had huge pricing benefits. Despite the pricing benefits, low quality and late delivery were serious concerns to the manufacturers and end users. Has the situation changed in recent years? Are valve manufacturers more focused on increasing their competency internally than earlier? Is the concept of ‘Insourcing’ or ‘Reshoring’ of valve manufacturing considered as a solution to the issues faced by outsourcing of valve manufacturing?

Let us understand how the valve industry operates before analyzing the advantages and disadvantages of outsourcing of the valve manufacturing process. In low-cost countries, there are two types of companies: US/European companies having their operation in developing countries as well as local companies based only out of the low-cost countries. In the former, activities such as designing, research & development, and testing happen in US/Europe, whereas the labor-intensive production processes such as manufacturing of rough castings for valves and valve parts take place in the low-cost manufacturing regions. This enables the manufacturers to maintain the quality and also have the advantage of low pricing. These companies manufacture products (special or customized valves) or parts (flanges, fittings, etc.) which are large in size or critical in applications. The second set of manufacturers produce standard products (standard valves, flanges, and fittings) in larger volumes and export to developed countries such as the US and Europe through various market channels. Demands for the low-cost manufacturers are usually generated either by direct buyers (process equipment manufacturers and engineering services companies) or indirect buyers (agents and distributors).

Quality has been a serious concern for the purchasers ever since the concept of outsourcing was introduced in valve manufacturing. Huge investments are made by valve manufacturers to improve the production and process. Along with investments, many standards are created and implemented to ensure quality and to increase repeatability of products manufactured in low-cost manufacturing countries. Specifications and guidelines are provided for vendor qualification, weld procedures, inspection and testing, and compliance certificates.

The issues faced during the beginning of this outsourcing are:

Quality is a major problem faced by all the buyers sourcing from low-cost countries. The castings used as the valve body have to be checked for internal and external defects. Porosity, surface roughness and inclusions, lack of consistency are the major issues that affect the product quality significantly. High rejection rates and delayed delivery were also a result of this failing quality of products. Inspection and testing is an inevitable part for these products from low-cost manufacturing countries to eradicate the concerns regarding quality. Growing supply chain demands development for new standards to ensure the quality compliance for products and processes. The existing standards organizations include all international associations such as the American Petroleum Institute (API), the American Society of Mechanical Engineers (ASME), the American National Standards Institute (ANSI), and some regional associations such as European Committee for Standardization (CEN), BSI Valve Standards (the United Kingdom), CSA Valve Standards (Canada), DIN Valve Standards (Germany), EEMUA Valve Standards (the United Kingdom), and JSA Valve Standards (Japan). The suppliers adhere to some International as well as regional standards based on the specifications from the purchasers. Counterfeit certifications were provided by suppliers to enhance their competency. Integrity of the certifications remains a huge concern these days. Therefore, buyers started to have stringent supplier selection criteria and conduct vendor performance evaluation program, including onsite assessments, monitoring, and evaluation of the quality of the valves produced. This resulted in a number of good suppliers emerging from many low-cost manufacturing regions and buyers have the approved producers list (APL) based on their requirements and specifications to avoid these issues and ensure quality.

Despite the quality issues prevailing, new concerns also arise which need to be addressed completely to improve the efficiency of the low-cost manufacturing regions.

Loss of intellectual property (IP): Many patents, copyrights, trademarks, trade secrets, confidentiality provisions, and licensing arrangements are established by valve manufacturers to ensure the protection and prevention of intellectual property. Valve manufacturers in developed nations restrict some important patents, copyrights, trademarks, trade secrets to low-cost manufacturing centers or enter into an agreement to maintain confidentiality. According to International Property Rights Index 2016, China and India rank low in IP protection, and enforcement is expensive and subjected to higher risk. Despite all these preventive measures, when the designs, technology, and processes are shared with other suppliers from low-cost manufacturing countries, the level of difficulty increases for safeguarding the intellectual property. Any proceedings against the misuse of intellectual property are usual costly and it is unrealistic to prove intellectual breaches to the law. Some companies also duplicated their patents in countries such as China for protecting the original patents. Lack of securing of intellectual property rights may lead to loss of competitive and financial position of the buyers.

Lack of Skilled Labor: Aging workforce on the verge of retirement is a threat prevailing throughout the manufacturing industries. Loss of product knowledge and hands-on experience are the major risks of an aging workforce which can be only obtained over the years by making errors and overcoming the same. Reduction of the skilled and expert workforce increases the overall costs to company such as productivity, employee replacement, etc. Investments for training and development have increased rapidly to maintain and develop the skilled workforce in most of the developed countries.

Cost Advantage: The criteria necessary for any country to match the requirements of low-cost manufacturing regions are massive low-cost labor, many production facilities for castings/forgings, and good transportation facilities. In China, yearly average manufacturing wages are growing rapidly and have increased more than 80% from the year 2010, and these countries are losing their position to Malaysia, India, Thailand Indonesia, and Vietnam. India is trying to maintain the competitiveness in manufacturing, however, issues related to infrastructure such as power, poor road conditions, and low productivity due to improper planning and supply chain management. The other countries lag in metal casting/production facilities to manage larger scale of operations when compared to China and India.

These issues evolved over the years and valve manufacturers are seriously thinking about the alternatives to increase the efficiency and productivity of valve manufacturing. Some companies feel that the today’s buyers are more specific about the quality and lead times of the product. Bringing back the manufacturing to or near customer bases will definitely have significant impact in the delivery and transportation. Gemco Valves, USA has maintained its strategic alliances with Viser Manufacturing of North Bergen, New Jersey and All Aces Construction of Edison, New Jersey for engineering, manufacturing, and installation of their valves. Giacomini brought its production from China and the Far East to Italy to avoid the high lead times and transportation costs. This enables them to use high quality materials and have better specifications and tolerances.

Conclusion: Valve manufacturers are still debating on the quality concerns and pricing benefits of ‘Outsourcing’ of valve manufacturing. Valve experts and manufacturers consider automation to reduce the labor cost difference and increase the scale of operations. They are trying to analyze the cost of outsourcing and resourcing and understand the benefits of each process completely. Although the concept of outsourcing may not end, it may reduce as valve manufacturers are trying to understand the total cost of ownership of outsourcing and insourcing by considering all the cost and risk factors involved in the process. This definitely increases the investments in automation of their facilities or identifying alliances within their supply or customer base. Technology, skill, capacity, and time are factors required by valve manufacturers to increase their competency and to insource their manufacturing.

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Frost & SullivanFor over five decades, Frost & Sullivan has become world-renowned for its role in helping investors, corporate leaders and governments navigate economic changes and identify disruptive technologies, Mega Trends, new business models and companies to action, resulting in a continuous flow of growth opportunities to drive future success. Contact us: Start the discussion.

Frost & SullivanFrost & Sullivan

For over five decades, Frost & Sullivan has become world-renowned for its role in helping investors, corporate leaders and governments navigate economic changes and identify disruptive technologies, Mega Trends, new business models and companies to action, resulting in a continuous flow of growth opportunities to drive future success. Contact us: Start the discussion.

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