MNeagle
7th August 2010, 07:25 PM
http://stmedia.startribune.com/images/502*342/2vertical0808.jpg
An ATV engine moved along the assembly line at Arctic Cat’s St. Cloud plant. The company recently announced plans to produce snowmobile engines there, making the process more vertically integrated.
Many manufacturers are reversing the decades-old outsourcing trend, preferring to build more parts in-house.
ST. CLOUD - A weekday afternoon finds the production line humming at Arctic Cat's plant here, turning out engines for the all-terrain vehicles the company produces at its main manufacturing facility in Thief River Falls. The engines move methodically through 22 work stations before they're ready to be tested and loaded onto pallets near garage-sized doors where they can be easily transferred to trucks for the trip up north.
Arctic has manufactured ATVs since 1995, but has been making the engines in Minnesota for only about four years and at the St. Cloud plant since 2007. The previous supplier, Suzuki Motor Corp., still makes Arctic's snowmobile engines, but that too is about to change. Arctic has plans to move production of those engines, now built in Japan, to St. Cloud as well -- a move that will add a still undisclosed number of jobs to the plant's roster of 35 workers.
In doing so, Arctic joins a growing number of manufacturers -- from General Motors to Oracle -- rediscovering the advantages of vertical integration, controlling more steps in the process of sourcing, making and distributing their products. It's a shift away from the outsourcing trend that took off in the 1980s. In 2008, more than half of U.S. companies had a strategy that included outsourcing functions overseas, according to Duke University's Offshoring Research Network, which began studying offshoring trends in 2004.
No one can say now exactly how much vertical integration currently is going on. "I hear a lot about it," said Myles Shaver, a professor of strategic management at the University of Minnesota. "The pendulum swung too far [toward outsourcing], and now it's swinging back."
http://stmedia.startribune.com/images/208*211/3vertical0808.jpg
http://stmedia.startribune.com/images/179*260/7vertical0808.jpg
"It was a goofy, sophomoric idea," said Fred Zimmerman, a retired business professor from the University of St. Thomas, of the wholesale move by companies to outsource functions. "It was based on the principle that it was always cheaper to do things overseas. But the ease of outsourcing -- both internationally and domestically -- was overestimated."
Rising transportation costs are motivating many companies to bring more work in-house. But some have other reasons, including greater flexibility over production as well as concern about the health of their suppliers.
Technology companies, which in the past outsourced many functions in order to specialize in a narrow competitive niche, are among the most active in bringing more work in-house. In January, Oracle Corp. acquired Sun Microsystems in a deal valued at more than $7 billion as part of a strategy to transform California-based Oracle from a database and business-software company giant into one that also offers hardware. In April, Apple Inc. bought a small Texas computer chip maker -- its second such acquisition in two years -- in order to secure a proprietary supply of fast-working chips for mobile devices.
But mature companies also are part of the trend, often for very basic reasons like strengthening their supply chains. Last fall, General Motors acquired the steering business and four plants of its largest parts supplier, which it had spun off in 1999. GM has said it acquired the businesses to ensure a reliable supply of automotive parts.
Much of the revival in vertical integration involves companies reaching back to early stages of a manufacturing cycle, like sourcing their own parts and sometimes raw materials. But in some cases companies are gaining control over later stages.
Last February PepsiCo Inc. acquired two of its largest bottlers, including Minneapolis-based PepsiAmericas, to gain more control over distribution and get new beverages out into the market faster. Rival Coca-Cola Co. quickly followed suit, buying the North American operations of its largest bottler.
That control is even more difficult when plants are in far-flung corners of the world. "In a volatile economy like this one it is hard to be flexible when you're sourcing things from half a world away," Zimmerman said.
That was the case for Bloomington-based Toro Co., which used to buy wheels and tires for its snow throwers and mowers from a Chinese supplier but now produces them at a Toro facility in El Paso, Texas. "Over the past two years, with demand fluctuating down and then up, we need suppliers that are flexible and responsive in shorter windows," said Judy Altmaier, vice president of operations. "Some of our off-shore suppliers are capable of supplying us with quality products at a competitive price, and are flexible in meeting our changing schedules. Others are not,"
The El Paso plant also has started producing emitters -- components that regulate water flow in drip lines used for irrigation. Toro made the switch after encountering quality problems from a Mexican supplier, Altmaier said.
Altmaier said Toro constantly reviews decisions to "make vs. buy," considering a variety of factors. Outside suppliers now make the molded plastic pods where operators sit in Toro's riding mowers, but its plant in Windom, Minn., will produce that component for a new mower the company will begin making this year.
Vertical integration is a key part of the message 3M Co. communicates to Wall Street in investor presentations. The Maplewood-based company has plants around the world that produce chemicals and compounds that support 75 percent of its businesses. The company says the structure, which sets it apart from many competitors, ensures a reliable supply chain and consistent product quality.
The move by manufacturers to do more work in-house has hurt some businesses that have been suppliers. Permac Industries, a Burnsville-based company that makes precision-machined parts for a variety of industries, saw its sales fall about 40 percent in 2009 partly because customers were doing more of that work themselves, said CEO Darlene Miller. She said she knows of other precision parts makers that experienced the same drop-off in business. At Permac it occurred mostly with customers that previously ordered parts for hydraulic systems used in construction and off-road equipment, she said.
Miller's customers told her they were taking the work in-house to keep their employees occupied at a time when the overall level of manufacturing activity was down. "They figured [the recession] would be short-term, and they didn't want to lay off people," she said. Much of that business has since come back to Permac, she said. So far this year Permac's sales are up about 30 percent from 2009.
Keeping up with changing consumer tastes was the major reason Arctic decided to begin making its own ATV engines, according to CEO Christopher Twomey.
"We began to see the market differently than Suzuki," he said. Arctic believed customers were interested in ATVs with more power, but Suzuki didn't want to make the 1000cc engines those vehicles would require, he said.
The St. Cloud plant has two production lines, one of which makes twin-cylinder 1000cc engines for single-rider and side-by-side ATVs. Arctic was first to come out with ATVs with such large engines, and is still the leader in that segment.
Its 1000cc vehicles currently account for about 6 percent of its ATV unit volume, and because they are more expensive, an even larger share of its ATV sales. Perhaps more significant, the more powerful ATVs have higher profit margins, not because of the engines but because they're bigger vehicles equipped with more features.
"We've been able to broaden our product line," Twomey said. That's been particularly important during the last year as the recreational vehicle market tumbled along with the economy, he added. Arctic's overall revenue fell 20 percent last year while its ATV sales dropped 24 percent. Earlier this year Arctic said it expects ATV sales to decline another 10 to 12 percent in the coming year, but said it has been able to gain market share in the hard-hit industry.
Arctic spent a couple of years designing and refining production of the ATV engines in Thief River Falls while the St. Cloud facility was being built. Steve Schwartz, manager of the St. Cloud plant, said he and a planning team spent months taking apart an average engine's 450 parts and putting them back together again. The team also was charged with signing up vendors that would supply engine parts.
That groundwork paved the way for the move to begin making snowmobile engines in St. Cloud, Twomey said. Although production won't begin until 2015, planning is underway. The company believes that it will be easier to comply with new government-mandated emission standards by making its own snowmobile engines and at the same time get a better return on its investment in the St. Cloud facility, which cost about $8 million to build and equip.
Twomey said the plant's employment, down from 60 people in 2008, will likely increase with the addition of snowmobile production. Other workers could be added if Arctic takes its vertical integration even farther and begins machining, or finishing off, some engine parts, he said.
Arctic hasn't decided whether it wants to take on the extra machining work, but the plant could easily be equipped to do that, Twomey said. "The important thing is that we have that capability," he said. "We're in charge now."
http://www.startribune.com/business/100152294.html?page=5&c=y
An ATV engine moved along the assembly line at Arctic Cat’s St. Cloud plant. The company recently announced plans to produce snowmobile engines there, making the process more vertically integrated.
Many manufacturers are reversing the decades-old outsourcing trend, preferring to build more parts in-house.
ST. CLOUD - A weekday afternoon finds the production line humming at Arctic Cat's plant here, turning out engines for the all-terrain vehicles the company produces at its main manufacturing facility in Thief River Falls. The engines move methodically through 22 work stations before they're ready to be tested and loaded onto pallets near garage-sized doors where they can be easily transferred to trucks for the trip up north.
Arctic has manufactured ATVs since 1995, but has been making the engines in Minnesota for only about four years and at the St. Cloud plant since 2007. The previous supplier, Suzuki Motor Corp., still makes Arctic's snowmobile engines, but that too is about to change. Arctic has plans to move production of those engines, now built in Japan, to St. Cloud as well -- a move that will add a still undisclosed number of jobs to the plant's roster of 35 workers.
In doing so, Arctic joins a growing number of manufacturers -- from General Motors to Oracle -- rediscovering the advantages of vertical integration, controlling more steps in the process of sourcing, making and distributing their products. It's a shift away from the outsourcing trend that took off in the 1980s. In 2008, more than half of U.S. companies had a strategy that included outsourcing functions overseas, according to Duke University's Offshoring Research Network, which began studying offshoring trends in 2004.
No one can say now exactly how much vertical integration currently is going on. "I hear a lot about it," said Myles Shaver, a professor of strategic management at the University of Minnesota. "The pendulum swung too far [toward outsourcing], and now it's swinging back."
http://stmedia.startribune.com/images/208*211/3vertical0808.jpg
http://stmedia.startribune.com/images/179*260/7vertical0808.jpg
"It was a goofy, sophomoric idea," said Fred Zimmerman, a retired business professor from the University of St. Thomas, of the wholesale move by companies to outsource functions. "It was based on the principle that it was always cheaper to do things overseas. But the ease of outsourcing -- both internationally and domestically -- was overestimated."
Rising transportation costs are motivating many companies to bring more work in-house. But some have other reasons, including greater flexibility over production as well as concern about the health of their suppliers.
Technology companies, which in the past outsourced many functions in order to specialize in a narrow competitive niche, are among the most active in bringing more work in-house. In January, Oracle Corp. acquired Sun Microsystems in a deal valued at more than $7 billion as part of a strategy to transform California-based Oracle from a database and business-software company giant into one that also offers hardware. In April, Apple Inc. bought a small Texas computer chip maker -- its second such acquisition in two years -- in order to secure a proprietary supply of fast-working chips for mobile devices.
But mature companies also are part of the trend, often for very basic reasons like strengthening their supply chains. Last fall, General Motors acquired the steering business and four plants of its largest parts supplier, which it had spun off in 1999. GM has said it acquired the businesses to ensure a reliable supply of automotive parts.
Much of the revival in vertical integration involves companies reaching back to early stages of a manufacturing cycle, like sourcing their own parts and sometimes raw materials. But in some cases companies are gaining control over later stages.
Last February PepsiCo Inc. acquired two of its largest bottlers, including Minneapolis-based PepsiAmericas, to gain more control over distribution and get new beverages out into the market faster. Rival Coca-Cola Co. quickly followed suit, buying the North American operations of its largest bottler.
That control is even more difficult when plants are in far-flung corners of the world. "In a volatile economy like this one it is hard to be flexible when you're sourcing things from half a world away," Zimmerman said.
That was the case for Bloomington-based Toro Co., which used to buy wheels and tires for its snow throwers and mowers from a Chinese supplier but now produces them at a Toro facility in El Paso, Texas. "Over the past two years, with demand fluctuating down and then up, we need suppliers that are flexible and responsive in shorter windows," said Judy Altmaier, vice president of operations. "Some of our off-shore suppliers are capable of supplying us with quality products at a competitive price, and are flexible in meeting our changing schedules. Others are not,"
The El Paso plant also has started producing emitters -- components that regulate water flow in drip lines used for irrigation. Toro made the switch after encountering quality problems from a Mexican supplier, Altmaier said.
Altmaier said Toro constantly reviews decisions to "make vs. buy," considering a variety of factors. Outside suppliers now make the molded plastic pods where operators sit in Toro's riding mowers, but its plant in Windom, Minn., will produce that component for a new mower the company will begin making this year.
Vertical integration is a key part of the message 3M Co. communicates to Wall Street in investor presentations. The Maplewood-based company has plants around the world that produce chemicals and compounds that support 75 percent of its businesses. The company says the structure, which sets it apart from many competitors, ensures a reliable supply chain and consistent product quality.
The move by manufacturers to do more work in-house has hurt some businesses that have been suppliers. Permac Industries, a Burnsville-based company that makes precision-machined parts for a variety of industries, saw its sales fall about 40 percent in 2009 partly because customers were doing more of that work themselves, said CEO Darlene Miller. She said she knows of other precision parts makers that experienced the same drop-off in business. At Permac it occurred mostly with customers that previously ordered parts for hydraulic systems used in construction and off-road equipment, she said.
Miller's customers told her they were taking the work in-house to keep their employees occupied at a time when the overall level of manufacturing activity was down. "They figured [the recession] would be short-term, and they didn't want to lay off people," she said. Much of that business has since come back to Permac, she said. So far this year Permac's sales are up about 30 percent from 2009.
Keeping up with changing consumer tastes was the major reason Arctic decided to begin making its own ATV engines, according to CEO Christopher Twomey.
"We began to see the market differently than Suzuki," he said. Arctic believed customers were interested in ATVs with more power, but Suzuki didn't want to make the 1000cc engines those vehicles would require, he said.
The St. Cloud plant has two production lines, one of which makes twin-cylinder 1000cc engines for single-rider and side-by-side ATVs. Arctic was first to come out with ATVs with such large engines, and is still the leader in that segment.
Its 1000cc vehicles currently account for about 6 percent of its ATV unit volume, and because they are more expensive, an even larger share of its ATV sales. Perhaps more significant, the more powerful ATVs have higher profit margins, not because of the engines but because they're bigger vehicles equipped with more features.
"We've been able to broaden our product line," Twomey said. That's been particularly important during the last year as the recreational vehicle market tumbled along with the economy, he added. Arctic's overall revenue fell 20 percent last year while its ATV sales dropped 24 percent. Earlier this year Arctic said it expects ATV sales to decline another 10 to 12 percent in the coming year, but said it has been able to gain market share in the hard-hit industry.
Arctic spent a couple of years designing and refining production of the ATV engines in Thief River Falls while the St. Cloud facility was being built. Steve Schwartz, manager of the St. Cloud plant, said he and a planning team spent months taking apart an average engine's 450 parts and putting them back together again. The team also was charged with signing up vendors that would supply engine parts.
That groundwork paved the way for the move to begin making snowmobile engines in St. Cloud, Twomey said. Although production won't begin until 2015, planning is underway. The company believes that it will be easier to comply with new government-mandated emission standards by making its own snowmobile engines and at the same time get a better return on its investment in the St. Cloud facility, which cost about $8 million to build and equip.
Twomey said the plant's employment, down from 60 people in 2008, will likely increase with the addition of snowmobile production. Other workers could be added if Arctic takes its vertical integration even farther and begins machining, or finishing off, some engine parts, he said.
Arctic hasn't decided whether it wants to take on the extra machining work, but the plant could easily be equipped to do that, Twomey said. "The important thing is that we have that capability," he said. "We're in charge now."
http://www.startribune.com/business/100152294.html?page=5&c=y