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Local-for-local production strategy – the Omron casePierre van Lamsweerde

Reshoring pioneers driven by a business reality How Omron in the Netherlands was one of the first companies to move ‘far-away’ production closer to home. What’s their secret?

At a time when ‘re-shoring’ was merely a freshly coined term - more of a pipe dream than a concrete goal really, Omron’s factory in ‘s-Hertogenbosch (the Netherlands) ran full steam. When it all began with setting up a few production lines, ten years later, the factory has expanded production by a factor of five: nearly three times faster than the market's growth. Their secret? Omron saw a new reality and decided to act on it.  

Our industry needs to become sustainable. That’s a fact. Together with the urgent threat of climate change, world-wide scarcity due to corona, and recent geopolitical tensions, this metamorphosis should be done today rather than tomorrow. As pioneers, Omron foresaw this reality a decade ago – although sustainability wasn’t on the agenda at that time yet.

Omron's Dutch factory illustrates how to be profitable while moving production closer to home. The key to success in one word? Innovation.

Not a dark factory

" When you walk through our factory, you will see all different types of assembly lines," says Paul Sollewijn Gelpke, President at Omron Manufacturing of the Netherlands BV in 's-Hertogenbosch and member of the Management team of Omron Europe BV in Hoofddorp – the city where Omron's European headquarters is located. He adds: "In our factory you will see a range of products that were transferred from our manufacturing facilities in China to Europe. However, not one production line is the same. Each line is based on both the latest proven technology and our own innovations developed by in-house R&D and Engineering teams. We are in a positive spiral of innovation that enables production on location. I believe it is the only way to improve landed cost performance and quality. This way we are able to stay ahead of the market."

The plant in ‘s-Hertogenbosch is not a 'dark factory' – and it also will never be one. On the newest assembly lines, people work together with a robot that does the repetitive test work. The robot also helps people to perform their task in the best possible way adjusted to the skill level of the operator. Omron’s vision on manufacturing is that there should be harmony and collaboration between automated processes and people. Repetition is automated as much as possible, and machines should help people to do their job better by providing relevant instructions and learning features.

This scene provides a peek into the future of work in a factory. Not a doom scenario, where people are replaced by machines, but one that positively elevates the skills and potential of people: “Labor scarcity is a huge problem everywhere in society, including factories. This means we have no choice than to make optimal use of available labor and find ways to prioritize the well-being of employees. That is why we choose to focus on smart manufacturing systems and training of people. Particularly education is important, because we need to keep people interested in factory work.”, says Paul Sollewijn Gelpke.

For example, the newest machine - a pilot line, has an AI controller on board. The machine learns from the human operator and uses that knowledge to give directions to new operators. The machine observes the operator and notices differences, such as if the person is right-handed or left-handed. In that case, the machine translates the instructions. This also means that at some point, the machine stores so much information that it will translate this data into a tool that efficiently teaches the human operator new skills.

Landed cost neutral as a competitive advantage

De-centralization turned out to be a winner. Nowadays, the plant in Brabant has become Europe's central location for Omron’s manufacturing and supply chain. But only a decade ago, there were about two plants and wide range of logistical hubs in each country. The factory’s role was much smaller: Only a fraction of what Omron sold in Europe was made in the Netherlands. From 2015 onwards, onshoring became a strategy. Complete new manufacturing lines were developed in the Dutch factory to produce products for the EU-market that previously were imported from China. Consequently, the factory grew much faster than the market.

Costs, mostly wages, motivated the industry to outsource manufacturing abroad. Omron the Netherlands made the decision to do the exact opposite: It became one of the first companies to do more locally. At Omron, they realized that if they wanted to be competitive, everything must be produced landed cost neutral. This means that every product made in the Netherlands, should cost the same when made in China - including transport costs. In other words, it does not matter if a product is more expensive, as long the overspending is counterbalanced by lower logistical costs. The competitive advantage is then mainly in flexibility and lower inventory costs. Now, ten years later, sustainability has been added to that.

So how was this feasible? In other words, how do you produce landed cost neutral compared to, for instance, China, where labor is 10% of the cost in the Netherlands? For Omron, it all started with a business mindset and the conviction that local production can be cost effective and that it brings additional benefits. In fact, the whole organization should be built around this belief. Because if you are going to produce locally, you need to find a way to solve increasing cost of labor and materials. Without process- and product redesign, you will lose the benefits you just won by producing locally.

Secondly, you need to invest heavily in innovation. Re-shoring production is not the same as making a ‘copy’ of another factory. On the contrary, the factory in 's-Hertogenbosch is a complete lean factory for which entirely new innovative assembly methods had to be developed. Such as low-cost intelligent automation, supplemented by automation, robots, and AI. In other words, a complete process redesign needs to be carried out to succeed in reshoring the production.

The burning platform for local production

What can companies, that are eager to reshore themselves, learn from Omron the Netherlands? Well, first, the awareness that reshoring itself is not the solution for all problems. It’s more than copy-paste of existing factories. In fact, a gigantic technological battle lies ahead that companies simply cannot handle on their own.

In this line of thinking, Paul Sollewijn Gelpke speaks of a ‘burning platform’. This means that there is no time to sit and wait to see what others will do: "There is a huge need in the market for local-for-local production. It will go very fast now. If you start the process now, and you do this all by yourself, you are reinventing the wheel. You basically start where we did eight to ten years ago”.

He continues to add the importance of doing this together: “Reshoring is something that is better done together with partners. With other companies, but also with knowledge institutions and the government. As Omron, we have a lot of knowledge that we are willing to share with others. But companies must also participate in a network where knowledge and experiences are exchanged. Technology is an enabler, but it comes down to automating processes - including underlying concepts, and the entire IT infrastructure. The government can also play a role in this with setting up stimulating innovation programs. These can help companies with the infrastructure and networking with the right parties."

Bound to make a difference

Today Omron’s factory in ‘s-Hertogenbosch produces 25% of the share in the European market today. Their goal is to grow to 50 to 60%. Plans are to triple the capacity in Europe over the next two or three years - either in-house or outsourced to regional (European) contract manufacturers. Because not all products are suitable for in-house production. A careful evaluation is needed to look at what is made in the factory itself, and what can be done by local partners.

Could reshoring mean a revival of the European industry? It looks hopeful. When local-for-local production picks up, independent players must work closely together. They are, in other words, ‘bound’ to make a difference.