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SRP takes back manufacturing

Exports heat up as some of the Ontario manufacturer's production returns from China.


Kevin Merritt is just getting warmed up with SRP's premium Even-Glo infrared patio heaters. PHOTOS: STEPHEN UHRANEY

Kevin Merritt is just getting warmed up with SRP’s premium Even-Glo infrared patio heaters. PHOTOS: STEPHEN UHRANEY

Kevin Merritt’s decision to bring production of Superior Radiant Products’ (SRP’s) EvenGlo infrared patio heaters back to Canada from China was a move that bucked the offshore manufacturing trend that even his company followed. But the president and CEO of the Stoney Creek, Ont.-based manufacturer of infrared heating products says it was necessary to gain better quality control of the product, which sells for $2,000 and up, to meet the needs of demanding five-star hotel clients and others in the North American market.

Low labour costs and currency, not to mention access to a burgeoning consumer market, once made China an attractive place to invest, but that’s changing now. Reshoring is a growing trend credited with contributing at least 25% of the 500,000 new jobs in the US between 2010 and 2012.

What’s causing this dramatic shift? China’s cost-competitive advantage in manufacturing over the US shrank to less than 5% by 2012, according to a TD Economics report on offshoring. At the turn of the century, American labour costs were 40 times that of the Chinese. Since then wage inflation in China has risen dramatically – three times the rate in the US – and now labour costs in the American south are a more manageable four times as high. The remninbi is appreciating, oil and transportation costs are volatile and tariffs rose 20% in 2013.

“Producing in China is becoming more and more difficult. Costs are going up, lead times are going up; the trading requirements are becoming more difficult to deal with because you can’t count on the quality and we are expected to pay upfront for the goods. It just wasn’t working out for us,” Merritt says.

Mike Konstantinidis welds supports.

Mike Konstantinidis welds supports.

The patented element on SRP’s patio heaters was developed and made in Quebec. These were shipped to China for further manufacturing and assembly, and then the value-added goods were shipped back for sale to the North American market. Now those patio heaters, are being made in Stoney Creek.

However, SRP still “controls 100%” of its Chinese production of commercial and industrial space heating units – used in factories, stadiums and chicken barns – through its wholly foreign-owned entity (WFOE) Qingdao Thermpro Ltd. in China.

Serving end-user markets
It’s a nimble manufacturer that builds a global strategy for coping with the ups and downs of the world economy. This has certainly worked for SRP, which first set up shop in China in 2000 after being approached by a foreign representative office there. SRP shipped product for large projects including Great Wall Motor Co. and ThyssenKrupp AG China. Problem was, the Canadian company was not allowed to sell to its Chinese customers directly. Nor was it allowed to invoice, says SRP export director Lily Ning.

A gas analyzer measures tube temperature at various points.

A gas analyzer measures tube temperature at various points.

So in 2009, SRP created a holding company in Hong Kong that in turn owns Qingdao Thermpro Ltd. With the WFOE – which took two years to set up – SRP buys and sells from overseas, and manufactures in China. Thermpro has an extensive dealer network there and is responsible for all sales. Most of the products sold in China are developed and supplied from the Stoney Creek facility, Ning says, except some components of the industrial and commercial heaters that are made for the local market and required to meet China’s tariffs regulations. Sometimes it just makes sense to make goods close to the end-user market.
“All of the R&D, all of the core components, the critical parts all come from the Canadian operation,” says Merritt. “We control the quality that way.”

He says business opportunities outweigh the challenges in China as the country’s economy continues to boom. “They are building huge factories. Where a typical large job in North America might be 50 to 100 heaters; a large job in China would be 300 to 500 heaters, or more. One operation in China has installed more than 1,600 of our heaters.”

He notes the “unbelievable” size of buildings. “I’ve worked in buildings in China that were a kilometre long and 250 metres wide. You can hardly see the end of the building. Just massive.”

SRP’s infrared industrial and commercial heaters are “just perfect for those buildings because they can maintain a comfortable temperature for working without having to keep a higher heat for the rest of the building,” Merritt says.
And it doesn’t hurt that the Chinese government is encouraging natural gas as an energy source for heating to curtail pollution levels.

The US has also changed its energy policy thanks to new supplies of shale gas. SRP expects to grow market share in the US, where it has a light assembly plant in Kennesaw, Ga.

In Europe, SRP has a strategic partnership with GoGas Goch GmbH, a Dormund, Germany-based manufacturer of heating equipment for soccer stadiums, but it also specializes in developing railcar defrosting and other infrared heat systems. Although there were 15 or so competitors in the European market, GoGas approached SRP because it provides as good a quality product, but at a lower price.

Mothusi Dominic spot-welds housings.

Mothusi Dominic spot-welds housings.

Under the 2010 alliance, SRP products are marketed in Europe, while GoGas products are marketed in North America and China. The strategy also allows for the sharing of product technology and engineering for future developments. Merritt credits this arrangement for the company’s growth in its next biggest offshore market: Turkey, where apparently there are a lot of soccer stadiums being built. SRP also has marketing arrangements in Saint Petersburg, Russia.

“We’re a net exporter to China. How many Canadian manufacturers can say that? Forty per cent of our business is in exports,” John Robinson, SRP’s operations manager told PLANT during the August grand opening of the new Stoney Creek plant.

Since its inception in 1995, SRP has grown from three employees in a 2,800 square-foot facility to 60 employees worldwide. The company recently moved its headquarters to a 50,000 square-foot facility, including a 40,000 square-foot fabricating and assembly plant, around the corner from its previous location. Merritt places annual revenues in the “eight figures” range.

The move to a larger footprint was the perfect opportunity to implement lean manufacturing principles from the get go.

Management consultant Nigel Southway served as sensei, encouraging input from everyone involved in production. This includes those stamping and bending the sheet metal, assembling components, to packaging and shipping. Key criteria included a build-to-order capability, ensuring the plant was responsive to seasonality, supporting a high mix of products, providing wide-aisle material handling, developing flexible work cells, and cross-training all staff. Interestingly, Southway is involved with SME (Toronto chapter) and the Take Back Manufacturing Initiative, which encourages companies to bring manufacturing back to Canada from overseas.

Mary Tomasic assembles garage heaters.

Mary Tomasic assembles garage heaters.

Ontario’s resources

Because there are so many variations of BTUs used in SRP’s burners, the decision was made to adopt a new ERP software. Plant manager Bruno Brieri says this has helped enormously with the company’s customized manufacturing approach. Each item is produced as needed. Items are made just-in-time so there’s very little inventory kept in the plant.

Why would a global manufacturing company choose to stay in Stoney Creek? Merritt credits Hamilton and Toronto’s “tremendous” resources in both blue- and white-collar workers, proximity to major transportation arteries that offer easy access to Detroit and Buffalo border crossings and the GTA, “all of which are major markets for us.”

It doesn’t hurt that it’s also a beautiful area near Niagara Falls and great for entertaining foreign visitors.
But another plus is Ontario’s corporate tax.

“Don’t say that too loud. But I think it’s a favourable situation for corporations in Ontario now compared to the US. Certainly the labour costs and overheads might be a little higher, but the corporate tax rates are certainly lower,” Merritt says.

“We all rushed to get our products made offshore because labour costs were so much lower in China,” says Merritt, who observes low labour cost isn’t everything.

There are many other factors to consider. Take a closer look at your other costs. As SRP discovered, manufacturing closer to home is more feasible than you might think.

Kim Laudrum is an award winning, Toronto-based business writer specializing in manufacturing. E-mail klaudrum@rogers.com.

This article appears in the October 2014 issue of PLANT.

4 Comments » for SRP takes back manufacturing
  1. Sandy says:

    We agree that the Reshoring trend continues to gain momentum.

    This is a great example of how workforce productivity and Lean strategies can boost competitiveness. By positioning manufacturing near customers, companies gain better flexibility, greater quality control as mentioned in the article, and the agility needed to compete with offshore.

    When productivity is increased, it reduces the Total Cost vs. offshore and boosts competitiveness.

    Reshoring enables companies to more easily respond to customers’ changing needs, eliminate higher shipping expenses, minimize supply chain disruptions and eliminate the larger production runs and inventories associated with long distance offshoring.

    The article mentions implementing lean manufacturing principles and encouraging input from everyone involved in production. Producing near customers contributes to a lean and agile supply chain strategy because when manufacturing is moved next to engineering, companies can improve design, eliminate waste, improve quality and increase productivity, many times making the product more easily and at a lower cost. Thus improving competitiveness by strengthening R&D, promoting innovation and reducing IP loss.

    Lean practices, automation and new technology also create high-skilled jobs that are more difficult to offshore.

    In order to help companies decide objectively to reshore manufacturing back to North America or offshore, the not-for-profit Reshoring Initiative’s free Total Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring. http://www.reshorenow.org/TCO_Estimator.cfm

  2. Duane Stabler says:

    Here is a model company who seems to be doing all the right things to re-shore. Quality is always a concern but when margins between North American producers and China (as an example) tighten the total cost of ownership goes red using an offshore supplier. It would be great to know more details but this story should be read by everyone even thinking about doing it. I’m sure there has been pain but now they are seeing the gain.

  3. Guenter Fischer says:

    I can agree with Sany and Duane – mainly “yes” and a little “no”. I am working in China for a long time and my experiances are two main points like this:
    1. The typical habits of chinese People are not really typical – every areas, if south, North, east or west of China have different habits which are not understandable partly if you don´t try to understand by speaking always true and having private talks additional.
    Use trustful translaters arranged by yourself if you discuss the business contracts and situations, especiall you expect problems of schedule and quality. Supplier translater like to translate too smoothy for the supplier – so they seldom see the reality in detail.
    The reason mostly is not that they want cheat you. No – the supplier´s translator is afraid that he becomes the bearer of bad news and his boss will change his working place to a bader one.
    Of course the own translator costs the own money but finally the communication becomes better and is more based on facts. I guess it is the worth you should pay.
    2. regulary monitoring should be agreed in the contracts always as helping each other to find the best and shortest way by the suppliers possibilities for the accepted quality.
    This also will costs money but you can estimate the costs if you have to change the delivery dates for your customer many times.
    For that Monitoring you have three possibilities according my experiances:
    – your engineesrs will be sent in depend of your requirements to the supplier from time to time, this way is the best safety with the view to the requirements you know best.
    – there are some companies who arrange it by their colleagues or cooperation partners
    – you can use experts, experianced in the profession and living in China as your cooperation partners temporarily
    To think about reshoring and manufacturing near customers can be a good idea if you want have just one customer or customers in just one area with definated distances. In my opinion it is a too short view in this global world.
    The same comment you can find in LinkedIn directly.

  4. Guenter
    Sorry for this late reply…… I was the consultant mentioned in the article and want to set a few things straight.. I think you badly miss the point and need to update your perspective.
    Of course globalized manufacturing can be made to work using the points you have made. I spent 7 years in China and Asia off-shoring manufacturing and the issues you suggest need careful management.
    But the main issue is to avoid assuming that globalized manufacturing to “low cost countries” is here to stay as the only correct strategy.
    The real issue is to understand that all business people must do a “balanced sourcing review” on an ongoing basis as the reshoring trend is supported with real numbers and is creating a move toward localized trade blocs for some products to optimize total costs.
    Although global supply chains have become more efficient they are still intrinsically wasteful and add the fact that container ships are one of the dirtiest things on our planet and you get a sea change in thinking of where we are heading…
    More on how to understand this new thinking at http://www.sme-tbm.org
    Or http://www.reshorenow.org/TCO_Estimator.cfm .
    Or go to http://www.ebnonline.com/author.asp?section_id=1487&doc_id=274559
    Or plug my name into the internet and see a lot of articles on Balanced Sourcing and how LEAN initiatives can help businesses make more informed decisions on eliminating global waste and also benefit the national economies.
    Nigel Southway
    TBM Advocate

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