Manufacturing from the ground up
For decades, many manufacturers have subscribed to the idea that outsourcing production to contract manufacturers in low-cost countries is the best strategy. That approach makes sense for those whose main objectives are to keep costs as low as possible and profits as high as they can. But not every company's manufacturing strategy is motivated solely by such cut-and-dried concerns as cost and efficiency. For some, the guiding principles are more complex and nuanced.
One of those is Amway, the Ada, Michigan, USA-based manufacturer of nutrition, beauty, personal care, and home products. Amway operates on a direct-sales model; its products are typically sold and delivered to consumers by individual entrepreneurs called Amway Business Owners. From its earliest days, Amway's founders, high-school pals Jay Van Andel and Rich DeVos, wanted their company to provide a means for individuals to provide for their families and forge their own economic futures. As the company notes on its website, "all people, regardless of education, economic background, or professional experience, can become an Amway Business Owner and build their business by selling Amway products."
The company—still family-owned and led by the founders' sons, Chairman Steve Van Andel and President Doug DeVos—emphasizes that it provides training, tools, and support to help these entrepreneurs succeed. That commitment to the success of Amway's distributors, together with a commonsense philosophy about when to make and when to buy, have shaped Amway's global manufacturing strategy and helped it to become the world's biggest seller in several of its product categories.
A global powerhouse
From its small beginnings in 1959, Amway has grown to become a global powerhouse. The company directly employs more than 19,000 people, and its products are sold in more than 100 countries. Gross sales were US $9.5 billion in 2015.
Amway offers some 450 individual products. Among its best-known brands are Nutrilite vitamin, mineral, and dietary supplements; Artistry skincare products and cosmetics; and eSpring home water-treatment systems. The very first Amway product, Liquid Organic Cleaner (L.O.C.), was concentrated, biodegradable, and environmentally sensitive. The company's next big hit was SA8, one of the first phosphate-free, biodegradable laundry detergents. Both remain among Amway's top sellers in the home products category. Other products in the company's diverse lineup include air filters and cookware as well as sports nutrition, weight management, bath and body care, and household cleaning products. Consumers receive their orders either via home delivery or by picking them up at Amway "experience" and business centers, which handle more than 50 million pickups a year in markets such as Thailand and China.
The company distributes its products through major distribution centers in Michigan and California, USA; Venlo, Netherlands; Guangzhou, China; Moscow, Russia; and Busan, South Korea. Amway also makes use of dozens of smaller inventory stocking and shipping centers around the world. Most of these are leased facilities managed by third-party logistics (3PL) providers, according to George Calvert, Amway's global chief supply chain and R&D (research and development) officer. "This gives us the ability to be very flexible and responsive to changes in market patterns," he says.
Amway owns 21 manufacturing plants across four countries: 13 in the United States, two in India, four in China, and two in Vietnam. While it does purchase some items from other manufacturers, its own facilities manufacture the majority of its products. It also owns four certified organic farms totaling 6,000 acres—two in the United States and one each in Mexico and Brazil—and 84 acres of organic farmland where it grows and conducts research on traditional medicinal plants in China. Amway also has more than 75 R&D and quality-assurance labs worldwide. All of that—an integrated supply chain, if ever there was one—is an outgrowth of Amway's laser-sharp focus on ensuring quality "from the ground up," as Calvert puts it. The reason for that focus, he says, is straightforward: to earn consumers' confidence and repeat business, salespeople must be able to demonstrate a product's quality, efficacy, and true differentiation from commodity products available elsewhere.
The organic farms grow crops used in nutritional and skincare products. Even at this early stage of production, the research and development teams work closely with manufacturing. "We partner at the stage of selecting varietals, growing conditions, and processing conditions all the way through to how much goes into a particular formula," Calvert notes. "Our supply chain starts with planting seeds and ends with more than 120 million home-order deliveries." Calvert adds that Amway proudly supports the local communities near its farms by providing not just jobs, but also schools, fresh water, medical care, and job training.
Where and why
Strategic choices regarding whether and where to manufacture the company's core products are based on an array of factors, but Amway considers three to be most important, Calvert says.
1. Laws and regulations. A country's laws and/or regulations may require the company to manufacture locally. For example, China mandates that direct-sales companies manufacture the products they sell within that country.
2. Scale and technology. Amway does not manufacture a product itself unless it has the scale and/or technology that make controlling the manufacturing process a competitive advantage. An example of scale would be the more than one billion soft-gel capsules Amway produces annually, with four production lines in Ada running around the clock to meet global demand. An example of value-added technology is Amway's powdered laundry detergent: the company developed a process that makes the detergent especially effective, with more surfactants per gram of carrier than other detergents. Meanwhile, Amway has stopped manufacturing a number of items, such as food bars, bar soap, and corrugated cardboard, where it does not add value and which can be purchased from outside suppliers without compromising quality or availability.
Sometimes there's an added bonus when Amway decides to stop manufacturing a product or component. When the company stopped manufacturing its own corrugated cartons, it filled the space that was freed up with a digital label press that produces different kinds of labels on demand. "Now we're able to make labels as we need them instead of ordering massive reels of different labels from a supplier," Calvert says. "In each case where we have freed up capacity, we try to pivot from a low-value-add commodity to something of much greater value."
A related consideration is efficiency. In one recent case, Amway brought production of an ostensibly low-value item back in-house. In Michigan, the company had been purchasing thousands of truckloads of empty bottles for products like shampoo and protein powder—on the order of 100 million bottles a year—which required a lot of storage space and generated significant handling and transportation costs. Now it brings in railcars of HDPE plastic material and blow-molds and silkscreens the bottles itself. "A bottle that's blow-molded from a very small amount of HDPE can be in production the next day," Calvert points out. "We fill them, put them in cartons, and produce labels as needed. We're extremely lean, as opposed to having massive storage centers with truck after truck after truck of bottles coming in."
3. Ability to be responsive. For Amway, manufacturing product lines that are subject to significant demand fluctuations closer to major markets has paid dividends in terms of responsiveness. Calvert cites the example of water- and air-filtration systems. The company used to import components from Asia, manufacture the products in the United States, and then ship finished goods to domestic and international markets. But Asia was by far Amway's biggest market for the filtration systems, and unpredictable events like an air pollution crisis in South Korea or water contamination due to swine flu in China could boost demand to 10 times normal sales for some items. Amway worked with an Asian supplier that could expertly integrate the printed circuit boards and do final assembly of the filtration systems. That cut lead times from demand signal to availability in a local warehouse from 150 days to 47 days. "If we had decided to keep water- and air-treatment products in the U.S., we wouldn't have been fast or agile enough to respond to changes in demand, and I don't think we would have seen the growth in durables that we have," Calvert says. It's critical, he adds, to maintain innovation and reliability regardless of where a product is manufactured.
In addition to those three top-line considerations, a number of other factors influence the "make vs. buy" decision. Quality control, of course, also plays a leading role. Amway has invested some US $335 million over the past four years in building new production capabilities for some of its nutrition, personal care, and beauty products. Calvert cites the examples of concentration and extraction facilities for botanicals that come from its farms; vitamin production in the United States; a nutrition, beauty, and personal-care manufacturing plant for India, which had previously been outsourced; and new nutrition and personal-care facilities for Vietnam. "Those are businesses where control of materials production is very, very important," he says. Customer preference also matters; global consumers, for instance, put a premium on nutritional supplements that are U.S.-made.
Amway has very strong analytical capabilities that help in making the best decisions about where and how to manufacture, Calvert says. "We have a very good international trade group that not only looks at the impact of free trade agreements but also helps us design our supply chain so we take full advantage of the duty savings allowed under an FTA," he says. The engineering group, meanwhile, models inventory and transportation costs for various shipping lanes. Their analysis also compares manufacturing costs in the locations under consideration, the availability of raw materials, and the conversion costs for those materials, among other factors. Labor costs, however, really aren't a large factor. "For our products, 80-85 percent of the cost is in materials and components," he explains.
The intangibles
Amway's decisions about what to manufacture and where to do it also take into consideration some less tangible factors, such as risk management and continuity planning. An ever-present concern is the risk associated with outside suppliers—one more reason for owning the majority of Amway's manufacturing capacity. At the same time, though, the company is careful to avoid overbuilding capacity. "It's a tough thing to have truly duplicate, redundant production capability and still be economical," Calvert observes. "But we can make water- and air-treatment systems in two places, we can make nutrition tablets in three or four places, and we can make beauty products in at least three places, so we do have some ability to recover."
When Amway does outsource manufacturing, it chooses suppliers that not only understand its quality-focused culture but also will devote the necessary resources to supporting it. That was not the case when the company initially outsourced production of its food bars to a large U.S. food manufacturer; Amway represented "a very small part of their portfolio," and it was difficult to get the level of attention and support his company needed, Calvert recalls. "Now we consider very carefully our scale to the scale of the supplier. We don't want to be 50 percent of that company's business, but we don't want to be 1/5000th of it either."
As is true for any global company with a diverse product offering, many different factors influence the scope and configuration of Amway's manufacturing network. In the end, though, what guides Amway's global manufacturing strategy is something that dates back to the company's origins nearly 60 years ago: a deep-rooted commitment to product quality, from the ground up.
George Calvert
As his title suggests, George Calvert, Amway's global chief supply chain and R&D officer, has responsibility for quite different functions. At first glance, supply chain might not seem a good fit with research and development (R&D). But Calvert says Amway's business philosophy creates a logical bond between the two areas.
Calvert, who's been with Amway for 27 years, did not set out to become a supply chain executive. With a Ph.D. in chemistry, he has spent most of his career in product research and development. He began at Amway conducting chemical analysis and working in product development for nutritional supplements like vitamins and minerals, and then gained experience in other product lines, such as water- and air-treatment systems.
Later, Calvert worked in quality assurance—an eye-opening shift from R&D, where successful completion of a project may take years, to a "very operationally driven" function with deadlines measured in hours. He then headed R&D for 10 years, and about six years ago was named Amway's chief supply chain and R&D officer. At that point Calvert took over responsibility for supply chain, which he calls "one of those areas where good, classical logic and paying attention to numbers and execution make a difference. I hope to bring some of the critical thinking you would expect from someone with a scientific degree to supply chain—an area that's filled with talented, smart people with a strong work ethic."
In his current position, he's deeply involved with teams that are constantly seeking to identify ways that supply chain and science can collaborate more closely. "R&D handoffs [to manufacturing] are not a problem here," he says. "We set annual and long-range plans together, and we're designing products for different manufacturing sites. ... The development of product and processing takes place together."
Today Calvert's charge includes oversight of manufacturing, distribution, logistics, international trade, procurement, planning, engineering, technology development, innovation, regulatory compliance, product development—in short, "anything that has to do with plan, make, design, source, and deliver," he says. Despite that daunting list, Calvert says his job is "a lot of fun. We have incredible talent, and the diverse nature of our business means that I have one of the most interesting jobs in this industry, period."