For several years there have been indications that manufacturing within the United States is making a comeback.
A Boston Consulting Group survey found that 21 percent of U.S. manufacturers are moving, or planning to move, a share of their production back home from offshore locations. Walmart launched an initiative to source $50 billion in additional goods that are “Made In America” within the next decade. Whirlpool, GE, Peerless, Motorola, and a host of other companies large and small are re-shoring — reversing previous offshoring decisions.
Given that manufacturing and the jobs it creates is so critical to a strong and stable economy, and that 80 percent of world trade is in goods and not services, it’s a positive sign, and all concerned parties would be quite pleased to see it continue.
However, realists will admit that stateside manufacturing will never return to what it once was. For example, one of the factors that brought GE’s water heater plant from China back to Kentucky were wage concessions from $22/hour to $13/hour. Thanks to automation, a mothballed textile plant in South Carolina is up and running again, but 130 workers are making what it once took 2,000 workers to produce. To compete on a worldwide playing field, a company must identify and exploit comparative advantages that give it an edge over its rivals, and sometimes that can actually include producing goods stateside.
Most reshoring success stories are smaller in scale and do not bring back thousands of jobs. But that’s not a bad thing, considering the average U.S. manufacturing company employs less than 40 people. It means companies of any size can consider reshoring.
Several factors are causing companies to reshore. Although overseas labor costs are still a fraction of American costs, wages in China and other countries are rising by at least 15 percent annually, and with wages decreasing in the U.S., the gap is shrinking.
But that’s only part of it. American companies were somewhat myopic in their decision to manufacture abroad, basing their decision solely on labor costs which are typically only 20 to 30 percent of total product cost. Include transport and inventory costs, insurance, currency rate risks, VATs, and duties, and the offshore bargain isn’t as impressive. Additional factors should be weighed, such as vastly longer lead times and delays, quality issues due to language barriers or corporate cultures, less flexibility in meeting customers’ changes in demand, or specification, to identify just a few.
When the comparative advantage of lower overseas labor costs can be sufficiently reduced, often achieved by automating its processes, many companies can rationally make a decision to reshore, when factoring in the benefits of producing goods in our own backyard.
Rather than focusing on labor alone, companies are learning to evaluate a product’s Total Landed Cost. TLC models attempt to sum up all of the supply chain costs up to the delivery of your product to your customer. Looking at the big picture, many companies discover that their savings wasn’t what they thought. And even if there is some savings overseas, getting your product delivered 10 weeks faster, or being able to market your product as “Made in USA” might outweigh a slightly higher TLC.
Unfortunately when production went overseas, so did the much of the infrastructure. Would you be able to re-shore if your supplier base is still in India? Can you find skilled employees to produce your goods and keep your equipment running? Should you invest in the machinery that will automate a process in order to build a quality product efficiently? And where is your customer base? Especially for larger durable goods, it is usually more cost effective to manufacture them where they’re sold.
The decision to offshore manufacturing is more complicated than originally assumed. For some commodities, it will always make sense to seek the lowest labor costs and send production abroad. But for others, the case to re-shore is more compelling.
This is a story that’s still unfolding. From President Obama to governors and mayors to consultants and unions, everyone is watching this activity closely, unsure if it will be a meaningful trend or simply a modest adjustment. Reshoring will occur only when it makes financial and logistical sense, not out of patriotism and hopefully not with excessive government incentives.
As leaders and experts within your markets and processes, it falls upon you to review your business models and determine where is best to manufacture your products. After that analysis, maybe a few more jobs will be heading back to the United States.
Curtis Williams has been in manufacturing management and operations for over 25 years. Contact him at cwmscolo@comcast.net.
