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Re-shoring a New Perspective

Re-shoring sure has been in the news a lot lately. Perhaps you’ve been reading about the trend of re-shoring, as an increasing number of American firms are moving their manufacturing back to the U.S. You may have read about Caterpillar making the choice to move their manufacturing operations from Japan to Georgia to produce small bulldozers and excavators, or how Chesapeake Candle realized that the advantage of doing business in China had disappeared and decided to move operations back to Maryland. In January, The Economist wrote about the re-shoring trend, and last month the Ohio House designated March 2013 to be “Reshoring Month.” So, why is this happening anyway, and what does it mean?

Many of the U.S. companies that followed the trend to outsource manufacturing operations in the last decade to benefit from Asia’s low-cost labor are coming back. As it turns out, low-cost labor often comes with a high price. Wages that were dirt cheap ten years ago have grown by 15-20% annually. The aforementioned article in The Economist, Reshoring Manufacturing: Coming Home, notes that the Boston Consulting Group surveyed American manufacturing firms in 2012, and that “37% of those with annual sales above $1 billion said they were planning or actively considering shifting production facilities from China to America” with higher Chinese labor costs cited as the most common reason. The article notes that “the crucial change that has taken place over the last decade or so is that wages in low-cost countries have soared.” Increasing labor costs aren’t just being felt at the lowest assembly positions either as “pay for senior management in several emerging markets, such as China, Turkey, and Brazil, now either matches or exceeds pay in America and Europe.”

Companies have also been burdened with high costs related to supply disruptions, quality and rework problems, intellectual property theft that leads to cheap copycats of their own products made by local suppliers, the bureaucracy and red tape of dealing with foreign (and often local) governments, and other hidden costs. This is all on top of having to deal with other issues such as expensive transportation costs and higher utility rates.

Most companies work to determine Total Cost of Ownership (TCO) when making the decision to re-shore. TCO is a financial estimate that assists in determining direct and indirect cost associated with a product or service. While we’ve noted numerous business factors that are leading American firms to re-shore, there is another factor that isn’t a variable within the TCO equation – the human factor that is intertwined with rebuilding American communities. This human factor may not be included when calculating TCO, but it is important nonetheless.

Bringing operations back to the U.S. is not only about a company’s business model, it’s also about growing American jobs, rebuilding our communities, and ultimately making America a better place. As members of the MEP team heard at the Site Seeker Perspective Panel during last month’s Reshoring Summit in Cleveland, OH, many U.S. manufacturing firms are looking into moving operations from abroad back to communities in states such as Michigan, Ohio, and Pennsylvania. These firms are considering the re-shoring equation in part because these states have the infrastructure, talent, and capacity already in place, and are primed for the opportunity to shine.

As reported by USA Today, fifty years ago, a third of U.S. employees worked in factories, making everything from clothing to lipstick to cars. Today, a little more than one-tenth of the nation's 131 million workers are employed by manufacturing firms. According to Advanced Manufacturing Workforce Strategies Toolkit, when it comes to regional economies, manufacturing firms are “an essential building block” and that “in the communities where these firms are located, manufacturing has traditionally been one of the better-paid economic sectors.”

America continues to rebuild and strengthen its manufacturing role as the world’s manufacturing leader at the same time that labor, transportation, and other business costs continue to rise elsewhere. It is within the context of this environment that re-shoring is primed to gain momentum and accelerate over the coming years. In an effort to keep this momentum going, the U.S. Department of Commerce has just launched a new tool to help inform manufacturing firms’ location decisions. The Assess Costs Everywhere (ACE) tool outlines the wide range of costs and risks that are associated with offshore production and provides links to important public and private resources, so that firms can more accurately assess the total cost of operating overseas.

As this total cost of operations is assessed and understood by more and more American manufacturers, communities await the opportunity to again embrace manufacturing in America. Will your community be ready for the re-shoring movement?

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As we offer cost estimating software to our manufacturing customers we are privy to direct news. Some customers like Caterpillar, and mentioned in teh above article reflect this change, however many manufacturing companies are still following the trend thinking off-shore manufacturing will remain a lucurative options. One good news is that America's manufacturing future is re-opening its doors for career minded students. Jay Snow, Marketing Manager, MTI Systems, Inc.
There is also a funding opportunity available for communities, The "Make it in America Challenge" which seeks to encourage foreign and domestic businesses to build and/or expand their operations in the United States. Awards will be made to accelerate job creation by encouraging re-shoring of productive activity by U.S. firms, fostering increased foreign direct investment, encouraging U.S. companies to keep or expand their businesses—and jobs—here at home, and training local workers to meet the needs of those businesses.
Reading this is all good news. Or is it? Is re-shoring the only answer? Is it the correct decision for all manufacturers? It could seem that too much emotion will become part of the decision process for manufacturers when deciding whether or not to re-shore. There needs to be more objectivity. One of the more balanced articles I've read recently on re-shoring was written by Linda Burns of BDG/WDG Consulting (below)… How much re-shoring, and what type of products, can be applied to manufacturing electronics on US soil remains to be seen. As for jobs, I'd wager only a very small percent of the electronics manufacturing jobs that went overseas the past ten years will return. Yet, chants of 'ride the re-shoring wave' are frequently shouted and read on most other blogs and Websites covering the subject and now, US lawmakers are leveraging penalties (incentives) to discourage offshore manufacturing. Plus, GE's Jeffrey Immelt, says his decision to invest $1 billion in GE’s appliance business in the U.S. is “as risky an investment as we have ever made”.… If he's talking about blenders and curling irons, I'd say he's correct. Can high-volume/low-mix (HV/LM) US consumer electronics manufacturing return stateside? It's unlikely. I doubt Mr. Immelt is talking about blenders and other HV/LM consumer electronics. You're likely to see GE dishwashers and kitchen ovens and water heaters, aircraft engines...sprouting from US soil along with other higher-end manufacturing jobs supported by STEM interests. However, another issue for US manufacturers, given US corporate tax structure, is carrying plant, property and equipment (P,P&E) on a manufacturer's books. And, this is where outsourcing can be the competitive answer. (Contrary to how the word sounds, outsourcing can take place on US soil) Take two companies in similar markets offering competing products with one company outsourcing its manufacturing (on US soil or offshore) and the other company manufacturing its products in-house, the competing company that outsources its none-core competencies will realize break-even and profitability sooner, where variable costs (VC) and revenues (R) are equivalent for both organizations. The company that outsources does not have overhead operating costs from performing activities in-house. This also leads to lower fixed costs (FC) and an overall lower total cost (TC) of doing business, where: VC + FC = TC More: One of the drivers for companies deciding to outsource has consistently been the elimination of financial liabilities hosting P,P&E. You remove these and ROIC increases dramatically. Re-shoring/outsourcing are both good so long as company supply chains can still remain competitive. Outsourcing / offshoring also makes sense even when taking total cost of ownership (TCO) into consideration, unless [incentives] offset benefits related to offshoring. But then, will US manufacturing be able to compete on a level playing field against foreign manufacturers able to freely use their supply chains as a competitive advantage to their US counterparts constrained by legislation? For those electronics manufacturers deciding to outsource or offshore, uncover possible additional savings with your electronics contract providers using our free online outsourcing calculator: On a final note, what happens when a growing number of citizens in China/India gain more individual economic power (discretionary income)? As these consumers exercise their demand for goods will it make sense for US manufacturers to place manufacturing bases nearer to the point of consumption to minimize shipping and freight costs, essentially? Will the re-shoring wave ebb? Mark Zetter President
Founded in early 2010, Ruralogic is based on a realization of a substantial market opportunity, combined with a desire to help the dire US economy. By locating and training talented people in the country’s Rust Belt, Ruralogic is ready to reshore IT jobs and benefit our customers and the nation.
Hi! I've been reading your blog for some time now and finawlly got the courage to go ahead and give you a shout out from Houston Tx! Just wanted to mention keep up the great work!

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