This is a guest post from Harry Moser and Millar Kelley of the Reshoring Initiative. The mission of the Reshoring Initiative is to bring good, well-paying manufacturing jobs back to the United States by assisting companies to more accurately assess their total cost of offshoring, and shift collective thinking from offshoring is cheaper to local reduces the total cost of ownership.
As a proud “Made In America” company and with the vast majority of our customers as manufacturers, we try and bring light to the importance of bringing back manufacturing not only for the benefits of more jobs, adding to the GDP, and strengthing of the economy, but also as a smart business decision as the beauty of closness to your suppliers and vendors makes a lot of sense. Please find out more about the Reshoring Initiative to learn more about Reshoring and how you can get involved, please visit their website here.
The Reshoring Trend is Good for U.S. Engineers and America
These are exciting times for the rebounding U.S. industrial base. Since the end of 2012, we have heard the news of Apple’s plans to move some Mac production back to the United States, and of Walmart’s commitment to spend $50 billion on additional U.S.-made products over the next decade. While these are small steps relative to the companies’ scale, it is a big deal that large corporations are making significant and well-publicized efforts to bring production back to the United States. And this is just the latest on the heels of the 50,000+ manufacturing jobs that have been added as a result of reshoring in the last three years.
There are other clear signs that the economic logic of local sourcing versus offshoring is penetrating the consciousness of both the business world and consumers. This past January, the Reshoring Initiative won a debate  in The Economist, supporting the motion that multinational corporations have an obligation to maintain a strong presence in their country of origin. This was a great achievement since the majority of Economist readers (the voters) traditionally support laissez-faire free markets and 100 percent profit maximizing over longer-range thinking that more fully recognizes corporate costs and risks, and considers the value of a strong society to the corporation and its shareholders. Voters, and especially the manufacturing community, stepped up and made it clear that investing and producing at home is a priority and is the choice that most benefits shareholders, companies and country alike.
Consumer preference is another indicator of bolstered support for U.S. manufacturing. Boston Consulting Group recently released two survey reports pointing to a strong and growing consumer preference for “Made in the USA” products, and to a marketing advantage for brands with the Made in the USA label. They report, “More than 80 percent of U.S. consumers stated that they are willing to pay more for products labeled “Made in USA” than for those labeled “Made in China.” Concerns about quality and a desire to keep jobs in the U.S. were the key drivers.”
Reshoring improves U.S. competitive advantage by strengthening R&D
|Examples of Reshoring of Electronic/Electrical Products
For the electronics and technology sectors, every reshoring case matters. Reshoring improves U.S. competitive advantage by strengthening R&D, and reducing IP loss. Returning manufacturing to the United States, of course, also adds jobs for electronic, computer and software engineers. The relationship between engineering and production is well understood: innovation works best if they are together. Harvard Business School Professors Pisano and Shih have documented the negative impact of separating these critical functions . It is in the self-interest of engineers to encourage domestic manufacturing, because if their companies offshore manufacturing, engineering is likely to follow.
In addition to OEMs (original equipment manufacturers), contract manufacturers also reshore. For example, Zentech , an EMS (Electronics Manufacturing Services) company reshored over $1M in manufacturing in 2012 with plans to reshore even more in 2013. President and CEO Matt Turpin reports, “Zentech is experiencing growth in all industry sectors and continues to see opportunities in the area of reshoring. CEOs and CFOs are realizing that total cost of ownership (TCO) for offshore manufactured goods is rising even faster than per-unit costs for the same items. Since focusing on reshoring, Zentech experienced a 50 percent growth in its customer base in 2012, and is forecast to increase revenues by as much in 2013. Many of these new customers have the ability to utilize offshore EMS providers but fortunately understand the TCO implications.”
Reshoring is based on the economic logic of producing near the customer
This logic applies to all manufacturing companies in their own sourcing decisions and in their sales efforts versus offshore competitors. As companies adopt a more comprehensive total cost analysis they are finding that rising offshore labor rates (going up by 18 percent per year in China, 500 percent in the last 12 years) combined with other “hidden costs” of offshoring often counterbalance any remaining savings from cheap price or labor abroad. An example of a hidden cost is millions of counterfeit and scrap electronic components from China getting into military and other systems. Reshoring more parts reduces this problem and increases the quality and safety of U.S. products.
The trend of returning to local sourcing is a shift in understanding and approach that has major positive implications for individual companies and the national economy. First, reshoring can improve the bottom line for a wide range of companies. Second, bringing manufacturing jobs back stabilizes the economy and makes the nation more self-sufficient. If the resurgence of American sourcing continues, we will see a large reduction in imports, which is the most efficient way to lower the trade deficit, the budget deficits and unemployment.
Reshoring is a Long Term Business Decision
The key to successful reshoring is for companies to use a comprehensive Total Cost of Ownership (TCO) analysis that calculates the true cost of offshoring. The non-profit Reshoring Initiative provides free TCO Estimator software. The initiative also offers a database of 380+ reshoring articles and a Case Studies feature where companies can share their real cases of reshoring. These resources are available on the website at: www.reshorenow.org.
The impact of using TCO analysis instead of price for sourcing decisions is demonstrated by a statistical analysis of TCO user calculations. Figure 1 aggregates the results for 27 recent cases in which users of the method had compared sourcing in China versus the United States.
Figure 1: Summary of 27 Cases Where Total Cost of Ownership Was Used to Analyze China Versus the United States for Sourcing Location
|Cost Comparison Basis||U.S. Cost Relative to China, average||Percent of cases where U.S. has the advantage|
|Price||69 percent higher||15 percent|
|Total Cost of Ownership||4 percent lower||56 percent|
|Difference||73 percent||41 percent|
Using a TCO metric instead of relying simply on ex-works prices, changes the sourcing decision in 41 percent of the 27 cases studied. Since the database is small, we conservatively estimate that about 25 percent of the work that has already been offshored to China would return to the United States if companies used TCO instead of price to make sourcing decisions. Ongoing research will refine that estimate.
Based on analysis of the articles in the Reshoring Library, the Initiative calculates that about 50,000 manufacturing jobs have been reshored in the last 3 years. That surge represents about 10 percent of the total increase in manufacturing jobs since the low in January 2010. If the current trend of increased TCO use is paired with other favorable trend factors, the potential for reshored jobs is estimated at up to 6 million in Figure 2.
Figure 2 Potential Impact of Reshoring: Four Cumulative Job Scenarios
|Scenario Description||Source of the Scenario||Cumulative Number of Manufacturing Jobs Reshored*||Total Cumulative Number of U.S. Jobs Created**|
|Companies use total cost analysis tools in sourcing decisions||Reshoring Initiative||500,000||1,000,000|
|By 2015: If Chinese wage trends continue at 18%/yr||Boston Consulting Group||1,000,000||2,000,000|
|Adoption of: better U.S. training; increased process improvements and automation; competitive corporate-tax rates||Federal Government’s Advanced Manufacturing Partnership (AMP)||2,000,000||4,000,000|
|End of foreign currency manipulation||Almost all manufacturing groups||3,000,000||6,000,000|
*# of jobs and scenarios are cumulative. ** Assuming a 1.0 multiplier effect
As we can see from this analysis, the potential is great for the American economy, workforce and individual companies.
TCO analysis helps to objectively identify, forecast and minimize total cost. TCO accounts for factors like rising costs of wages and currencies in low-labor-cost countries and energy and transportation prices. Other factors such as the risk of supply chain shocks and disruptions caused by natural disasters and political instability are also entered into the TCO calculation. Figure 3 shows the frequency of reasons cited for reshoring in the articles in the Reshoring Library.
Figure 3 Distribution of Reasons for Reshoring
NUMBER OF CASES CITED
|Wage and Currency Changes||
|Quality, Warranty, Rework||
|Travel Cost/Time or Local Onsite Audit||
|Intellectual Property Loss or Risk||
|Image/Brand (prefer U.S.)||
|Loss of Customer Responsiveness||
|Difficulty of Innovation/Product Differentiation||
|Natural Disaster Risk||
|Burden on Staff||
Source: Reshoring Library 01/17/13
How to Calculate TCO
To determine the TCO with the TCO Estimator, the user provides 36 answers that are used to calculate 26 unit costs . The Estimator accumulates a single cost value for a product sourced from a particular supplier. The user repeats the process for each vendor, and can then objectively compare the TCO for the same product from multiple vendors, whether local or offshore. The following list is a guide to the costs addressed in TCO. The Estimator begins with “hard cash” costs and progresses to more subjective measures. For a full description of TCO cost factors, go tohttp://www.reshorenow.org/TCO_Estimator.com, then login/Add a New Form/View Example Form.
1. Cost of goods sold or landed cost
2. Other “hard” costs
a. Carrying cost for in-transit product
b. Carrying cost of inventory on-site
c. Prototype cost
d. End-of-life or obsolete inventory
e. Travel costs.
3. Potential risk-related costs
c. Product liability
d. Intellectual property risk
e. Opportunity cost
f. Brand image
g. Economic stability of the supplier
h. Political stability of the source country
4. Strategic costs:
a. Impact on innovation
b. Product differentiation and mass customization
a. “Green” quantification will be added to a future version of the TCO Estimator.
When it becomes clear that there is often not a TCO penalty associated with domestic sourcing, it is easier for a company to place more emphasis and resources on building strategies such as product-differentiation or product innovation, both of which are maximized via local sourcing. A company might pursue local cost-reduction programs, such as lean, theory of constraints (TOC), design for manufacture and assembly (DFMA), quick response manufacturing (QRM), automation or training that might have seemed insufficient to close a 40 percent price gap but are more than able to close a 10 percent TCO gap.
When companies understand their total cost of ownership, they offshore less and reshore more. Individual companies, educational institutions, Wall Street and consumers are all embracing reshoring. In early 2012, the White House hosted the “Insourcing Forum,” highlighting the Reshoring Initiative in the lineup. In this year’s State of the Union, President Obama predicted a manufacturing revolution, and laid out a plan to improve our workforce to support such a revolution, including providing funding to education and industry clusters committed to supplying modern, streamlined training programs.
The Reshoring Initiative met with the U.S. Department of Labor on 18 September 2012 to discuss how to develop the needed workforce. Part of the solution is to provide better Bureau of Labor Statistics data on the comparatively high-income rewards to those workers passing apprenticeships and earning certificates, compared to four-year college grads. It is also critical to demonstrate that reshoring is happening so that students seek manufacturing training and so that schools provide the training. A great example of innovative training programs is by Samuel Havelock of Federated Precision who has setup a recruiting and training
Manufacturing in the United States is now a viable, intelligent and economical choice. TCO use is showing more companies that they can help both themselves and America by bringing production back. We offer a Call-to-Action for readers to utilize the Initiative’s free tools to reduce their costs, increase their sales and report their reshoring successes. Here are some ideas for helping reshoring while you help your company:
- Use the free TCO Estimator for more objective sourcing decisions and as a sales tool to convince your customers to buy from you instead of offshore. Contact the Initiative for no-charge help if needed. (harry.moser@ReshoreNow.org)
- Take advantage of our webinars to educate your staff and customers. Archived webinars are always on the website. Upcoming live webinars are often also linked.
- Submit your reshoring cases on the Reshoring Initiative’s website at: http://www.reshorenow.org/resources/cases/. The resulting PDFs can be posted on the websites of your company, your customers, and the Reshoring Initiative, to provide publicity. Also, earn a Cool T-shirt.
- Check the searchable Reshoring Library to see if any of your customers or prospects are reshoring. Sell or outsource to them.
- Post a link to the Reshoring Initiative website to help promote the trend.
Total Cost analysis can help companies see the economic benefits of bringing offshored manufacturing back to the United States and limiting future offshoring. With current high freight costs, increasing Chinese wages, and a growing consumer sentiment for Made in America products, now is the right time to focus on rebuilding American manufacturing, and thus strengthening American engineering.
3. Roger Thompson, “Why Manufacturing Matters,” Working Knowledge newsletter, Harvard Business School, March 28, 2011.
5. The TCO estimator is very user friendly: create an account and enter the values for your company and receive a report. The whole input process takes approx. 20 minutes. Data gathering will take longer. If you do not have the data, how have you been making accurate decisions? All company data is 100% confidential.
7. A free “Manufacturing is Cool” T-shirt, supplied by MFG.com, will be awarded to the first 50 individuals that submit a reshoring case study.