The data on comparative labor and energy costs may seem compelling. But the process of bringing assembly work back to domestic factories from abroad is substantially more challenging than the economics alone would predict.
Rising labor costs in China and other emerging economies, high supply chain and logistics costs, and wide differentials in the costs for electricity and natural gas in different parts of the world are provoking a fresh round of relocation of manufacturing and production. While some labor-intensive jobs are moving out of China to Southeast Asia or the next emerging low-cost regions, some high-profile manufacturing work is returning to the United States, to the cheers of some who are proclaiming the beginnings of a manufacturing renaissance. Wal-Mart holds supplier conferences to promote “Made in U.S.A.,” and the retail giant encourages manufacturers to commit to producing in the United States by promising to purchase $50 billion more in U.S. manufactured goods in the next 10 years. It is targeting the reshoring of products made for its stores by trying to facilitate and accelerate reshoring efforts among its suppliers. Consultants proclaim the reemergence of the United States as a competitive place for manufacturing — and are pushing their services with reshoring conferences, reports and lots of advice.1
While the macroeconomic data on comparative labor and factor costs may be compelling, the actual process of reshoring — bringing assembly work back from abroad — is hard work. This is especially true when the resources upon which a company draws (the supplier base, the workforce, and even the company’s own internal product design capabilities) have atrophied. In an earlier paper, my Harvard colleague Gary Pisano and I documented the loss of the “industrial commons” in the United States, the shared resource base upon which manufacturers draw.2 My recent research has looked at several initiatives aimed at rebuilding regional capacity, including General Electric Co.’s Appliance Park operations in Louisville, Kentucky; Google’s efforts in partnership with Flextronics International Ltd. to assemble the MotoX smartphone in Fort Worth, Texas; a high-end technology product manufactured at Flextronics facilities in Austin, Texas; as well as comparison factories in Europe and Asia. (See “About the Research.”) What can we learn from these efforts to help managers prepare for reshoring?
The benefits were no surprise. Positioning manufacturing close to the market minimizes the inventory of goods in the pipeline and reduces delivery times.
2 Comments On: What It Takes to Reshore Manufacturing Successfully
The reshoring transition can be difficult, so every detail should be planned carefully as mentioned. Most companies failed to do the math when they offshored. We urge them to do the math when they consider reshoring so that the decision is a long-term good solution for the company.
As many as 60% of companies made the decision to offshore based on miscalculations, never taking into consideration the total cost of ownership (TCO) including all of the hidden costs and risks of offshoring.
Current research shows many companies can reshore about 25% of what they have offshored and improve their profitability simply by using TCO (total cost) instead of price to make their decision.
Reshoring is the logic of local sourcing.
– TCO is the methodology you use to decide what to reshore or offshore
– TCO = more obvious costs + “hidden” costs and risks
– Total Cost = True Cost
In order to help companies decide objectively to reshore back to the U.S. 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
I also recommend reading “ReMaking America” the AAM’s new book on the wealth and growth opportunities of manufacturing in the U.S. Harry Moser, founder of The Reshoring Initiative wrote an excellent chapter on Reshoring. http://americanmanufacturing.org/remake-america/
Dr. Rabindranath Bhattacharya, Kolkata
While off shoring products or assembly lot of factors are to be taken into consideration before deciding the country, city in the country as well as the supplier or group of suppliers in the selected city or the country. Factors may be labour cost, financial health, political situation, transportation cost, climate, availability of labour, raw material availability, logistics cost, quality cost, return cost, engineering cost etc.. Although I have observed TCO ( total cost of ownership) is quite a good tool to monitor the situation from time to time once the system is in operation, this may not be the only tool to decide whether to offshore or re shore until and unless all factors are carefully chosen and the problem analysed using available techniques like AHP, Goal programming or a combination of them.
I have observed while working in Chicago 6 years back although we had outsourced few sub assemblies to India and Japan we had to take them back one for the quality and another for the TCO. One must understand that return cost from USA to Asian countries is very prohibitive and one or two lot rejections may put the suppliers in jeopardy. Are we taking rejection/return cost, pipe line inventory into account?
I firmly believe off shoring is not an easy business as is the re shoring. . In fact situation is so dynamic today that one solution observed to be right today for somebody may not be OK for you. Look before you leap is my suggestion.