Reshoring: It’s not a myth (but it needs your help)

In response to steadily increasing labor rates, higher transportation and fuel costs, higher reject rates (lower quality), and currency manipulations overseas, more American companies are bringing its manufacturing operations back to the U.S. in a trend known as "reshoring."

The advantages of coming back to America are plentiful:

There is also the "soft" factor of the ease of doing business in the U.S. - things like easier communication, faster response times, no language or time-zone complications, and less overall risk-all of which make it easier for CEOs to sleep at night.

Companies that survived the Great Recession are leaner and more efficient than ever, with high expectations about how to conduct business with vendors. They are shortening their supply chains and looking for partners that completely embrace their business philosophies and production goals. They want vendors who are aligned in philosophy and commitment and use the same technologies to stay connected, respond quickly, and add value. Long-term relationships with key vendors are also essential for continuing to find ways to increase efficiency, trim costs, and improve global competitiveness.

All of this is easier to manage back home - the trick is making it profitable.

The first step for company leaders is to understand their total cost of ownership. They then must develop and commit to a strategy that increases their cost-competitiveness with foreign countries by investing in the equipment, automation, quality control, training, and other improvements they need.

Companies that have made that commitment and returned to the U.S. in recent years include: Peerless Industries, Outdoor Greatroom, Caterpillar, NCR, Master Lock, Whirlpool, Apple, Otis Elevator Co., Buck Knives, Karen Kane, General Electric and Coleman.

Several recent studies also indicate reshoring is gaining momentum.

According to a September 2013 survey by The Boston Consulting Group (BCG), 54 percent of the 200 U.S.-based manufacturing executives at companies with sales greater than $1 billion who were interviewed are planning to bring back production to the U.S. from China, or actively considering it-a 17-percent increase over the 37 percent who said yes to the same question a year ago. These companies represent a broad range of industries and manufacture products in the U.S. and overseas.

Although there are lots of variables at play, BCG predicts that reshoring could create as many as five million American factory and related service jobs by 2020.

This line of executive thinking is confirmed by Grant Thornton's January 2014 "Realities of Reshoring" survey, which indicated that more than one-third of the 275 business leaders it interviewed were planning on bringing back at least some of their overseas manufacturing in 2014. Industries most likely to reshore include IT, components/products, and materials.

This shift toward reshoring is being driven by a number of macroeconomic factors that seem to have "tipped the balance" (at least for now) in favor of manufacturing in the U.S., for the U.S. market. As outlined in a recent A.T. Kearney survey, these factors include the appreciation of China's currency versus western currencies, China's labor rate inflation, increased concerns about supply interruption, lower energy cost in the United States as a result of hydraulic fracturing, and a general push from federal and state governments to reduce the costs and administrative barriers of bringing manufacturing back.

"The wide range of reasons executives cite for shifting production shows that companies are becoming more sophisticated in their understanding of all the factors that must be considered when deciding where to manufacture," says Michael Zinser, a BCG partner who leads the firm's manufacturing work in the Americas. "When you look at the total cost of production for many goods, the U.S. appears increasingly attractive." 

Total cost of ownership

Nobody knows reshoring better than Harry Moser, founder and president of the Reshoring Initiative (www.reshorenow.org), an industry-driven effort to bring manufacturing jobs back to the U.S. by helping companies recognize all the costs and risks associated with offshore and domestic sourcing. "Over the last few years, more companies are recognizing the feasibility of reshoring some work, based on both total cost of ownership and consumer preference," says Moser.

This is especially true for companies that mostly manufacture for the North American market.

According to Moser's table below, incremental reshoring and offshoring are now roughly in balance and the "bleeding has stopped."

*Estimated

The Reshoring Initiative indicates that reshoring has created about 15 percent of all new manufacturing jobs in the U.S. since January 2010. Moser indicates that about 150 larger companies reshored to the U.S. in 2013.

The most obvious reason for coming home is the increasingly prohibitive cost of labor overseas. In China, for example, wages are going up about 15 percent every year; in comparison, U.S. manufacturing wages have risen about 1.5 percent per year since 2011. These two trends are rapidly closing the wage gap between the two countries.

Companies often decide based on ex-works price or landed cost and ignore, or under-appreciate, other cost factors that have a big impact on the bottom line. These are sometimes referred to as hidden costs, but it doesn't really take a lot of digging to find them.

"Most companies make sourcing decisions based on price alone, resulting in a 20 to 30 percent miscalculation of actual offshoring costs," says Moser.

These company leaders don't fully understand total cost of ownership (TCO). TCO includes inventory carrying costs, travel costs to check on suppliers, intellectual property risks, and opportunity costs from product pipelines being too long. When TCO is factored in, low-cost countries often look less attractive. In fact, for some companies, after running the calculation, staying in the U.S. is closer to a break-even situation (or even be more profitable) compared to setting up shop overseas. 

To make it easier to determine TCO, Moser created the Total Cost of Ownership Estimator, a free online tool that helps company execs account for all relevant factors when determining total cost of ownership. It aggregates all cost and risk factors into one cost, for simpler, more objective decision-making. The program incorporates 29 cost factors and automatically calculates freight and duty rates. Once a company's unique data is entered into the estimator, a cost-of-ownership analysis is produced that includes:

"The TCO Estimator is a useful tool for companies that are currently offshore and thinking about coming back to the U.S., U.S. companies that are thinking about going offshore, local suppliers that compete with offshore sources, and business consultants or economic development groups," says Moser. "Our user data suggest that at least 25 percent of all offshored work would return to the U.S. if TCO is consistently used."

Supply chain disruption

TCO can be severely impacted by an unstable supply chain.

According to a survey of over 500 companies from across 68 countries and 14 industry sectors by the Business Continuity Institute, outsourcing failure is ranked as a key factor in supply chain disruption.

"Service issues attributed to outsourcing jumped to third place in the causes of supply chain disruption at 35 percent, up from 17 percent in 2011, highlighting the importance that outsourcing decisions have in supply chain resilience," states the report. It also showed that 73 percent of organizations recorded at least one supply chain disruption in 2012, with 39 percent of analyzed disruption originating from below the immediate supplier.

The survey report concluded that "effectively managing supply chain continuity is critical-not just because of the immediate costs of disruption, but also the longer-term consequences to stakeholder confidence and reputation that may arise following a supply chain failure."

Stabilizing the supply chain is a great reason for reshoring an operation to the U.S. This makes it much easier for the company and its supply chain vendors to communicate, collaborate, and evolve together as a team to meet market challenges.

"Most manufacturers today are looking for partnership [with vendors] to share information at a very detailed level," says Wally Gruenes, Grant Thornton's national managing partner for industry and client experience. "They might need collaboration or face-to-face meetings, which makes the proximity of a supplier very important."

In addition to the potential for deeper collaborations, working with U.S. suppliers can speed up every phase of a manufacturing operation.  "A complete analysis should consider the timely delivery of supplies and materials, quality issues, and the process of addressing any defects," adds Gruenes. "A local supplier can fix these issues more quickly, creating a win/win for the supplier and the manufacturer."

Supply chain solutions include using locally manufactured products and components instead of importing them from offshore. A package is available from the Reshoring Initiative and Datamyne that can assist economic development groups to help companies determine how much of their offshored work can be brought back. "The Datamyne database helps identify all imports by regional companies, generally OEMs," says Moser. "Economic development groups can then decide which imports are, in aggregate, larger volume and can possibly be replaced by regional existing capacity."

Part of this process is asking the importing company to consider producing or sourcing locally. "The importers will say they cannot source locally because prices are much lower (typically 30 percent) offshore," Moser continues. "However, show them how to use the Total Cost of Ownership Estimator to re-evaluate offshoring versus reshoring costs. Chances are they'll see there is no TCO difference, or only a slight one, when local sourcing is used."

Workers needed

One of the biggest barriers to American reshoring is having enough high-quality workers to run the operations. This is already a problem for many manufacturing companies in the U.S. - they have plenty of job openings, but not enough skilled workers to fill them.

According to the Society of Human Resources Management, most manufacturers are hiring, but many of them cannot find the skilled workers they need. A 2011 survey conducted by the National Association of Manufacturers showed that 600,000 jobs go unfilled in the industry because of a lack of necessary skills, despite the high unemployment rate. Further, 75 percent of manufacturers reported the skills shortage has negatively affected their ability to expand.

This situation is exacerbated by an aging manufacturing workforce, which is retiring in larger numbers of every year and not passing their skills and knowledge on to a younger workforce.

"Availability of a sufficient quality and quantity of skilled workers is often the number-one site-selection criterion and a key issue for retention and expansion," says Moser. "The bottleneck to expanding the skilled workforce is recruitment: few students want to follow the science-technology-engineering-math (STEM) fields, especially in manufacturing."

As a result, the skills gap is growing, especially for skilled trade positions like machining, casting, welding, and programming. 

"As baby boomers retire, we must look to the younger generations to fill the gap," comments Adam Beckerman, partner in charge of manufacturing and distribution at Habif, Arogeti, and Wynne in Atlanta, Georgia, a CPA and business-consulting firm that works with manufacturers around the world. "The problem is that the younger generation has shifted its focus away from the skilled trades, and today an apprenticeship is almost unheard of. According to Atlanta Business Chronicle, for every four skilled workers retiring, Georgia is producing only one replacement."

The skills gap isn't expected to change any time soon. NAM's research indicated that 56 percent of respondents expect the shortage to grow even worse in the next three to five years.

"To turn this trend around, states and communities need to rally behind vocational schools and encourage students to look into trade skills," says Beckerman. "In January, NAM launched the NAM Task Force on Competitiveness and the Workforce, in collaboration with 15 of the nation's largest manufacturers, to dig into the problems that impede American manufacturing's competitiveness-including the growing skills gap in the manufacturing industry."

So, that's the situation - the U.S. is getting tantalizingly close to being cost-competitive with low-cost countries like China. However, some big challenges need to be resolved before reshoring gains enough traction to create 5 million new manufacturing jobs by 2020. Part 2 of this white paper will outline a "call to action" that, if seriously embraced by federal and state governments, manufacturers, educational institutions, and the American public, will result in a reshoring "wave" that takes U.S. manufacturing to a much higher level.

Kaysun Corp., headquartered in Manitowoc, WI, was founded in 1947 as one of the first plastic injection molding firms in the United States. Fast forward over 60 years and Kaysun has transformed into the recognized leader in providing highly engineered injection molded products throughout the world. The company provides world class manufacturing solutions to the most demanding markets including medical device, automotive and defense.

Editor's note: The author is a PlasticsToday contributor. The opinions expressed are those of the writer.