Domestic outsourcing: A key component in successful reshoring
By MARK DANNA, Vice President Business Development, OWENS DESIGN, INC.
After nearly a quarter of a century, the off-shoring manufacturing trend that decimated the U.S. manufacturing sector and played a significant role in the slow pace of the current economic recovery seems to be ending. A number of large manufacturers, including NCR, Apple, Google, Caterpillar, Whirlpool and Ford have recently announced plans to return some of their overseas manufacturing to the United States. Even Nissan recently announced it was relocating a manufacturing plant from Mexico to the U.S. Many other American firms are considering taking similar action.
While this reshoring trend might be considered a ripple rather than a wave in the economic waters, it is growing. According to a study conducted in August 2013 by the Boston Consulting Group (BCG), 54 percent of the more than 200 companies surveyed were planning or seriously considering reshoring some of their manufacturing. That is a 17 percent increase over the 37 percent considering reshoring in 2012 when BCG last conducted the survey. Twenty-one percent of respon- dents said they were actively engaged in reshoring or will do so in the next two years, double the number reporting such activity a year ago.
According to Harry Moser, former CEO of Charmilles Technology Corp. and founder of the Reshoring Initiative, over 50,000 manufacturing jobs returned to the U.S. between 2009 and 2012. In the five years previous, the number returning was close to zero. Those 50,000 jobs constitute about 10 percent of the new manufacturing jobs created in the U.S. over the last three years.
Contributing factors to the reshoring trend
There are a number of global and domestic economic factors that are causing many American, and even some foreign companies, to consider moving their manufacturing operations to American soil. The two most significant are wages and productivity.
For example, according to an April 2013 Bloomberg article, the average pay in Asia almost doubled between 2000 and 2011, while wages increased by only 5 percent in the developed world and by 23 percent worldwide. Labor costs were one of the prime drivers off the off-shoring trend, and this significant rise in labor costs in the region erodes one of the key economic benefits of moving manufacturing to that region.
When that upward wage trend is coupled with differences in the levels of productivity of American and foreign workers, reshoring becomes even more attractive. According to a U.N. report compiled by the International Labor Organization (ILO), American workers out-produced and worked longer hours than their counterparts in Japan, Switzerland and all 27 European Union countries. While workers in Asian countries do tend to work longer than their American counterparts, even this is changing. Chinese workers have recently been demanding shorter hours and in some cases, job tenure after a certain number of years of employment.
Further, even when working fewer hours, American workers consistently out-produce their Chinese counterparts. According to ILO statistics, the average Chinese industrial worker produces $12,642 worth of output per year, while the average Chinese farmer or fisherman produces about $910 worth of output in the same time. By comparison, an American worker in the industrial sector produced $104,606 worth of output and a worker in the farming or fishing sector produced $52,585 per annum.
When one considers the diminishing difference in labor costs and the magnitude of difference in worker productivity, reshoring starts to become a very attractive alternative. It becomes even more attractive if one takes some additional factors into consideration.
Logistics are vastly simplified. The distances parts and finished goods have to be shipped will generally be shorter, which saves on both time and cost. The expenses and risks in maintaining a global supply chain are significantly reduced, as is the time and expense involved in dealing with customs issues. Communication across multiple time zones is also minimized. Reshoring to the U.S. can also help reduce employee stress and increase productivity, since fewer employee hours will be lost to overseas travel. Business travel expenses will also be reduced. In addition, employees will experience fewer frustrations due to linguistic or cultural misunderstandings, making it easier for them to do their jobs.
Additional potential benefits of reshoring manufacturing to the U.S. include greater security and a more stable political environment, better protection of intellectual property and lower energy costs as the U.S. becomes a global leader in energy production.
In BCG’s survey, 43 percent cited labor costs as a factor in their interest in reshoring, 35 percent cited proximity to customers and 34 percent cited quality issues. Additional considerations cited skilled labor, transportation costs and supply chain management efficiencies. According to Moser, when the total cost of ownership of overseas manufacturing is considered, domestic manufacturing in the U.S. is the clear economic winner.
Of course, a decision to move a company’s manufacturing back to the U.S. offers its own set of challenges. It takes time to build a manufacturing facility and train workers. This can easily take a couple of years and a considerable investment in capital. In the mean time, one still has to be producing the goods needed to meet customer demand.
Once a company decides to reshore, it has to handle the logistics of ending production in its overseas facilities and ramping up in the new U.S. facility. It also may have to deal with overseas employees and even its host country being less than supportive of its reshoring decision. Indeed, an American factory manager in China was briefly held hostage by his factory workers over rumors the company planned to move its manufacturing back to the U.S.
In addition to the purely logistic issues, it is critical to consider your customers in your reshoring equation. It’s vitally important to assure them that your reshoring transition will not interrupt their expected flow of finished products or lead to significant increases in their price.
Easing the reshoring transition with domestic outsourcing
Ironically, a potential solution to these reshoring transi- tional challenges can be found in outsourcing. In this case, however, it’s a domestic outsourcing, rather than overseas outsourcing that offers a viable business solution. A domestic outsourcing partner can provide the engineering and manufacturing resources that are needed to minimize the pain involved reshoring.
Partnering with a domestic design house offers a number of advantages. The outsource partner will have a core of experienced engineers and design teams used to bringing multiple new designs to volume production every year. In addition, most will have access to established U.S. manufacturing facilities capable of producing products in volume. As a result, whether it is bringing an estab- lished production line back to the U.S. or building one for a company’s next generation product, collaboration with the right outsourcing partner can essentially make a company’s reshoring transition seamless from a customer point of view. Of course, the key is picking the right outsource partner.
Picking the right outsourcing partner
The very first things to consider when deciding to choose a domestic outsource partner to smooth your company’s reshoring transition is their size and experience in your particular industry. Are they large enough, and do they have the resources to give you the level of manufacturing support you require? On the other hand, are they so large with so many clients that your project won’t receive the attention and support needed for it to succeed? Most importantly, do they have experience in your industry or one that is closely related?
An outsourcing company with lots of semiconductor manufacturing experience, for example, may be an excellent partner for a company in other high technology industries such as LED, flat panel or solar manufacturing, but it may not be the best choice for a company manufacturing home appliances.
Finally, you need to consider the kind of working relationship you want to have with your partner. Do you want a very close association with a lot of communication between your team and theirs? Would you rather have a more hands-off approach, where you provide them the project specifications and expect only periodic updates unless a problem arises? Is their preferred working relationship compatible with yours? Getting the answers to all these questions will require research in terms of formal references, word of mouth from others in your industry and online research, but the time spent researching your potential partners upfront will pay dividends in the long run.