New research reveals a growing trend of North American manufacturers opting to bring once-outsourced functions closer to home to avoid hidden costs and complexities.

With the global financial crisis in full swing and a deepening recession, it would seem logical for companies to continue offshoring and outsourcing partnerships in an effort to keep operations lean. However, today’s unprecedented global uncertainty isn’t enough motivation for some industries to ship components of their businesses offshore in an effort to lower costs.

The North American Die Casting Association (NADCA) recently surveyed its members and, based on responses, determined that 78 percent of United States die casters believe die cast components are migrating back to the U.S., a trend that is expected to continue in the near future.

Concerns regarding quality, proximity and overseas logistics were cited as reasons for the reversal of strategy.

The NADCA survey also found that some North American companies are completely reversing course, working only with domestic suppliers. One U.S. bicycle manufacturer, for example, is no longer working with its Asian suppliers to prevent sharing technological breakthroughs with competitors.

Another prominent reason components are returning to the U.S.: Original equipment manufacturers (OEMs) want closer proximity to their supply base. Oftentimes being closer to customers translates into a better understanding of their needs, as well as faster turnaround on orders.

Perhaps unsurprisingly, the aforementioned trend is not exclusive to die casters.

The distance between manufacturers and their offshore suppliers makes long-distance sourcing too costly and time-consuming for increasingly more companies. Toss in heightened shipping costs and longer cycle times, and it’s easy to see how quickly offshore savings can disappear.

Bernie Hart, global product executive of logistics management with financial services firm J.P. Morgan’s Global Trade Services group, recently discussed what he considers to be the top nine trends that will characterize global supply chains in 2009. “J.P. Morgan continues to see U.S. manufacturers reconfiguring their supply chains by moving plant operations and sourcing vendors closer to home and away from Asia,” Hart wrote in December’s J.P. Morgan Global Trade Services newsletter.

Due to “limited free trade agreements, high energy costs and rising labor and production costs in Asia,” U.S. manufacturers are reevaluating their extended supply chains, and some companies are shortening the supply by reverse-offshoring, or onshoring and nearshoring; that is, they are moving plant operations and sourcing vendors closer to home. “While opportunities still exist in Asia, Mexico has become an increasingly popular source for manufactured goods,” Hart wrote, citing a U.S. Department of Commerce report that indicates a 7.2 percent increase from year-to-date imports through Mexico compared to the year before.

Other, broader issues are forcing companies to rethink their outsourcing and offshoring strategies according to global legal firm Morrison and Foerster:

• U.S. Jobs Policy — The current administration’s priority of creating 2.5 million U.S. jobs may or may not fulfill a campaign promise to stop giving tax breaks to companies that ship jobs overseas. As a result, some customers and their suppliers are likely to create new U.S. entities to operate outsourced functions, and take advantage of increasingly idled domestic labor pools.
• The Machinists Strike Against Boeing — As the third longest in history against the company, the machinists union’s strike last fall was largely related to issues of outsourcing in the delivery of components of the 787 Dreamliner, and highlighted organized labor’s increased sensitivity to outsourcing.
• Availability of Visas — Unless the H-1B visa cap is raised, offshore companies will have more difficulty putting resources in the U.S. to help with transition assistance, governance and project management, but may begin to hire from the U.S. labor pool for these functions.
• Terrorism — The deadly attack in Mumbai late last year means companies will revisit their sourcing decisions in terms of business continuity, which could also lead to the adoption of more onshore solutions.

A Deloitte LLP survey of 321 executives last year also concluded that the U.S. is the destination of choice for manufacturers when it comes to expanding operations. Of the top-tier manufacturing executives surveyed, results showed that these companies have expansion plans for a variety of operations, including sourcing, sales, service, and research and development. “While expansion plans are global, North America — especially the U.S. — was cited as the No. 1 likely location in the short term,” according to a Deloitte statement.

An announcement of Deloitte’s findings, presented in a report titled Made in America, states:

Overall, the vast majority of respondents said North America will not lose competitive ground in those areas over the next five years. And a significant number said they believe North America will become even more competitive by 2012 in sales and marketing (45 percent), information technology (41 percent), customer service (37 percent), R&D/engineering (36 percent) and finance/accounting (34 percent). A small percentage predicted that North America will be less competitive globally in these areas by 2012, with the balance being neutral.

“While globalization will continue and some manufacturing jobs will follow, North America is showing significant resiliency, based on the plans of these executives,” said Craig Giffi, a Deloitte LLP vice chairman.

Resources

Die Casters Report Sourcing Returning to the U.S.
The North American Die Casting Association, Feb. 26, 2009

Global Supply Chain Risks and Rewards: Top Nine Challenges for ’09
by Bernie Hart
J.P. Morgan Global Trade Services newsletter, December 2008

Global Sourcing Trends in 2009
by Alistair Maughan, Julian S. Millstein and Nigel Stamp
Morrison and Foerster, January 2009

Made in North America: Has NAFTA Made Us Competitive?
Deloitte LLP, June 20, 2008

U.S. is No. 1 as Manufacturers Plan to Expand, New Deloitte Survey Shows
Deloitte LLP, June 18 2008