Procurement

Reshoring Brings Back Multiple Strategic Benefits for Companies

May 9, 2013

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Harry Moser

Reshoring, the return of manufacturing that was earlier offshored, is based on the economic logic of producing or sourcing near the consumer: localization. The reshoring trend in the U.S. has been driven by rising offshore costs such as labor rates, energy prices, impact on innovation, and intellectual property theft, and by the increased use of total cost analysis that recognizes all relevant costs and risk.

The reshoring logic applies to all manufacturing companies in their sourcing decisions. 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, and 500 percent in the last 12 years), when added to the "hidden costs" of offshoring, often have closed the cost advantage. Common "hidden costs" include travel, carrying cost of inventory, emergency air freight, and the impact on innovation from separating engineering from manufacturing.

Another hidden cost is millions of counterfeit and scrap electronic components (predominantly from China) getting into U.S. military and other systems. The U.S. government has produced numerous reports on the dangers of counterfeit components to national defense. Users of high-precision products such as the military and aerospace and medical equipment companies simply cannot afford the risks of using under-regulated manufacturers found oversees. They are therefore shifting production back to the U.S., where quality and compliance standards remain the highest in the world and where it can be more easily monitored. While the quality standards associated with "Made in USA" or in other developed countries are sometimes essential for high-precision products, "Made in USA" branding offers value across all sectors of manufacturing.

Zentech, a Maryland company that manufactures electronic systems for a wide range of customers, including defense contractors, medical diagnostics makers, and telecommunications firms, reshored over $1 million in manufacturing in 2012, with plans to reshore even more in 2013. President and CEO Matt Turpin reports the company "is experiencing growth in all industry sectors and continues to see opportunities in the area of reshoring."Offshoring-vs.-Reshoring-the-Business-Perspective

Turpin continues: "CEOs and CFOs are realizing that total cost of ownership (TCO) for off-shore 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 (electronic manufacturing services) providers but fortunately understand the TCO implications."

Zentech's customers cite reasons in their decision to reshore that are common complaints: inventory carrying costs, supply disruption, intellectual property risk, and the need for compliance. Companies that reshore routinely achieve inventory reductions of 50 percent. Some published cases mention reducing inventory by factors of three or even six. The reasons behind inventory reduction include better payment terms, smaller stocking quantities, shorter lead times, and more certainty delivery dates and quality.

Reshoring at least a portion of what has been offshored is a beneficial strategic decision for many companies. But the benefits extend beyond individual companies. The reshoring trend in the U.S. adds jobs, reduces the severity of recessions, helps balance the trade deficit, helps balance budget deficits at all levels, and makes recruiting the next generation of the skilled workforce easier.

Recent reshoring decisions by Apple, Caterpillar, GE, and others suggest that millions of jobs could be reshored in the next 10 years. Based on analysis of the articles in the Reshoring Initiative's Reshoring Library, about 50,000 manufacturing jobs have been reshored in the last three years. That surge represents about 10 percent of the total rise in manufacturing jobs since the low in January 2010.

It is estimated that if all offshored companies used TCO analysis, 25 percent of all offshored work would come back. If the current trend of greater TCO use is paired with other trend factors, such as energy abundance, manufacturing will make a huge comeback in the U.S. The Reshoring Initiative's goal is to help reshore 50,000 to 100,000 manufacturing jobs annually within a few years and bring back 3 million jobs in the next 20 or 30 years. As the reshoring trend grows, so does media coverage, rising consumer preference for "Made in USA," and the realization that companies can keep jobs in America and still gain the edge needed for short-term and long-term success by sourcing locally.

Harry Moser is founder and president and Millar Kelley is research analyst of the not-for-profit Reshoring Initiative, which assists 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." The Reshoring Initiative provides free resources, including the Total Cost of Ownership Estimator(TM), which accumulates a single cost value for a product sourced from a particular supplier, local or offshore; the Reshoring Library, with articles of companies that are reshoring; and archived webinars and videos. It also produces a quarterly newsletter. Contact the Reshoring Initiative at http://www.reshorenow.org/contact.

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