What Are the True Costs of Offshoring?

There is a growing trend to reshore manufacturing back to the U.S. as managers re-calculate and compare the true total costs of production. Still, there is a range of hidden metrics that are not factored often enough when determining where to produce goods.

Michele Nash-Hoff, author of the book "Can American Manufacturing be Saved?" told IMT the theme of this year's Del Mar Design and Electronics Show (DMEDS) in San Diego, Calif., was "The Re-Birth of American Manufacturing." The show conference featured a full-day track on the topic of reshoring.

"The buzz at the show was that manufacturing is returning to America, and every contract manufacturer I spoke to at the show had experienced a 'reshoring' event," said Nash-Hoff.

Time magazine's April 22 cover article also noted the reshoring trend. The article "Made in USA: Manufacturing is Back -- But Where are the Jobs?" is replete with photos of consumer products that have returned to American-based manufacturing from offshore.

What is refueling the trend of reshoring? Brands are not returning on an impulse or because of public pressure, IndustryWeek reports. They are doing so "to more efficiently serve the world's largest free market. Unlike when they left, this time they are measuring why they should return."

Too many companies moved their production to countries like China based solely on the unit prices. "Buyers are rewarded with the money they save their company based on the piece price," added Nash-Hoff. "They fail to see the bigger picture."

As the cost of manufacturing overseas is being re-examined using total costs models, several factors have been at the forefront. Nash-Hoff listed a few of the major factors that first led to bringing work back to the U.S.:

  • Inventory: "Businesses are being forced to buy larger lots to get the best China price," she explained.
  • Cash flow: "Lower-volume businesses are being forced to pay for parts before they're shipped... Only the major companies are getting favorable terms."
  • Travel: This can chip away at savings "if traveling to Asia becomes necessary or frequent," which she said often happens when "the qualities of parts are sub-par and the manufacturing has to be reworked."

Nash-Hoff added, "When one or two of those problems became egregious, then companies would make the determination to return manufacturing" to the U.S.

The Reshoring Initiative, a non-profit industry-led effort to bring manufacturing jobs back to the United States founded in 2010, has created total cost of ownership (TCO) software and spreadsheets that calculate many of the hidden and overlooked aspects when deciding where to manufacture. TCO refers to an estimate of the direct and indirect costs and benefits related to the purchase of any part, subassembly, assembly, or product.

The Reshoring Initiative's founder, Harry Moser points out, "Not factored often enough are costs associated with shipping, inventory time, quality issues, and exchange-rate risks."

According to Moser and Nash-Hoff, other hidden costs of sourcing production offshore can include:

  • Currency Fluctuations. Last year's invoice of $100,000 could be $140,000 today.
  • Appropriate Management Skills. Many companies underestimate the people, process, and technology required to manage an outsourcing contract.
  • Design Changes. Language barriers make it difficult to get design changes understood and implemented.
  • Quality Problems. Substitution of lower grade or different materials than specified is a common problem.
  • Legal Liabilities. Offshore vendors often refuse to participate in product warrantees or guarantees.
  • Cost of Transition. It is easy to overlook the time and effort required to successfully offshore production. It takes from three months to a year to complete the transition to an offshore vendor.
  • Poor Communication. Time zone differences and language barriers can make communication complex and burdensome.
  • Intellectual Property. Foreign companies, particularly Chinese firms, are notorious for infringing on IP rights without legal recourse for American companies.

Keith Mobley of Life Cycle Engineering has earned an international reputation as one of the premier consultants in the field of plant performance optimization. In an interview with IMT, he said, "Labor makes up about half of typical manufacturing cost. If you can drop the labor costs by 40 percent to 80 percent by moving offshore then that really impacts operating profit.  What is unseen is the cost of unemployment, health care, Social Security, and all of the infrastructure costs that result from the loss of manufacturing plants."

American consumers are also putting more pressure on retailers to have more American-made products. Nash-Huff referred to recent polls that she has seen over the past few years that indicate 78 to 80 percent of consumers would be willing to pay more and prefer to pay for U.S. made goods.

On that same note, Time magazine reported in April that Walmart promised to buy $50 billion more U.S.-made goods over the next decade for its Walmart and Sam's Club stores.

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