Bringing Manufacturing Back Home
Almost 40% of U.S.-based manufacturing executives polled say they are shifting some production back to the states or considering doing so, according to a survey by the Boston Consulting Group. That’s more than double the rate compared to a similar BCG survey in early 2012. For many decades, the logic of the global economy was to outsource manufacturing from the U.S. market to China, India, and other low labor cost economies. Recent articles in trade and business publications point to a reversal of this trend where production is re-shoring, or returning to American shores. Here’s a quick look at why re-shoring makes sense today.
The Reshoring Initiative logo from the website reshorenow.org.
Labor Savings Not Likely
The savings on labor was thought to be tremendous compared to American labor costs. Turns out most American companies outsourcing production were wrong. Any labor costs savings were lost in other expenses.
Here’s the problem with labor costs: Some companies went to China, India and other offshore locations to gain a foothold to sell their products and services in those economies and to be in a better position to serve the global marketplace. Companies with these goals in mind were in a better position to succeed. But those simply looking to take advantage of low cost labor markets so they could sell for less in the US generally lost.
Often overlooked in the outsourcing era by companies seeking lower cost production were the hidden costs of overseas manufacturing. Long lead times, miscommunication, legal issues, die failure, shipping problems, and payment for products sight unseen have always made offshore manufacturing an iffy proposition at best. Today, when you factor in the reality of rising costs for labor, transportation costs, fuel, and power, the savings, if any rarely justify the investment.
What Went Wrong?
One of the reasons companies took to offshoring in the first place back in the middle of the last century was to take advantage of the product life cycle. The idea was a new product in those days needed to be manufactured near the source of design and product development. Distance made it difficult to make design improvements and take advantage of more efficient ways to manufacture. But as the new product matured, its production became more of a cookie-cutter operation requiring a minimum of engineering and designer involvement. With simplified manufacturing it became easier to reduce production costs by moving manufacturing to low costs overseas markets. Unfortunately, companies didn’t always make an accurate calculation of the hidden costs of offshoring.
Today, lean manufacturing, green initiatives, high technology production, and continuous improvement programs necessitate greater engineering involvement and closer management of production throughout the product cycle. These trends make it more efficient to manage production close tot the source of design and closer to the source of customers.
USA – The Low Cost Production Country
In recent years, labor costs have started to go through the roof in places like China and India. They have risen 20% a year for the last four years in China alone. As new product designs become ready to go into production, companies are very concerned about having their innovative technology ripped off in markets that do not respect intellectual property rights. Meanwhile manufacturing in the US is becoming more technology driven with less reliance on labor. This translates into extremely high productivity rates from American production plants.
The U.S. economy has a virtual unlimited supply of natural gas to keep power costs low. Shipping costs are minimal when shipping from a U.S. plant to a U.S. customer.
All these factors add up to lower cost of manufacturing in the U.S. Re-shoring is the natural result of these trends in the global economy.
As a U.S. based manufacturing company, North American Casting Corporation supports and encourages re-shoring efforts for American companies. If you are currently manufacturing overseas, we can help you calculate the potential cost savings and other benefits of bringing the work back to America.
