Guest Commentary: The Next Big Thing in Manufacturing? On-shoring

Few of us could have imagined that when Dorothy Gale of Wizard of Oz fame clicked her ruby slippers three times and uttered the iconic phrase “There’s no place like home,” she was on to something. Especially when it comes to the nitty-gritty, high-stakes world of manufacturing.

Rewind 15 or 20 years. Offshoring was all the rage. As far back as 1979, companies were starting to send manufacturing to low-wage destinations like China, Taiwan and Vietnam to lower labor costs. According to John Shook of the Lean Enterprise Institute, “There was a herd mentality to offshoring and an inability to see the total costs.”

Today, wages in Asia are rising from 15 to 20% annually, according to The Boston Consulting Group (BCG). As a result, the economics of manufacturing in China, Taiwan and Malaysia aren’t as appealing as they once were. In fact, today, manufacturers are doing something that would have been unthinkable a decade ago: they’re bringing manufacturing home.

A few examples: in January, Bill Simon, Wal-Mart U.S. President and CEO committed to buy $50 billion of American-made products over the next 10 years. Similarly, after producing appliances offshore for years, General Electric is moving production operations back to the United States. GE CEO, Jeffrey Immelt, stated in the Harvard Business Review that outsourcing “is quickly becoming outdated as a business model for GE Appliances.” According to The White House blog, Ford, Apple, and Caterpillar are making large investments in U.S. facilities.

Ready to see if “there’s no place like home” resonates for you? Here are 5 key considerations:

1. What’s fueling the revival in onshore manufacturing?

A perfect storm of factors are converging to fuel the renaissance in American manufacturing:

• Rising labor costs in developing countries: according to HSBC, wages in China have risen 350% over the last 11 years. As wages rise, the workforce has become less loyal. Young workers are jumping from job to job seeking higher pay. Meanwhile, wages for technical and supervisory jobs are nearing those of their American counterparts.

• Affordable domestic energy: access to abundant and domestically produced natural gas has dramatically lowered the cost of running energy-intensive production facilities (natural gas is 75% less expensive in the U.S. than Asia). Today, U.S. manufacturers can power production plants for far less than it cost 15 or 20 years ago.

• Access to low-cost American capital: surprisingly, capital is easier and less expensive to secure at home than in any other region, Asia included. As a result, it’s easier and cheaper to buy equipment, buildings and land at home than it is abroad.

• American productivity: while the productivity of American workers has always been high, it’s estimated to be between 3 and 3.5% higher than that of workers in other countries. As U.S. labor productivity grows, labor costs will account for a smaller proportion of production costs.

• Supply chain complexity: if you’re manufacturing in Asia, then you’re also tasked with running two supply chains – one in the Asian country and one at home. With that extra supply chain, come worries about quality issues, theft of intellectual property, freight forwarding, getting products to the dock and through customs and the cost of innovation. Without an experienced partner to help them manage the complexities of multiple, lengthier supply chains, offshoring can be a daunting undertaking for many companies.

Factors like these have resulted in the creation of between 250,000 and 500,000 jobs (varies by source) in three years, signaling a strong trend toward on-shoring.

2. What trends are impacting how companies approach on-shoring?

In today’s complex market, different companies take different approaches to on-shoring based on what makes sense for their supply chains. Some are on-shoring entire production operations. Others are using a split model that combines offshoring and on-shoring. This could mean producing just specific components, models or aspects of the supply chain at home.

For example, a plastics manufacturer might opt to bring back its blow-molding facility, but not its entire manufacturing operation. A computer manufacturer might produce new laptop models in China, shipping pallets of them to America on 747s and then packaging them with batteries and accessories in the U.S. In so doing, the manufacturer can eliminate two months of inventory.

3. Pros: the case for on-shoring

• Removing inventory from the supply chain: given the distance between the plant and consumer, time to market is the leading issue when offshoring to Asia. By eliminating lengthy transoceanic transit times and resulting delays, you can extract some eight weeks of inventory from your supply chain and respond to customers with more agility.

• Predictable quality: by producing goods in the U.S. you immediately eliminate one of the biggest risks of manufacturing in Asia – inconsistencies in product/vendor quality.

• More control over intellectual property: manufacturing in the U.S. also eliminates another key concern of Asian production – theft of ideas and intellectual property.

• Support for faster innovation cycles: American production is more efficient, productive and automated than ever. And without the lengthy supply chain, you’re better able to innovate and get new products to market before they’re obsolete.

• More flexible U.S. labor environment: wages are more competitive, the union environment has become more favorable and lean principles are giving workers a stake in workplace decisions, resulting in greater efficiencies and quality improvements.

• Lower costs: given the skyrocketing costs of cargo ship fuel (three times what it was 10 years ago) and the high fixed costs of launching an offshore operation and managing one supply chain at home and another overseas, on-shoring can be an economical alternative for products like appliances, computers, machinery, TVs, plastic and rubber.

• Tax credits: President Obama has laid out a plan to encourage manufacturing in the U.S. The plan eliminates deductions for offshoring, offering tax incentives for manufacturing in America. Still in “the works” they’re expected to become law.

4. Cons: the case against on-shoring

• Labor costs remain high for some products: labor-intensive products like shoes, textiles and apparel are still cheaper to produce overseas.

• Costs of setting up/retooling American plants/supply chains: in the past 10 to 20 years, many American factories were shuttered or torn down. You’ll need to build your manufacturing infrastructure back and fire up your supply chain.

• Workforce training: the American manufacturing workforce’s skill set may not have kept up with advances made over the last 15 or 20 years. This could mean investing in training, lean enterprise education and skill set adjustments.

• Capital investments: setting up or retooling production facilities also means investing in new equipment. If you are not ready to invest in packaging, warehousing or distribution centers, there are partners that can help with this.

• Most facilities are in the southern states: for the on-shoring effort to be viable long term, we’ll have to find ways to cost-effectively cover the entire country. In the meantime, it may be beneficial to partner with companies that offer product completion and distribution centers nationwide.

• Labor and regulatory environment: while labor unions are cooperating with efforts to “bring manufacturing home” and labor costs have flattened, they need to do more.

• Tax credits: While there is a plan laid out that offers tax incentives for manufacturing in America, it is still not complete and there is no law in place. It could be months before this legislation is implemented.

5. The future: expect continued growth in on-shoring

Looking ahead five years, we’ll likely reach a tipping point when all of the above economies of scale come together. Especially with companies like Wal-Mart making pledges to buy American, governmental initiatives and tax credits, cost-effective energy sources making manufacturing less expensive and continued workforce stress in Asia.

Look 10 years down the road, and the Boston Consulting Group predicts that China will have 20 cities the size of New York, exacerbating pressures on its labor force. At home, energy costs will continue to fall, workers will be more skilled and production is expected to expand across America. The result? A very exciting decade for on-shoring – to the tune of $100 billion of manufacturing returning to the United States.

Michael Rackley is Senior Director of Product Completion for Ryder Supply Chain Solutions. In his role, he is responsible for designing plant layouts, engineering specifics, demand planning requirements, shop floor requirements as well as creating awareness for the product completion center solution. Mr. Rackley joined Ryder in 2004 and since then has held various positions of increasing responsibility. Prior to joining Ryder, he worked as the Director of Quality for Lego Systems for 2 years. Before Lego Systems, he worked for Coca Cola USA for 22 years in roles of increasing responsibility and eventually became their Corporate Director of Quality for US Facilities. Mr. Rackley earned a BS in Biology from Lubbock Christian University and an MS in Microbiology from Abilene Christian University. He was also certified as a Logistics Professional with Georgia Tech University.