By Len Prokopets
As recently as last year, before the global economy's plunge into recession, U.S. manufacturers were becoming increasingly concerned about the hidden costs of offshoring. Many manufacturers responding to an Archstone Consulting survey reported alarming growth in offshore labor rates, exchange rates, commodity costs, transportation costs and a variety of soft costs that had spiked their offshore manufacturing costs by 25 percent or more in the last three years.
At the time, we suggested — and responses to our survey supported — a trend developing among many manufacturers to rethink their offshoring strategies. In fact, 90 percent of the survey's respondents reported that they had already begun rebalancing their manufacturing and supply strategies or were considering doing so.
We had argued that manufacturers can make more informed sourcing and manufacturing network design decisions by considering "total cost," and that on-shore or near-shore manufacturing would increasingly be an attractive option. Many in the media shared our view and heralded the return of manufacturing to the U.S.
Since then, as the recession swamped the global economy, the acute pain caused by rising costs of offshoring has diminished — transportation and commodity costs for offshore manufacturing have declined as oil prices eased and labor and exchange rate growth have leveled off. Some have argued that this shift has opened the door for companies to resume their prior "rapid-fire" offshoring and that the return of manufacturing to the U.S. would not materialize.
We disagree with this view. Manufacturers' responses to our survey indicate that they have seen what seemed like bullet-proof business cases for offshoring be negated by growth of transportation, commodity, exchange and labor rates. In fact, 59 percent of manufacturers report that they are being more selective in making offshoring decisions or are relocating manufacturing/sourcing to avoid those risks. [See Chart 1 in pop-up box (may need to turn off pop-up blockers to view this and other illustrations in this article.]
Further, manufacturers' responses to our survey point to the fact that they have realized that offshoring carries "hidden" costs in the form of soft costs such as lost flexibility and secondary hard costs such as the cost of excess inventory and increased cost of managing quality. [See Chart 2 and Chart 3.]
Shorter supply networks simply favor greater product flexibility, network visibility and the ever-present need to meet customer expectations for value, service, timeliness and innovation. A number of manufacturers, responding to our blog on this debate, seemed to agree:
- "A deciding factor has to be related to service of the customer."
- "For every dollar saved on sending casting, forgings and fabrications overseas, I can point to two you lost. Quality and logistics are the real problems for most organizations. When your parts are coming from overseas, the idea of JIT purchasing is nearly impossible."
- "[With] proximity to the U.S. market, the time to get the engineering down and the production up is less, and costs are generally lower from a total cost perspective. Inventory can be reduced by greater than 50 percent vs. those operations that are in Asia with goods on the boat."
- lost supply chain visibility;
- container load management in lieu of mass customization as a competitive differentiator;
- reduced ability to use operations and the supply chain to deliver more product customization;
- overall supply chain risk;
- risk to intellectual properties;
- reduced SKUs and less flexible ordering patterns;
- product quality issues;
- more complex quality resolution;
- additional warehousing and related higher inventory costs.
About the Author Len Prokopets Archstone Consulting