On the Record

The economic benefits of reshoring in American manufacturing may not be so clear cut


Over the past 30 years, most nations became more dependent upon others to promote their own economic development and to import the goods and services not made in their own country. And while recent trends and reports show that major companies in the U.S. appear to have started reshoring—or at least are seriously considering it—I do not necessarily trust reshoring to be such a clear economic benefit to a company.

The global front

It is widely known that the American manufacturing capacity and the jobs in this sector significantly diminished in the past decade. According to the Federal Reserve, U.S. industrial production since 2007 (the base year when data last hit 100 percent) decreased anywhere from 10 to 18 percent. And because of China alone, an estimated 2.1 million manufacturing jobs left the American economy since 2001.

Truth be told, if all former American manufacturing jobs and capacity that disappeared then were truly economically feasible, they would have endured the test of time. They left because the economics of the marketplace and the related demands that affected them dictated that they were no longer needed. As such, there was no cost benefit justification for their existence.

In the current state, IT, financial services data, HR data and CRM support—all service provider capacity without materials or finished goods—continue to see strong offshoring growth and expansion.

But China, India and a number of the emerging Southeast Asian nations continue to undergo inflation combined with increasing labor costs. As such, to have a corporate overseas plant or manufacturing facility became much less attractive.

Even so, for a company to reshore manufacturing to the U.S. requires capital to create jobs and payroll; and a physical plant for processing, production and inventory storage. There is a depreciating capital investment in equipment and employees laden with heavy federal/state legal requirements and regulations. There is also the risk element on whether or not the manufacturing and production of these material goods will be an effective economic fit into a company’s operations. All of these factors have an impact on start-up costs and must be weighed to determine if reshoring is the right move. For the capital and equity utilized for such actions could have otherwise been invested elsewhere to make a definite income return.

One overlooked aspect of whether or not it is cost competitive for major companies to reshore is the continued ability by many of them to do procurement; issuance of purchase orders (POs); and contract out for finished goods inventory. Fulfillment here is often transacted through small business and entrepreneurial vendors, distributors or suppliers. They are eager to work within the criteria of the PO provided by a big company in order to obtain the opportunity. Through natural supply and demand marketplace economics and competition, these enterprises will do their utmost to keep their costs at a minimum in order to be profitable. As part of this they will take the initiative to be accountable on all aspects of the transaction whether it is quality control; integrity of inventory; or proper shipping and delivery. These small business owners often do their best to cooperate with the big company to maintain a strong relationship and renewal opportunities.

In the field

To weigh this playing field against the long-term financial commitment and issues required to ramp up reshoring, the latter poses the greatest risk for a company to incur higher costs and perhaps, suffer losses. Part of the threat a company is faced with in the creation of a reshoring operation is the permanent status of such an undertaking that can become embedded in an organization. It may not be easy to extricate and costly to abort or phase out.

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