"Well,” goes the punch line to an old joke, “it seemed like a good idea at the time.”
But today, many manufacturers who decided to offshore their production aren’t laughing. While offshore labor prices, especially in China, initially were very alluring, times have changed. Those once attractive Chinese wage rates have risen. Then there are total landed costs, including raw material and component costs, manufacturing costs, transportation and logistics, inventory carrying costs and taxes and duties to figure into the equation.
Then there are the long lead times, the inventory carrying costs and missed opportunities to respond to shifting market trends. Then there is, perhaps, the increased risk caused by a lack of visibility into the supply chain. What about natural disasters like the Japanese Tsunami, the Thailand floods or the Iceland volcano? What about political instability? And if that’s not enough, there’s the very real risk of intellectual property theft.
A 2012 study by the Boston Consulting Group (BCG) indicated that more than a third of U.S.-based manufacturing executives at companies with sales greater than $1 billion are planning to bring production back to the United States from China, or are considering it. Of 106 companies across a wide range of industries, 37 percent said they planned to (or were considering) reshoring. At companies with $10 billion or more in revenues, 48 percent indicated they were at least seriously thinking about returning to the U.S.
“Not long ago, many companies regarded China as the low-cost default option for manufacturing,” said Michael Zinser, a partner at BCG who leads the firm’s manufacturing work in the Americas. “This survey shows that companies are coming to the conclusion surprisingly fast that the U.S. is becoming more competitive when the total costs of manufacturing are accounted for.”
Look at the entire picture, advises Tucker Marion, Assistant Professor for the Northeastern University College of Business School of Technological Entrepreneurship. “You need to be smarter about things. The U.S. is still the largest economy in the world by two or three times, even with China growing,” he said. “If you’re going to look at the total equation, it doesn’t make sense to ship [products] 15,000 miles in four weeks. Ten years ago, everyone was on the bandwagon to offshore. We’re smarter now.”
According to consulting firm The Hackett Group, reshoring is expected to become more viable with each passing year. Its research found that the cost gap between the U.S. and China shrunk by almost 50 percent over the past eight years and is expected to stand at 16 percent by the end of this year. The trend is driven by rising labor costs in China, as well as rising fuel prices globally, which affects shipping costs.
Additionally, American consumers are beginning to come around to “Made in the USA.” A 2012 survey by the Alliance for American Manufacturing indicated that 78 percent of U.S. consumers view products made in America favorably, up from 56 percent two years before. A study by Perception Research Services International revealed that 76 percent of Americans are more likely to buy U.S. products and 57 percent are less likely to buy Chinese products.
A sinking feeling
Acorn Consulting Group builds cost account systems. Part of their work is analyzing the cost of import versus domestic resources. “Half the time, it’s better to do it domestically. For years, people thought it was cheaper [to outsource],” said Acorn’s Jack Haedicke. “But then you add in transportation, duties, fees, pallets, trucks to the DCs—there’s a lot going on. It’s more of an appreciation of the total supply chain.”