The Changing Pace of Manufacturing

Manufacturers abandon outsourcing to drive down costs, shifting focus to internal operations and supply chains


U.S. manufacturers are targeting an aggressive 1.5 percent reduction in cost of goods sold (COGS) for 2013 in an effort to drive margin growth, according to a new study from The Hackett Group Inc.

With GDP growth stabilizing in major regions of the world, manufacturers are expecting reduced sales forecast uncertainty, enabling them to plan supply requirements and manufacturing capacity with far greater confidence, the study found. The Hackett Group's research showed that companies are taking advantage of this stability by looking inward for cost reduction opportunities and other improvements: companies are turning to strategic sourcing, improving their operations, and optimizing their supply chain networks.

“Over the past few years major companies have outsourced the large majority of the activities that can be managed by third parties, to take advantage of low-cost locations,” said Dave Sievers, Principal and the Practice Leader of The Hackett Group's Strategy & Operations Practice. “But in many cases the labor cost gap is shrinking, making on-shore and near-shore manufacturing much more attractive. At the same time, new opportunities for cost reduction are emerging, including internal optimization, materials cost cuts, and reduced energy prices. For 2013, companies are clearly focusing on building the skills and infrastructure they need to take advantage of these trending opportunity areas.”

According to the research, the focus for 2013 cost improvements will continue to move away from outsourcing and towards internal manufacturing productivity, which is expected to contribute nearly 50 percent of the overall improvement. The Hackett Group found that while companies aggressively used outsourced manufacturing to reduce costs through 2011, starting in 2012 companies shifted away from this strategy, and expect to be much less reliant on outsourcing for savings in 2013 as well.

In 2012, The Hackett Group issued research showing that the tide has begun to turn on the flow of manufacturing jobs from the U.S. to China and other low-cost countries. The research found that some companies are already reshoring a portion of their manufacturing capacity, and this trend is expected to reach a crucial tipping point by 2015, as the total landed cost gap between the two nations continues to shrink, driven in part by rising wage inflation in China and continued productivity improvements in the U.S. The new study's findings indicate that manufacturers are indeed shifting focus of improvement initiatives away from offshoring and outsourcing.

The Hackett Group's research found that manufacturers are targeting a 1.5 percent reduction in the cost of goods sold for 2013. A significant portion of this will be driven by a planned 1.7 percent reduction in internal manufacturing costs, which is on top of a 1.8 percent reduction in 2012. In addition to internal manufacturing efficiencies, purchased material cost reductions are expected to reach 0.5 percent of total materials cost in 2013, 0.3 percent lower than 2012, as companies continue to lock-in savings from favorable commodity price markets.

Favorable energy prices as well as stable aggregate demand also helped spur a 1.8 percent reduction in logistics and 1.5 percent reduction in warehousing costs during 2012. This trend is expected to continue in 2013 with companies anticipating additional savings of 2 percent in logistics costs and 1.7 percent in warehousing costs.

“With demand really beginning to stabilize in 2012, companies began to optimize their existing distribution networks, reducing overhead and operating costs,” said said Len Prokopets, Associate Principal, The Hackett Group's Strategy & Operations Practice. “We expect this to be a significant trend going into 2013.”

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