Companies considering offshoring must look at the total costs of manufacturing when making their sourcing decisions.
To regain some of the ground that the U.S. has lost in manufacturing at home, companies need to ramp up production of a crucial commodity: clear-thinking about the pros and cons of moving their operations offshore.
From a manufacturer's standpoint, there are very good reasons to source some products and components from low-cost countries. That's why many U.S. manufactures have embraced the practice -- often with good results. The savings are real, especially for labor-intensive, high-volume components. Furthermore, some companies, including automakers and their suppliers, would have a tough time meeting the burgeoning demand for their products in China and other distant countries without producing or sourcing components there.
However upon closer look, offshoring is not always the right answer for all products, especially those sold in America. For one thing, labor costs in general are shrinking as a share of the total cost for many items. Moreover, average factory wages in many developing countries are rising, as is the demand for America's sophisticated just-in-time, cost-saving, logistical systems. When common shipping problems are added into the mix -- natural disasters, security threats, political instability, theft and other risks -- more manufacturers are concluding that the savings offshoring had promised are just not there.
The decision to offshore has been typically made with focus on labor cost and local markets. Companies assumed production in a low-cost country would lead to lower costs. It's hard to fathom how this mind-set had become so deeply ingrained in U.S. manufacturing. A herd mentality explains part of it, according to Harry Moser, the president of the Reshoring Initiative and retired chairman emeritus of GF AgieCharmilles -- an Illinois-based maker of machines and automation for precision toolmakers and component manufacturers. He is one of the country's most vocal onshoring advocates.
Moser argues that many companies began moving production to low-cost countries mainly because they thought everyone else was. They worried that a competitor might gain a cost advantage; and, in the process, they put a limit on their thinking by fixating on a component's sticker price rather than considering its total cost. For those who do the latter, a different picture emerges.
According to the findings of a 2009 analysis by Archstone Consulting and Duke University, most manufacturers use rudimentary total cost models that ignore 20% of the offshoring's cost. Other studies indicate that the prices for Asian manufactured products have risen 15% to 20% in the last four years; and, at that rate, it won't take long for the cost advantages of many offshored products to vanish.
Clearly, new tools are needed that evaluate offshoring cost factors that I've mentioned as well as others: quality, excess inventory to replace poor-quality products and insure against late shipments, stolen intellectual property, rising fuel costs, environmental impact and more. Excess inventory alone is a huge, costly problem; a widget may cost $1 to produce offshore but when we factor in the cost to make, ship, inspect, scrap and insure the additional units, each unit ends up costing more in terms of dollars and wasted time.
The defect rates of some shipments from Asia can be so high that entire batches must be inspected (contained) upon arrival piece by piece to separate defective units because effective quality control is not practiced by some manufacturers. The time and expense to do this, along with the cost of either reworking or scrapping products, can quickly wipe out the savings offshoring promised and even exceed the made-in-America cost.
The Total Cost of Ownership Estimator is a new, complimentary, Web-based tool that is designed to calculate total cost estimates of products made abroad. It aggregates 29 factors to provide comprehensive, objective estimates according to The Reshoring Initiative which Harry Moser heads.
The lesson is simple: as manufacturers make their sourcing decisions, they must consider all cost factors. The case for onshoring is especially strong for complex products with short lifecycles, high shipping costs and frequent engineering changes.
I agree with a recent analysis by the Boston Consulting Group that forecasts a manufacturing renaissance in the United States in the next five years and that some U.S. states will become among the most cost-effective locations for manufacturing in the developed world. Caterpillar and NCR are among the manufacturers leading the way. And, while this renaissance won't bring all U.S. manufacturing jobs back, it will help solve many of the problems offshoring has created, while improving the U.S. employment rate.
But for this to happen, American manufacturers must give themselves an edge by maintaining world-class standards for quality, innovation, skilled workers and other performance-related factors. Ultimately, these are the considerations manufacturers will use to answer the question: should we onshore or offshore our production lines?
Guy Morgan is managing director & global operations advisory group lead for BBK Southfield , and CEO, Performance Improvement LLC. He has more than 30 years of experience in plant management and operational improvement processes. His areas of specialty include program launch, lean manufacturing, and interim management in various realms of manufacturing.
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