The falling dollar, high fuel and energy prices, and rising labor costs in traditionally low-wage markets have some manufacturers rethinking how far they're willing to extend their supply chains. Over the past year, a handful of companies have publicly acknowledged that cost pressures factored into their decisions to move production back home.
Depending on the situation, the changing economic climate could make the United States the ideal sourcing country for domestic manufacturers, says Tom Jones, senior vice president and general manager of U.S. Supply Chain Solutions for logistics provider Ryder System Inc. "It really depends on the industry and the cost of the product, the value of what you're shipping and the characteristics," he says. "You can ship a box full of microprocessor chips quite a long ways without a significant penalty on the shipping side, but if you're shipping diapers a long way, which are very bulky, and the cost of transportation is high, you're not going to get what you want with that."
Case in point: The cost of shipping residential heaters from China to Bowling Green, Ky., became too high for Desa LLC. In October 2007 the company's retail heating unit shifted manufacturing operations for the product back to the United States after shipping costs spiraled out of control.
The Long Road Back
Desa, a privately held company that also sells power tools under the Remington brand name as well as lighting products, followed the path of many other U.S. manufacturers that wanted to take advantage of China's lower labor costs to remain competitive.
Desa's Asian migration began around 2000 and picked up steam about four years later when the company moved a considerable chunk of production to China. At the time, Desa was receiving a 15% value-added-tax rebate from the Chinese government on its exports, says Claude Hayes, president of Desa's retail heating division. But in July 2007 Desa lost part of this incentive when China announced that it was reducing the rebate for several products, lowering the company's benefit to 5%. Added blows came over the next year with skyrocketing fuel and raw material prices. Desa's shipping price per container had increased about 50% in one year, according to Bill Wong, Desa's director of marketing. The 2,000-mile trek from the Port of Long Beach, where the company's cargo arrived via China, to the Bluegrass State was no longer cost-effective with diesel prices hovering around $4.05 per gallon, says Hayes.
In addition, the cost of Chinese steel was taking off while U.S. price increases were considerably lower, and the falling dollar vs. the Chinese yuan reduced Desa's labor savings, he says. "So when you look at energy costs, the exchange rate, value-added tax and all the commodities, it's beginning to look a little greener in the United States," Hayes explains.
The decision to move some jobs back to the United States was made easier by the fact that the company never sold the large presses and machine tools located in its Bowling Green plant when operations were moved to China. Desa is paying more for labor now but breaking even with production costs in China through the transportation and commodity savings. The move also puts the company closer to customers.
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