The positive momentum of economic news highlighted by the 30-month growth streak of the Purchasing Managers' Index as measured by the Institute for Supply Management, is one reason that manufacturers are looking more closely at reshoring.
"Economics favoring offshoring is murky at best," explains Paul Martyn, vice president of marketing at BravoSolution. "Companies moved offshore due to the allure of the single metric of a 50% reduction in unit costs. Now they realize that that one metric doesn't tell the whole story. We now have better analytics available to realistically evaluate whether or not to go offshore including lead times and risk."
He points out that the real issue at hand is "proximity to the customer." Aside from the obvious decrease in distribution costs when plants are located near their customers, there is also the issue of risk management. "Currently there is a broad level of tension with regard to risk management," says Martyn. "From a natural disaster perspective a premium has been put on responsiveness."
Another factor that might be overlooked but is exerting a strong influence on whether or not to reshore, is the U.S. energy policy. "A comprehensive energy policy that takes into account domestic drilling as well as the process of permits is a positive step. The U.S. process is costly and time-intensive relative to other countries," says Martyn.
To illustrate his point, Martyn cites increased drilling in the U.S. as the reason why one manufacturer brought back operations to the U.S.
Labor is another consideration. Companies are finding across the board that difficult labor situations overseas can have negative effects, Martyn says. "If you don't have control over a contract manufacturer there is a risk." There are often a variety of labor issues depending on the country.
Another major concern is the issue the quality of what contract manufacturers are producing. "A consequence of offshoring that often isn't taken into account but should be is that the cost involved with sending over teams on a quarterly basis to ensure the proper quality levels."
A change in favor of reshoring is now coming from the decreased cost of doing business in the U.S. in the area of transportation. "One of the better kept secrets is that shipping rate going from the U.S. to global locations is less than rates entering the U.S. We have more products coming in than leaving, creating surplus of capacity leaving the U.S."
However, the predominant reason that manufacturers will choose to return or locate in the U.S. has to do with innovation, Martyn says. "As a country we will continue to invest in innovation. New technologies will surface based on the pent-up demand. If you look at products over last few years there is not a lot of investment in new product design. But this will change. And the change will begin with smaller, more nimble companies that can use the new technologies to bring products to the market quickly."
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Viewpoint: OUT: Outsourcing IN: Insourcing