When offshoring came of age in the 1990s, the economics for many U.S. manufacturers was a no-brainer. Skilled laborers created a high-volume, quality product at a fraction of the price of American-made goods.
No matter that the vast majority of products had to be shipped overseas to U.S. consumers. The value the inexpensive labor delivered far outweighed the inherent challenges of a bi-continental supply chain.
But the past 10 years proved to be a period of rapid evolution within the materials handling business.
Technological innovation and hyper-consumer demands have reconfigured the equation in a way that may mean it’s a better business decision to locate manufacturing centers close to where customers live. For most companies with a stateside customer base, that means a return to the U.S.
It’s called next-shoring, a glimmering movement which may signal a reversal in the conventional wisdom of recent decades that it’s cheaper to make many goods abroad.
Fifty-four percent of executives from billion-dollar U.S. manufacturing companies said they hope to soon shift production to the U.S. from China, according to a recent survey by the Boston Consulting Group. It’s a staggering leap from just one year earlier, when 37% of executives reported the same. And it’s not just talk. Twenty-one percent of the respondents said they are actively working to move their manufacturing operations, some as soon as 2015.
A decade ago, it seemed that investing in infrastructure, equipment and training for offshore employees would offer manufacturers a huge competitive advantage. Despite the inherent costs of launching new operations in Asia and shipping the finished goods overseas, executives predicted they would still come out ahead.
Automation seemed like a risky prospect. Even though robotics had the potential to dramatically reduce long-term costs, integrating them into operations came at a steep price and with no guarantee they would function efficiently. Executives at Fortune 500 companies heard horror stories of painful four- to six-year lag times before their peers saw a significant return on investment.
But as the decade passed, offshore investments turned out to be more fraught with risk than expected. The labor itself wasn’t as cost-effective as it used to be, as China, for one, made minimum-wage reforms. That smaller wage gap between Chinese and American manufacturing salaries makes the prospect of localized production all the more appealing when you insert factors such as fuel prices and delivery times into the picture, according to a recent McKinsey analysis.
And as profit margins for foreign-made goods decreased, automation’s reliability and functionality increased—spectacularly.
The success stories are growing to show that automation isn’t what it used to be. There’s a clear roadmap for incorporating robotics into the supply chain. Engineering support is much more sophisticated. The rapid ROI satisfies investors.
The renewed focus on science and engineering education in the U.S. is also cultivating a workforce that can maintain and optimize highly technical systems. Fortune 500 executives say they’re comfortable with automation now because they can hire qualified people to keep the supply chain running efficiently.
If a company is moving toward automation, it just makes sense to do it domestically when you can take advantage of a sophisticated labor pool while shrinking significantly the shipping costs and distribution speed to a U.S. customer base.
Swift, customizable delivery is becoming a critical component of the supply chain, as omni-channel distribution turns into the new normal. Consumers expect to be able to buy a pair of odd-size sneakers on a whim while surfing the web and receive them the next day.
Retailers, too, increasingly require daily shipments to their brick-and-mortar stores of ever smaller and more diverse selections of goods.
You just can’t do that if your manufacturing facility is in Asia, where the cycle from first stitch to consumer doorstep might take three months. All the while, the cost of inventory is tied up in warehouses, ships and docks as it meanders to U.S. shores.
In this climate, producing goods locally becomes a very big deal. Indeed, 35% of the executives who responded to the Boston Group’s survey said proximity to customers will drive their decisions about where to situate production.
On a micro level, domestic retailers such as Amazon are already reorganizing their operations to meet consumer demand by building a web of distribution centers in major metropolitan areas, rather than relying on a few large DCs in rural outposts several states away.
It’s not a huge leap to predict that other retailers will follow suit and, eventually, extend the practice to manufacturing.
These kinds of actions offer a glimpse into where the industry is trending and the larger ramifications for material handling. Subtle movements today become the sea change of tomorrow as we contemplate manufacturing’s return to our shores.
Kevin Ambrose is CEO and president of Wynright Corp., a wholly-owned subsidiary of Daifuku Webb and a U.S.-based provider of intelligent material handling systems. With more than 200 engineers in-house, Wynright designs, manufactures, integrates and installs a full spectrum of intralogistics solutions, offering both Wynright-branded and third-party equipment to meet client needs.