Reshoring: The Supply Chain Returns
By Mark Kleszczewski
For decades, the U.S. economy shed manufacturing jobs as production of goods from tennis shoes to electronics went overseas. Today, the status of China and Southeast Asia as the “go-to” place for manufacturing is changing.
“A number of macroeconomic factors have definitely tipped the balance in favor of domestic manufacturing, at least for some industry sectors,” says Patrick Van den Bossche, partner and Americas operations practice leader, A.T. Kearney, Inc.
Among them, he says, are the appreciation of China’s currency versus. western currencies, China’s labor rate inflation, increased concerns about supply interruption, lower U.S. energy costs as a result of shale gas exploration, and a general push from federal and state governments to reduce the costs and administrative barriers to attract manufacturing companies. There’s also a growing movement around “Made in USA” branded goods that is generating top-line benefits around “imaging,” in addition to the potential bottom-line benefits of manufacturing domestically.
For communities, there’s no one-size-fits-all response, but helping companies with workforce development and the seemingly mundane, yet critical functions of logistics and supply chain management can make the competitive difference.
Reshoring Gains Momentum
The Boston Consulting Group (BCG) estimates that as companies doing business overseas reconfigure their production capacity, U.S. manufacturing could bring back $70 billion to $115 billion of export business by 2020. The group’s analysts project that within five years, the total cost of production for many products will be only 10 percent to 15 percent less in coastal regions of China, than in some parts of the United States where factories are likely to be built or expanded.
More than half of U.S.-based manufacturing executives BCG surveyed at companies with sales greater than $1 billion are planning to bring back production to the United States from China or are actively considering it.
While cost efficiency is one of the key reasons executives cited for opting to repatriate their production, it’s not the only motivation.
In a 2012 national survey performed by the Alliance for American Manufacturing (AAM), 83 percent of respondents thought it was very important to strengthen American manufacturing. Also, no less than 87 percent of respondents, regardless of political party affiliation, favored strong provisions for “Buy American” legislation. This sentiment appears to be reflected in the move by more than 30 states to introduce “Buy America” bills in recent years.
How this is actually playing out in the marketplace can be seen in Pennsylvania where a leading, multinational medical products manufacturer is gaining a competitive edge by expanding production closer to its U.S. customer base.
The initial impetus for moving a key product line from Asia to the United States this year may have been the federal “Buy American” Act, but it sparked a deeper interest in looking at the total benefits of domestic production, explains Rex Boland, vice president and general manager of Allentown operations, B. Braun Medical Inc.
“With a medical product made with highly-automated processes, the percentage of the labor —even when paying higher U.S. wages — is not really what drives the overall cost,” Boland says. “When we looked at the numbers involving the cost of capital, material, freight and shipping charges, and then started accounting for language barriers, time differences and shipping delays, it absolutely started making sense for us to bring the product into the U.S. and manufacture it here.
“Also, whenever your point of manufacture is closer to the customer, you shorten the supply chain and get more immediate feedback and communication, which makes for a much faster and better customer experience,” Boland continues.
Having a pool of engineers and a pipeline of future workers nearby was a key consideration as well, Boland adds. “Pennsylvania and the Lehigh Valley are really getting active in building the technical base we need. They’re custom-designing programs for local students who will transfer directly into our plant. That’s a big deal because not only is that turning out the kids who will be able to do the highly-skilled jobs we offer, it’s also going to replace our workforce as it ages.”
Strengthening the Supply Chain
“Looking critically at rising labor rates, the risks and costs of long supply chains, and the total cost of ownership and acquisition is going to make local suppliers more attractive,” confirms Nicholas Testa, Jr., CEO of Acuity Consulting and supply chain instructor at Brandman University School of Extended Education. “Reshoring is going to bring back the most jobs to local communities adjacent to where a product can be designed, manufactured and sold. That makes good workers and infrastructure, including highways systems, port facilities and railroads, extremely important.
“Offshoring may have been cheaper because of labor, but what’s happened is that if you start looking at the total picture, it’s become more difficult to do business overseas in a lot of cases,” Testa continues. “We’ve also stretched the supply chain to the point where it’s become harder to manage and single points of failure have emerged. The lack of a relatively small part from a distant factory that was wiped out can shut down a multimillion dollar project here in a matter of days.”
Bringing back production also reduces the need to stockpile inventory and rely on large, incremental shipments, which can translate into lower carrying costs. That brings the need for strong distribution and logistics even closer to the forefront, Testa says.
Indeed, logistics-related organizations and networks are springing up to attract manufacturers and help make entire industrial regions more competitive on the world stage.
One of the most prominent is centered around Chicago, where back in December 2013, Mayor Rahm Emanuel and World Business Chicago announced the launch of a new organization to increase the city’s competitive advantage in supply chain, transportation and logistics.
Paul Fisher, vice chairman of CenterPoint Properties and chair, Supply Chain Innovation Network of Chicago (SINC), says that the group is focusing on public policy, innovation, talent attraction and collaboration to elevate Chicago’s competitive advantages.
For example, SINC will look at the potential of replicating a New York City program intended to shift truck deliveries to nighttime hours to limit traffic congestion, in turn creating an estimated $100 million to $200 million in time, environmental and efficiency savings.
Such initiatives are a natural fit for Chicago’s $14 billion transportation and logistics industry, home to the only location in the nation where six of the major North American railroads intersect. Estimates suggest that between a quarter and a third of all freight tonnage in the United States originates, terminates or passes through the region.
“Innovation wants to be close to talent and customers, yet inventory is an enormous expense, so an efficient supply chain is particularly important in keeping us competitive today,” Fisher says. “We may not get back as many direct manufacturing jobs as there used to be, but we think this region will benefit tremendously from reshoring, especially in high-level assembly work.”
Over in nearby Michigan, improving delivery speed, reducing waste and controlling costs is at the heart of the state’s effort to coordinate logistical and supply chain support for businesses stretching from the Upper Peninsula to northwest Ohio and southern Ontario — a key to creating jobs in the ongoing reinvention of the Michigan economy.
To elevate itself as a strategically located North American logistics hub, the state established the Commission for Logistics and Supply Chain Collaboration earlier this year, featuring a partnership between government and industry to raise the international profile of Michigan’s logistics capabilities, says Peter Anastor, managing director of logistics, supply chain and manufacturing, Michigan Economic Development Corp. (MEDC).
“More and more companies are either ‘nearshoring’ or making products and sourcing in the U.S. — especially in the automotive sector where we’re strong — so the goal is to leverage our logistics and supply chain assets, which include our location next to Canada and access to 40 percent of the population,” Anastor says. “Manufacturers can also tap into extensive highways, four Class I railroads, access to the Great Lakes, an experienced manufacturing workforce and two of the nation’s top-ranked supply chain management and logistic programs here.”
Making the Right Choice
To ensure that any reshoring decision is future-proof, at a minimum for the time required to generate the necessary return on investment, Van den Bossche urges first taking a close look at existing manufacturing locations rather than trying to build up entirely new ones. That could help minimize the risks in case the inherently cyclical macroeconomic forces behind the current drive to reshoring start to push manufacturing away again.
“The equation to determine whether reshoring is right for you, both now and in the foreseeable future, is probably a bit more complicated than most make it out to be,” Van den Bossche cautions. “The question that companies should ask themselves is not ‘should we reshore,’ but ‘for how long will domestic manufacturing in my industry be advantageous over manufacturing in other regions?’”
As today’s manufacturers develop their future sourcing strategies, reshoring may not be a possibility or the right choice for every producer or supplier, but for communities and regions looking for growth, making it as easy as possible for businesses to come back spells opportunity.
“Many may say that we’re down and out here in the Midwest, but I don’t think so,” Fisher says. “We’ve got the most productive labor force in the world, so anything that requires sophisticated assembly can come back. We’ve got the best transportation hub on the continent, so anything that’s heavy and expensive to transport can come back to North America, too. Most of all, here in Chicago, we understand the importance of the supply chain and how to connect innovators with consumers.”
For complete details on the organizations featured in this article, visit:
Illustration by Stuart Miles at Free Digital Photos.net