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Thursday, May 5, 2016

CAEDC Action Report

Friday, May 6, 2011

Benefits of on-shoring

There has been much speculation and conversation of late about U.S. manufacturers considering "on-shoring" or "re-shoring," essentially bringing production operations back home.

Certain American manufacturers have learned the hard way that they could not best meet the needs of their U.S. customers with production facilities offshore, especially if their customers were here in the United States. Offshoring is about moving operations offshore only to later import the goods back into the U.S., which still remains the world's largest market, to fulfill demand. Mind you, it can work. But for many U.S. manufacturers, offshoring has not proved to be the panacea as expected.

A recent survey of 287 manufacturing companies found that 61% of the respondents said they were currently considering shifting their manufacturing operations closer to customers to provide better service and accelerate growth.

Managing supply operations that are located far from where demand occurs has weakened some companies' overall operational planning, forecasting, and general flexibility, while driving up costs, particularly when energy prices are soaring. In short, the offshoring experiment for many has backfired.

It would probably not be accurate to call offshoring a fad. Again, it does work for certain companies in certain industries. But it is also clear that there is a lot of follow the leader because he might know something we don't know. For many companies, these strategic moves are simply not well thought out. For example, nearly half (49 percent) of the respondents to the survey reported facing issues with cycle or delivery time, and 46 percent have experienced product quality concerns as a result of offshored manufacturing and supply operations.

The simple truth is that global competition will always force factory managers to try to replace expensive workers with machines or with low-wage overseas labor. Seeking nirvana through low labor costs has been a prime reason for offshoring. Coincidentally, it has also resulted in increased U.S. manufacturing efficiency; i.e., since U.S. manufacturers cannot compete in terms of labor costs, they have had to develop more efficient, more automated systems for production.

The proof is in the numbers: A recent report by IHS Global Insight said China required 110 million workers to produce approximately the same amount of goods that 11.5 million American workers could produce. You may want to read that again! In 2009, U.S. manufacturing productivity increased by 7.7 percent, more than any other country followed by the Bureau of Labor Statistics. The simple truth is that U.S. manufacturers beat sweatshop wages in developing countries through innovation employed here at home. It is the only way they can hope to compete. It is their only chance.

But, clearly, it is a chance, a risk that may not be worth taking for many manufacturers who have discovered issues of quality control not to their -- or their customers' -- liking. Consequently, total costs of manufacturing offshore turned out to be not as low as expected.

In addition, labor costs are rising in Asia, particularly China, where wealth is building and a middle class is being created. And on the energy front, many analysts are predicting $150 a barrel oil before the year's end. Anyway you cut it, moving a container load from a far-off plant in China's Shandong province to a local store in the U.S. is going to become more expensive.

So the seemingly initial cost savings -- the reason why many, if not most, U.S. manufacturers jumped into an offshore strategy with both feet -- are no longer that great. In fact, they are diminishing. And then there are those U.S. customers. They are those challenging people requiring better service, agility, speed, and quality.

Now it starts to dawn on the manufacturer that his plant in Shandong province alone may not cut it. Indeed, if he's going to keep those U.S. customers as customers, he is going to have to bring at least some production back home.

BMW, Nissan, Siemens, Electrolux are recent examples of companies investing hundreds of millions of dollars in this country.