What It Takes to Reshore Manufacturing Successfully

The data on comparative labor and energy costs may seem compelling. But the process of bringing assembly work back to domestic factories from abroad is substantially more challenging than the economics alone would predict.

Rising labor costs in China and other emerging economies, high supply chain and logistics costs, and wide differentials in the costs for electricity and natural gas in different parts of the world are provoking a fresh round of relocation of manufacturing and production. While some labor-intensive jobs are moving out of China to Southeast Asia or the next emerging low-cost regions, some high-profile manufacturing work is returning to the United States, to the cheers of some who are proclaiming the beginnings of a manufacturing renaissance. Wal-Mart holds supplier conferences to promote “Made in U.S.A.,” and the retail giant encourages manufacturers to commit to producing in the United States by promising to purchase $50 billion more in U.S. manufactured goods in the next 10 years. It is targeting the reshoring of products made for its stores by trying to facilitate and accelerate reshoring efforts among its suppliers. Consultants proclaim the reemergence of the United States as a competitive place for manufacturing — and are pushing their services with reshoring conferences, reports and lots of advice.1

While the macroeconomic data on comparative labor and factor costs may be compelling, the actual process of reshoring — bringing assembly work back from abroad — is hard work. This is especially true when the resources upon which a company draws (the supplier base, the workforce, and even the company’s own internal product design capabilities) have atrophied. In an earlier paper, my Harvard colleague Gary Pisano and I documented the loss of the “industrial commons” in the United States, the shared resource base upon which manufacturers draw.2 My recent research has looked at several initiatives aimed at rebuilding regional capacity, including General Electric Co.’s Appliance Park operations in Louisville, Kentucky; Google’s efforts in partnership with Flextronics International Ltd. to assemble the MotoX smartphone in Fort Worth, Texas; a high-end technology product manufactured at Flextronics facilities in Austin, Texas; as well as comparison factories in Europe and Asia. (See “About the Research.”) What can we learn from these efforts to help managers prepare for reshoring?

The benefits were no surprise. Positioning manufacturing close to the market minimizes the inventory of goods in the pipeline and reduces delivery times.

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References

1. The Boston Consulting Group made a strong argument for U.S. manufacturing competitiveness in a report prepared by H. Sirkin, M. Zinser and D. Hohner, “Made in America, Again,” Boston Consulting Group (August 2011); McKinsey argued for a more nuanced manufacturing location strategy in “Manufacturing the Future: The Next Era of Global Growth and Innovation,” McKinsey Global Institute (November 2012); PricewaterhouseCoopers argued for localizing production as a way of mitigating the risk of supply chain disruption in “A Homecoming for US manufacturing? Why a Resurgence in US Manufacturing May Be the Next Big Bet,” PwC (September 2012); see also H. Sirkin, M. Zinser, D. Hohner and J. Rose, “U.S. Manufacturing Nears the Tipping Point,” Boston Consulting Group (March 2012); and J. Haggerty, “Why U.S. Manufacturing Is Poised for a Comeback (Maybe),” Wall Street Journal, June 2, 2014, p. R1.

2. G.P. Pisano and W.C. Shih, “Restoring American Competitiveness,” Harvard Business Review 87, no. 7-8 (July-August 2009): 114-125.

3. An MSSC survey of CPT certification candidates found that 34.5% were currently unemployed and more than 80% had worked in a manufacturing position for less than one year; 76% had not completed high school.

4. The classic paper on the subject is F. Herzberg, “One More Time, How Do You Motivate Employees?,” Harvard Business Review 46, no. 1 (January-February 1968): 53-62.

5. Toyota founded the Kentucky Federation of Advanced Manufacturing Education as a training program to serve multiple manufacturers and build the skill base in the region surrounding its factory. Students attend classes two days each week and are paid by the sponsor company to work in its factory the other three days.

1 Comment On: What It Takes to Reshore Manufacturing Successfully

  • Sandy Montalbano | October 9, 2014

    The reshoring transition can be difficult, so every detail should be planned carefully as mentioned. Most companies failed to do the math when they offshored. We urge them to do the math when they consider reshoring so that the decision is a long-term good solution for the company.

    As many as 60% of companies made the decision to offshore based on miscalculations, never taking into consideration the total cost of ownership (TCO) including all of the hidden costs and risks of offshoring.

    Current research shows many companies can reshore about 25% of what they have offshored and improve their profitability simply by using TCO (total cost) instead of price to make their decision.

    Reshoring is the logic of local sourcing.

    – TCO is the methodology you use to decide what to reshore or offshore
    – 

TCO = more obvious costs + “hidden” costs and risks

    – Total Cost = True Cost

    In order to help companies decide objectively to reshore back to the U.S. or offshore, the not-for-profit Reshoring Initiative’s free Total Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring.
    http://www.reshorenow.org/TCO_Estimator.cfm

    I also recommend reading “ReMaking America” the AAM’s new book on the wealth and growth opportunities of manufacturing in the U.S. Harry Moser, founder of The Reshoring Initiative wrote an excellent chapter on Reshoring. http://americanmanufacturing.org/remake-america/

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