Reshoring US manufacturing is an efficient way to reduce imports, increase exports, and regain manufacturing jobs here in the States. It's also the fastest and most efficient way to strengthen the US economy. This is all well and good, but what about the impact on shareholder value and the company’s bottom line?
Producing in America for the North American market has increasing advantages that are driving some companies to reshore. Reshoring US manufacturing is becoming more attractive and a good strategic move for many companies due to rising offshore wages, sourcing risks along complicated supply chains, loss of flexibility to respond to customers' changing needs, intellectual property risks, and the impact of distance on innovation. Companies can often eliminate these problems and be more profitable by reshoring.
Most companies make the decision to offshore solely on labor rate or ex-works price, never taking into consideration the total cost of ownership (TCO) including the hidden costs and risks of offshoring. These companies ignore about 20 percent of the total cost related to expenses such as shipping, supply chain disruptions, quality, tariffs, and the larger production runs and inventories associated with long-distance offshoring.
To help US manufacturers realize that local production and sourcing often reduce their total cost of purchased parts and tooling, the Reshoring Initiative developed the Total Cost of Ownership Estimator. This free tool enables aggregation of all cost and risk factors into one cost for simpler, more objective decision-making. Current research shows that many companies can reshore about 25 percent of what they have offshored and improve their profitability if they use TCO instead of price to make their decision. That percentage will rise as Chinese and other offshore wages rise.
The Reshoring Initiative tracks all reported and some private cases of reshoring and concludes that more than 100,000 manufacturing jobs have been reshored since January 1, 2010. Many companies cite quality as a main component when deciding to reshore manufacturing to the US.
The reshoring trend’s momentum is also largely due to companies reevaluating product design from a manufacturing standpoint. Outsourcing has taken a toll on innovation because of the separation of product engineering and production. Companies are finding that when manufacturing is moved next to design, and design engineers are working closely with manufacturers, they can improve the design, eliminate waste, improve quality, increase productivity, and make the product more easily and sometimes at a lower cost.
This was the case when GE reshored manufacturing of the GeoSpring water heater from China to Kentucky. Design engineers, manufacturing engineers, and factory line workers optimized the product. Material cost went down, the labor required to produce it went down, and quality improved. Time-to-market also improved because consumers are located near manufacturing. Reshoring also enables product differentiation by reducing large inventories associated with offshore manufacturing and achieving faster supply chain response.