Anecdotally, we are hearing from more and more clients asking us to help produce goods domestically. Without getting into politics, it is worth considering some of the basic issues (avoiding the issue of tariffs) that are driving the growth of manufacturing in the U.S.
|Over the past decade, we've seen steady growth in US manufacturing jobs. (Image source: Reshoring Institute)|
1.) Tax and regulatory environment
Recent tax and regulatory changes reduce the economic disadvantages to manufacturing products in the United States. While there may be offsetting factors involving the heavy use of certain raw materials, those factors do not necessarily come into play in technology-oriented products.
2.) High consumer demand globally
Worldwide demand for products is at a phenomenal level these days. This is taxing the capacity of many manufacturing plants domestically, but also in the Far East. As a result, those products not committing to high volume up front are not getting the same attention from overseas suppliers as one might experience in “normal” or slow times. This is presenting new opportunities for U.S.-based manufacturers and final assembly shops, which have been proving to be more agile (and increasingly competitive) in ramping up capacity.
3.) Smart, connected manufacturing is reducing the impact of labor cost differentials across geographies.
For high volume manufacturing, it is tough for U.S.-based manufacturers to compete—especially when the cost of production involves the use of labor intensive processes. U.S.-based labor rates remain disproportionately high compared to labor costs in many other locations (though Asian labor costs are rising). As U.S. manufacturers employ less labor intensive (and more technology intensive) means of manufacturing, the impact of direct labor cost can often be reduced.
4.) Responsiveness of domestic manufacturers
Given today’s rapid changes in demand and short product life cycles, it is necessary for manufacturers to be able to quickly pivot in response to new market pressures and product technologies. While overseas manufacturers are optimized for consistent high-volume production flow, they often struggle with high-demand volatility and fluctuations. It is often harder for them to scale if volumes unexpectedly rise or if market opportunities do not ramp up as rapidly as expected. This reduces flexibility. U.S. based supply chain partners are frequently more nimble and responsive to change.
5.) Transportation issues
Companies that manufacture products in Asia are being impacted by several factors that are driving some products back to U.S. manufacturing sources. First, transportation costs are on the rise. While not a radical change at this point, it does erode some of the cost advantages of manufacturing product abroad—especially when shipping physically large or heavy items. Second, in markets that are rapidly changing, shipment via seagoing vessel—still the lowest cost option—reduces flexibility. For all but the smallest, lightest items, faster delivery means (such as air) are cost prohibitive in any reasonable volume.
In addition to these “hard” factors, there are subtle underlying factors that are rarely expressed but have a bearing on supply chain decisions. Importantly, U.S.-based companies have been expressing subtle (and sometimes overt), conscious preferences for U.S.- based manufacturing. While pricing has to be competitive, in some scenarios, the lowest cost option does not, de-facto, always win the deal. Secondly, much more so than in the past, there is a widespread recognition that there is a significant “cost of doing business” with overseas partners.
Examples of such hidden costs are the very substantial expense of sending a company’s staff overseas (often for extensive periods) to onboard suppliers, manage communications, and oversee quality processes. Additionally, there can be a heavy burden on a company’s domestic labor team to handle the innovation work, answer questions from overseas partners, and manage quality, etc. Worse, this incremental work by domestic teams often requires frequent or daily calls at crazy hours of the night or early morning as a result of time zone differences—a burden that is difficult for those team members.
These factors, and likely others, are driving some shifting of manufacturing back into the U.S. by U.S.- based product companies and their suppliers. Is the tide totally shifting? Of course not, but even the shift of a small percentage of manufacturing back into the U.S. is a driver for domestic jobs and the growth of U.S.-based suppliers.
Mitch Maiman is the president and co-founder of Intelligent Product Solutions (IPS), a leading product design and development firm. He honed his deep knowledge of product design on the strength of a 30-year career with companies that manufacture commercially successful products for the consumer, industrial, and DoD markets. Prior to launching IPS, Mitch was VP of engineering at Symbol Technologies.
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