Guest post: What can be made in the USA?
We were contacted recently by Derek Singleton, an ERP (Enterprise Resource Planning) Analyst for Software Advice, who has written about a growing trend of re-shoring manufacturing operations. Derek felt that the article content would be interesting for our Value Unchained community and having reviewed it, we agreed. In the excerpted post below he looks at factors that are driving some companies to reevaluate their operations. (Singleton is not an employee of ModusLink. His views are his own and do not necessarily reflect those of ModusLink or its clients.)
What Can be ‘Made in the USA’?
by Derek Singleton (ERP Analyst, Software Advice)
Why Companies Are Coming Back
In January 2011, I reported that a small number of manufacturers were bringing production back home. At the time, the trend of reshoring was just starting to take hold, and that trend seems to have continued unabated.
Much of it has to do with China. Low labor costs were of course what brought so much manufacturing to China, but China’s attractiveness may be waning. Chinese labor costs are expected to increase 13 percent per year through 2015. Concurrently, the cost of shipping products around the world is increasing.
Intangible factors promote reshoring, too. For instance, distance and cultural boundaries can make collaborating on design and engineering challenging; lengthy lead times can complicate supply chain management; and, protecting intellectual property (particularly in China) is a nightmare for some manufacturers. These kinds of indirect costs are often underestimated when manufacturers choose to offshore production.
Other factors related to America’s economic downturn are driving reshoring, too. City and state governments are more willing to provide tax breaks and other incentives to open domestic manufacturing facilities, and a renewed sense of pride in the “Made in USA” label is generating goodwill for manufacturers.
This year, General Electric decided to move production of its water heaters from China to Kentucky. Like Hurst, GE moved back partially because it allowed them to collaborate more closely with suppliers. Meanwhile, supply chain issues–such as the inability to coordinate short delivery times–made it difficult to keep production overseas.
Although GE’s labor costs in China were 30 percent lower than in the U.S., the labor savings were eaten away by an inability to carry the appropriate inventory levels as well as inconsistent delivery schedules. As a result, the 30 percent labor savings turned into six percent higher costs.
Peerless-AV originally made its audio-visual mounts in Illinois but, like many others in its industry, eventually decided to offshore some production to China. They soon found themselves spending seven figures in legal costs to fight knock-off products.
As a result, Peerless decided to move production back to Aurora. They’ve been able to reduce carried inventory by 20 percent, better protect their intellectual property, and bring products to market faster.
How to Propel the Trend Forward
These examples are encouraging for those in favor of domestic manufacturing, but reshoring has yet to move from a trickle to a trend. Mitch Free, CEO of the online manufacturing marketplace MFG.com, has noted that “it takes time for the mindshift to happen.” He and other analysts in the space agree that three key pillars are:
- A more educated workforce to fill skilled labor gaps, and more Americans interested in careers in manufacturing at all levels (e.g., assembly, engineering, management, etc.).
- More extensive use of automated assembly processes to limit the labor input of production.
- Tools to help companies evaluate their true total cost of ownership (TCO) when offshoring to model all costs and risks.
Thanks to Derek for the post. We certainly see a renewed interest in completing final packaging and assembly operations in the US to reduce logistics costs and to improve supply chain responsiveness to changes in domestic consumer demands. Are there other factors that you see that will influence the return of manufacturing operations to the US?