Re-shoring or Rebalancing, U.S. Manufacturers Seek National Stability

Even the Web address of Kildeer, Ill.-based Reshore Initiative—www.reshorenow.org—communicates the urgency founder Harry Moser assigns to re-shoring.

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His industry-led initiative helps U.S. manufacturers recognize they would be more profitable using more local sourcing and production. That will increase more U.S. jobs and develop a stronger economy, he says. “It’s also necessary for the economic future and stability of the United States—and for the future of my son and his children.”

Moser views re-shoring from two perspectives: country and corporation. The former has created a huge trade imbalance, he says: “If we could balance the trade deficit through re-shoring, the unemployment rate would be 4 percent rather than the current 9 percent.” He estimates the reduction by assuming the trade deficit equals $600 billion and average sales per manufacturing employee equals $200,000.

“That means about three million manufacturing jobs lost,” Moser says. For every returning manufacturing job, Moser estimates a 1.4x to 5x multiplier effect. “Using 1.4, you get four to five million non-manufacturing jobs and a total of seven million jobs created,” he explains. 

From the corporate perspective, Moser predicts companies will see more profits. “Fifteen years ago when they began off-shoring, especially to China, many companies made a wrong decision by looking at just prices, but not accurately looking at relative costs,” he says. Now, even those costs have changed. “Chinese wages rise by about 15 percent annually and currency, about 6 percent. The price of goods also rises,” he adds.

If companies go off shore, Moser says they create five to ten times as much inventory. Three realities drive this unnecessary excess, he states. First, Chinese manufacturers often get paid before shipment. Second, the product may take six or more weeks to arrive, rather than the few days from an American manufacturer. And third, Chinese manufacturers ship goods in large containers, as opposed to just-in-time deliveries from U.S. vendors.

With all that must be considered, though, what’s the most challenging issue facing re-shoring? It’s convincing big companies to use total cost of ownership (TCO), Moser says. It’s so important, the Reshore Initiative created a TCO estimator for free distribution.

In their 2011 publication “Manufacturing’s Secret Shift: Gaining Competitive Advantage by Getting Closer to the Customer,” Accenture authors John Ferreria and Mike Heilala echo that need. In 2010, they surveyed 287 manufacturing executives across a variety of manufacturing industries in North America, Europe and Asia Pacific. Fifty percent of respondents had greater than $1 billion in revenues.

Chicago-based Accenture (www.accenture.com) found that, because most companies have not used TCO, they historically included few components in respective definitions of total costs. “Direct costs are most often the only major components of an organization’s total cost model used to evaluate the off-shoring decision. This overreliance on direct costs to the exclusion of other legitimate cost factors distorts the business case for off-shoring, and likely many decisions to offshore were incorrectly made,” Ferreria and Heilala noted. “Even with the few companies using TCO, not all were using all the best practices,” Ferreria adds in a late 2011 interview.

Rebalancing

One notable difference exists, however, between Moser’s re-shoring and Ferreria’s and Heilala’s rebalancing. “Re-shoring basically means you have product offshore, or you’re simply importing product into a domestic market demand,” Ferreria says. “In rebalancing, in which you also consider the skill of the workforce and much better and tighter linkage for local demand, it’s highly dependent on the product you have.” That, explains this executive director of Accenture’s North American manufacturing practice, could mean what foreign manufacturers are doing to meet U.S. demand; for example, BMW, which built facilities in South Carolina; or Hyundai and Kia, which built respective facilities in Alabama and Georgia.

“We’re at the beginning edge of a wave, a trend that’s beginning to take shape. It’s a recognition that tweaks and changes need to be made over time,” Ferreria states. “And rebalancing, which may be more important than re-shoring, is really a new trend that’s here to stay. It allows tighter collaboration between customer and manufacturer.”

Boston-headquartered Boston Consulting Group (www.bcg.com) agrees with the coming wave that’ll change the direction of off shoring. In its August 2011 publication “Made in America, Again: Why Manufacturing Will Return to the U.S.,” authors Harold L. Sirkin, Michael Zinser and Douglas Hohner declare, “China’s overwhelming manufacturing cost advantage over the U.S. is shrinking fast. Within five years, rising Chinese wages, higher U.S. productivity, a weaker dollar and other factors will virtually close the cost gap between China and the U.S. for many goods consumed in North America.” And, as with Reshore Initiative and Accenture, BCG recommends that companies use TCO.

But getting companies to think TCO presents real challenge, Moser says.  “Companies hurt themselves by just looking at price. It’s a cultural thing.” Ferreria adds, “Certainly, there’s also consideration of government policy in all this.”

For more information:
Reshore Initiative www.reshorenow.org

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