Reshoring: Right for America

Reshoring in America is picking up speed—even in this uncertain economy. Costs (especially labor) are increasing in China, a trend that is eroding the big cost savings that initially compelled companies to set up operations there. This is leading to the emergence of new lowest-cost centers like Vietnam or Indonesia, which are far behind on the quality curve.

According to a survey by Boston Consulting Group (BCG) in late February, more than one-third of U.S.-based manufacturing executives at companies with sales greater than $1 billion are planning to bring production back to the United States from China or, are considering it. That’s great news for American manufacturing.

Companies that have already reshored or are in the process of reshoring include General Electric, Master Lock, Wham-O, Windstream Technologies, Element Electronics, Sleek Audio, ECI Biotech, Whirlpool, and Chesapeake Bay Candle.

The top considerations for reshoring are labor cost, product quality, and just-in-time manufacturing and delivery. Other key factors are ease of doing business, speed of doing business, proximity to customers, same time zones, and lack of language barriers.
This may come as a surprise, but products can be manufactured in the U.S. at a comparable cost to China when new technologies and best practices are applied.
“Not long ago, many companies regarded China as the low-cost default option for manufacturing,” says Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas. “Our results show that companies are coming to the conclusion surprisingly fast that the U.S. is becoming more competitive when the total costs of manufacturing are accounted for.”
A case study reported in Manufacturing News (August, 2011) supports this claim—it revealed that, overall, only an 8 percent savings is realized when a product is manufactured in China rather than the U.S.
“There are substantial savings associated with purchased parts from China that include direct labor (79 percent savings versus U.S. labor rates), indirect labor and salaries (61 percent savings), benefits (75 percent savings), overhead (40 percent savings) and selling, general and administrative (SG&A) (11 percent savings),” states the study. “When adding logistics to the China price, the cost advantage of producing in China shrinks to 8 percent: $13.85 for a case-study product made in China versus $14.99 in the United States.”
This reduced cost differential reflects the total cost of ownership—a concept that the Reshoring Initiative (www.reshorenow.org), an industry-led effort to bring manufacturing jobs back to the United States, wants every company to understand.
Its "Total Cost of Ownership" tool shows that the average price of a product made in the United States is 142 percent higher than in China; however, when the total cost of ownership is calculated, the U.S. price disadvantage shrinks to 23 percent.
And that’s just the average—when proactive manufacturers establish innovative best practices and invest in newer technologies (especially automation), they can actually make products at lower cost than their Chinese counterparts, averaging 37 percent lower.
The Reshoring Initiative’s Total Cost of Ownership Estimator provides a free, powerful online tool that can quickly and easily help uncover costs that might not otherwise be considered.
“Large companies can use the tool to aggregate their costs and risk factors to truly compare apples-to-apples in their sourcing decisions,” says Harry Moser, president of the Reshoring Initiative. “Additionally, smaller companies also can utilize the software as a sales tool, harnessing it to more accurately reflect their competitiveness with overseas manufacturers. The ‘Insourcing American Jobs’ forum brought substantial attention to this software and it is our hope that an even greater number of U.S. manufacturers will now benefit from it.”