The Benefits of Reshoring Manufacturing: An Overview

Guest Blog from Apllied Interactive -

The process of “reshoring” – that is, returning manufacturing operations to the United States after previously having moved them to another country – has been widely reported to be one of the strongest recent trends in the manufacturing sector. The motivations companies have to engage in this practice range from improved quality control and stronger protection of intellectual property to the cost reductions realized when finished products are delivered to a domestic market. Adding weight to this trend has been escalating labor rates in countries to which manufacturing has traditionally been outsourced, as well as a true understanding of the total cost of ownership (TCO).

Many companies have learned a hard lesson by not ensuring they truly understand total costs, which incorporate cost of quality. While it’s certainly intriguing to see a lower “per unit” price quote, many factors can add up quickly to reduce - or even completely eliminate - that perceived lower unit price. In a nutshell, companies have learned that it is necessary to “peel back” the proverbial onion.

Indeed, before delving into the myriad benefits afforded by the process of reshoring, it is critically important to fully grasp the interconnected nature of a number of related elements, including a product’s lifecycle phase, material value as compared to labor content, IP protection, costs to manage supplier/travel/import-export expenses, change traffic and inventory management, timezone-sensitive communications management, skilled labor requirements, production volume, and – often considered the most important factor – the ultimate cost of missing a market opportunity.

One of the more obvious benefits of reshoring manufacturing operations is the often significant reduction in delivery and distribution costs. Finished goods scheduled to travel to the U.S. after being manufactured overseas must endure a torturous delivery process. This includes moving goods from the factory to the nearest port, loading them onto a cargo ship, transporting them across oceans to a port near the intended marketplace, having then unloaded onto a truck or rail car, followed by - at last - final delivery.

This complex logistical path is not only costly, but also makes rapid adjustments to production quite difficult, if not impossible. Further exacerbating the issue, when product demand fluctuates, lead time often becomes too long to take full advantage of market opportunities. You could be faced with increased demand, but with no viable option to increase supply quickly enough. Or, on the other hand, demand could dwindle and you could end up being stuck with containers full of inventory that is no longer wanted or needed.

While this holds true for delivery to much of the United States, the issue is especially evident in the Northeast where goods traveling from Asia have had to journey the farthest. It is there that companies are likely to have the best opportunities to save a significant portion of their supply chain budget by engaging a local manufacturer.

The reshoring trend is, in fact, a major factor behind the strong resurgence of contract manufacturing - especially medical device manufacturers - in the New England area. Larger manufacturers like Boston Scientific as well as emerging contract medical device manufacturers like Cogmedix are headquartered there and, as a result, Massachusetts has become a true global force in the design and manufacturing of medical devices. Computer and electronic products (computer equipment, microchips, PCBs, etc...) are the state's leading manufactured products, all of which are commonly manufactured in Asia today. Some contract manufacturers of these products are having to add shifts to production schedules - just to keep up with demand. Companies in the Northeast have been forced to learn the benefits of keeping innovative design, engineering, and manufacturing in close proximity to the marketplace. However, in doing so, they have created a renaissance within the industry in that region.

Reshoring also offers more robust protection of your intellectual property. Dealing with offshore contract manufacturers leads to exposure to the countless differences between local laws and regulations…something that’s certain to have an impact on how well your intellectual property is protected from piracy. It should be noted that in many countries of the world, there are simply no effective safeguards in place at all – the robust controls or legal system required to enforce protection actions simply do not exist, making it easy for unscrupulous operators to steal your IP with no worries about repercussions for piracy or infringements of patents, trademarks and copyrights. Indeed, the price of doing business overseas may be too steep for innovation entities possessing valuable intellectual property.

Recent reports have indicated that the tide may in fact be turning in favor of the United States, where production is more frequently reshored for goods sold both domestically and to export markets. According to a Boston Consulting Group survey conducted in late February 2012 regarding positive reshoring perspectives, manufacturers were expected to see the trend “pick up steam” over the coming years. Among 106 dominant U.S. manufacturers surveyed, 70 percent reported that sourcing in China is more costly compared to “how it looks on paper” while 37-percent shared plans to bring production back to the U.S. from China – or actively considered it.

The argument for reshoring is compelling: It not only helps manufacturers cut down on substandard quality goods being produced, it also avoids the pitfalls associated with theft of IP, deals effectively with supply chain problems, and reduces overall costs of delivering products to a domestic market. Lastly, and of no small importance, it returns much needed employment opportunities to an economy in recovery.

At the end of the day, any company selling goods in the United States would be well-advised to thoroughly investigate well beyond that initial “per unit” price quote and make sure to consider the full costs associated with sending - or keeping - manufacturing operations offshore. We recommend that companies use the Reshoring Initiative’s free Total Cost of Ownership Estimator™, as well as the extensive Resources for Retail Suppliers to facilitate the best sourcing decision practices.

Author:

Jessica Stevens

Account Manager at Applied Interactive