In this tumultuous election season, the evil antagonist Offshoring as well as the heroic protagonist Reshoring are getting a lot of air time. Outside of the political arena, manufacturing pundits such as Harry Mozer at the Reshoring Initiative and bloggers like Derek Singleton on What Can be ‘Made in the USA’? are making strong cases for reshoring. Heck, we even blog periodically on the subject, see for example Making reshoring work. But is reshoring really the right battlefield here?
One of the main counterarguments to offshoring is that there is often little or no ROI to the effort that it takes to set up and dial in an offshore manufacturing solution. Spending $50K in travel, $250K in senior management time or a like amount in productization effort, eating 3 months of yield hits, excess field returns, and / or missing Christmas have to be weighed against the cost savings. And like any good ROI calculation (we actually prefer IRR / NPV, see for example Productizing for dollars) the time value of money has to be weighed in–these costs are up front; the savings comes over time. So spending $300K to set up offshore manufacturing that will yield a $10 savings on 10K units per year over 4 years with a hurdle rate of 20% yields a negative NPV.
But, and this is big, once this money is invested in off-shoring, there is a similar barrier to bringing it back. Sometimes this can be offset by local incentives and reductions in overhead costs like travel, but reshoring then has to swim upstream against the recurring savings.
A better financial case can be made for onshoring of new products–never moving their production offshore in the first place. Now the playing field is more level, and a careful IRR analysis may indeed show that using local sources yields savings in the overhead, supply chain, and management bandwidth that offset that labor premium. Less time spent on airplanes to China means more time spent improving yields or managing the business, more money for design experiments and less for doing far flung audits.
It should be noted that in some ways onshoring is counterproductive to our business model, since we make good money flying our productization team to far-flung locations fixing messed up supply chains and flawed processes. This week in fact we have a process engineer and a program manager on airplanes doing just that. But just because we can make money on it does not make it right, and that cost has to be weighed into the equation. Frankly, one advantage to outsourcing such tasks to folks like us is that those costs are quite visible, as opposed to fixed costs of sending overhead already on the payroll.
In our Keepin’ it local series of blogs, we are looking at exactly the onshoring case. We could save some money for sure by going offshore, but would we recoup that additional investment in terms of finding, qualifying and bringing up an offshore solution? The analysis isn’t complete in that case yet–stay tuned to see how we fare.