reshoring Archives - Zebulon Solutions

Why Reshore?

Reshoring seems simple: bring manufacturing back home. The counterargument—offshoring saves money—is also simple, and for decades has been perceived as a winner. Reality lies somewhere in between, as the total cost of ownership needs to be considered, including intangibles.

Conceding for the moment that there is real cost savings from low–cost offshore labor, let’s look at the other factors that influence the total cost of ownership.

Parts and materials—the cost for most products are driven much more by the cost of the bill of materials than the cost of labor. To first order, this is independent of assembly location, but second order effects are common (e.g. sub supply chains, where do the materials and labor for the parts come from?)
Freight—both inbound, for parts and materials, and outbound, to the customer
- This includes the actual transport costs, but also packing, labor at both ends to pack and unpack, overhead for managing, shipping materials, insurance, everything
- And it really depends on mode—surface, sea or air—with the latter being a wildcard that can show up unplanned to deal with intangibles like demand shifts or expedites (see below)
Tariffs—much has been made about this recently, so we won’t dive too deep into this, but remember this can apply at every level of the supply chain
Automation—this is the great equalizer for labor costs, but has a significant ROI aspect that has to be addressed in cost of ownership
Yield, scrap, and other attrition—this is related to quality, which can vary by region, but also ties to the supply chain and even automation (oftentimes the true benefit of automation isn’t labor cost reductions rather consistency and tolerances)
Overhead—especially for lower volume products, this can be the real difference-maker in terms of reshoring vs offshoring. How many people on how many airplanes to set up and manage an offshore supply chain can swamp piece part savings

Intangibles are also important, although tougher to quantify

Patriotism—this is the moose in the room for any discussion of reshoring, the kneejerk reaction of “build it here, in my country/state/ town.” This of course has local merit, but can lead to emotional rather than logical decisions. This isn’t the forum for that aspect, enough said.
Branding—related to patriotism, but more tangible. Does Made in USA (or for that matter Made in Germany) add value to a brand? Not our area of expertise, but valid.
Supply chain—this seems a duplicate from above, but supply chains are called chains for a reason, and how those chains splay out around the globe matters
- In general, the shorter the supply chain the better—a molder on the same campus as the resin compounder (their supplier) and the contract manufacturer (their customer) has a huge advantage over a supply chain where all three are on different continents
Cost of money—there is a real cost to carrying inventory, whether on the water or in warehouses or in WIP on an assembly line.
Agility—the shorter the overall supply chain, the easier it is for a company to be agile, change product mix based on demand shifts, new markets opening, or competition. This is often the strongest argument for reshoring, as a short, domestic supply chain can dramatically improve agility
Management focus—if your CEO is spending all her time on midnight conference calls with a recalcitrant Asian supplier, is that really why she makes the big bucks?
Risks
- IP risk is obvious and real
- Global risks are on people’s minds at the moment, and of course it’s not just pandemics, it can be politics, war, famine, labor unrest or whatever
- Other risks include boring things like getting products through customs (has anyone not had issues at the Port of Long Beach?) or shipping damage
- Yes, insurance can cover some risk, but at a cost, and doesn’t cover intangibles like brand damage

While every product and situation are different, in general a total cost of ownership can (and should!) be modeled. This needs to include ROI, risk, cost of money, and intangibles. Then various solutions can be compared and the tradeoffs weighed in order to allow a data-driven decision. Zebulon Solutions can help both with the modeling of the various options as well as managing the actual transitions to on the planet you choose to manufacture.

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Manufacturing Amid COVID: US vs. China

I have spent the last fifteen years in manufacturing and supply chain, working on and off with companies in China. I’m used to expecting the week off for Labor Day in May and Golden Week in October. I know the time difference by heart. And every year I start planning ahead for Chinese New Year starting in September to ensure we aren’t short on parts or are scheduled to start a product launch when China is essentially closed for a month.

Despite my rigid preparedness, this year was different. Workers left for Chinese New Year but the factories didn’t reopen, and we were told repeatedly for our projects that there was no schedule for reopening. I couldn’t plan for this – no one could.

On one of my projects, the buyer spent their days scouring the planet looking for the specific battery needed in the assembly to keep the US production line going. On another project, we simply waited and waited for the factory to return just to confirm the manufacturability of the proposed design change on the display.

With an early Chinese New Year and Coronavirus sweeping through China, many of our Chinese partners have been out since mid-January. Only now, over three months later, factories are beginning to come back as reports of China’s cases of COVID-19 decrease. Yet, when Coronavirus came to US shores and we sheltered in place, many of our factories remained open.

Ford Motor Company converted its production line from cars to ventilators. Hunter Douglas stopped making blinds and used the raw materials to create face masks. Other factories likewise converted their production lines nearly overnight to begin our combat of the virus causing a global pandemic. Many other factories kept fulling orders to meet demand and, while there has been some drop off in orders, it wasn’t the complete shut down like we saw in China.

All of this made me curious to see how US manufacturing has fared during the COVID crisis in comparison to China. I pulled the US Bureau of Labor and Statics numbers for manufacturing and the slight loss of 18,000 jobs in March is well within a normal monthly variation. The employment numbers out of China are unclear, but practically, I know of well over 50,000 people who were out of work in the factories with whom I have contact.

In my efforts to find a comparable number between China and the United States, I think the Purchasing Managers’ Index (PMI) tells the story. China’s PMI historically hovers around 50, but for March it plummeted to a historic low of nearly 35. In comparison, the U.S. numbers have fluctuated between 47 and 53 in the last 12 months, so 49.1 in March is well within the standard variation, again pointing at a marked difference between US and Chinese manufacturing.

Going back to conversations I had with US manufacturers in 2012, I repeatedly heard how after a decade or more that several of their old customers had grown weary of dealing with China and had brought all of their business back. For nearly eight years, I’ve worked on a handful of projects that I thought were good candidates to move overseas, Asia specifically. Yet, when I’ve run the numbers, US manufacturing has frequently been very competitive, especially once freight and overhead costs are calculated.

With what happened this year with COVID, it has only bolstered my opinion that offshoring may not make the best business sense in every instance. While Chinese manufacturing still might make sense for some projects, the challenges of manufacturing overseas needs to be seriously considered. I’m wondering if it isn’t time to take a long hard look at US manufacturing before looking internationally for new products and emerging industries.