April 26, 2013 Re-shoring: A Long Difficult Voyage Home

Volume 16 | Issue 3

U.S. Manufacturers realize they’ve lost the edge on global competitiveness – due in large part to off-shoring. Now they’d like to regain a l

Good news for the U.S. economy?

The intention reflects a growing shift away from decades of off-shoring and a return to more domestic manufacturing. The Walmart announcement points to a positive trend toward re-shoring, says Daniel Mahler, Ph.D., a partner with global management consulting firm A.T. Kearney who recently became its Americas lead. A successful bid for on-shoring will involve what he terms a “re-realization” of the United States as an attractive manufacturing base, as well as overcoming some major challenges. Let’s look at the global picture.

A Perfect Storm
Current economic circumstances leading to the shift to re-shoring result from what Mahler calls “a perfect economic storm.” The global picture he paints involves at least three major contributing elements.

“First, thanks to lower energy costs, America has once again become more competitive. U.S. energy costs have fallen tremendously due in part to new methods of extraction, and other technologies here on our own soil,” he says.

Mahler next looks to the winds of change blowing through China. “The world is witnessing a rise in China’s labor costs, and this is critical to the global economy. Cost differentials are declining,” adds Mahler. “If China’s labor rates continue to rise by 17 percent a year, as they have been, in three years’ time the labor cost gap with the U.S. will be closed.”

The third element defining the re-shoring trend, according to Mahler, is attitudinal — companies are looking for a more sensible approach to manufacturing, while consumers are beginning to appreciate the need to source their goods in a way that impacts the planet less harshly. “Sustainability efforts – both environmental and economic – have assumed increasing importance,” notes Mahler, adding that 21st-century consumers are increasingly savvy. “They have a better understanding of what is environmentally and socially responsible, and in turn, controllable.”

Some companies have taken note. Consumers have become empowered to help drive trends, and manufacturers have had no choice but to listen. But the challenges to bringing manufacturing back to America are considerable – far greater than people realize, Mahler thinks.

Three Challenge Sets
Our biggest challenge is that the U.S. manufacturing equipment base has aged considerably during the decades that witnessed off-shoring. “The age of our machinery has doubled,” observes Mahler. “Major rethinking, retooling, and reinvestment in new equipment will be necessary. It’s not enough to just dust off the old equipment and get the machinery and operations up and running again.” With new technologies and equipment engineering allowing for much more efficient, less labor-intensive, and cleaner approaches to manufacturing, the U.S. clearly has some catching up to do. And this piece of the puzzle is not only critically important, it’s also capital intensive.

Our skill base – that is, the pool of workers trained and able to take on these returning manufacturing jobs – poses a confounding challenge, as well. “Manufacturing jobs, as a percentage of total labor, have declined significantly. Also the average age of the manufacturing employee has increased considerably,” reports Mahler. “No matter how technologically advanced we become, people still reside at the core of manufacturing. And we’re looking at a large part of a valuable workforce – as much as 10 percent over the next few years – that will be reaching retirement age. So the U.S. faces an aging and in turn, declining skill base.” This will mean more expense. “A shortage of skilled workers will mean higher salaries for those still available,” Mahler points out.

These issues point directly to a critical consideration in business: costs. “Companies always have to look at expense, and this means that they will have to forecast future business costs,” says Mahler. “They need to look at the expense versus current cost, and project the possible return on their investment.”

Daniel Mahler describes the organizational challenge relating to re-shoring in terms of how products are sourced. “Companies have needed to rearrange their supply chains to accommodate complexities related to globalization. If re-shoring is to be taken seriously, companies will also need to bring into the equation more value-added functions that have been off-shored.” These include not only the low cost of labor that induced companies to take their operations off shore in the first place, but unseen savings in items like lack of environmental controls and much faster turnaround times. Organizational reinvention will need to take concepts of sustainability, such as local sourcing, shorter shipping distances, and environmental and human resources impacts into consideration.

Re-shoring is going to entail a far more complex resetting of corporate operations and values, and deeper structural change, than anyone could have imagined. Mahler’s insights and his data, which are based on publicly available numbers and internal case studies, give some clues as to where companies should be looking.

How Can the U.S. Make It Happen?
Mahler suggests that companies need to employ both practical and philosophical tools to effectively allow for re-shoring. “Transformation requires cross-functional thinking,” he says. “Manufacturing can’t figure it out all on its own. The highest levels of management need to get involved. This is something that can only be accomplished holistically.” There is far more to this issue than meets the eye, Mahler advises. “It’s not just a mechanical or logistical exercise to get manufacturing back into the United States. Companies need to be asking what are the implications, and what will be the impact.”

Mahler’s suggestions are far-reaching and thoughtful ones. After all, he is not an ivory tower academic; he gets right down into the trenches. With more than 20 years in the business, he has gained real-world, real-time insights, and he communicates his broad prospective. “I advise the companies I work with to look carefully at the whole picture and take a future perspective,” he says. “You can’t just focus on a current situation.” Mahler says that companies need to project at least five years out, if not more. Mahler himself is already looking 15 years into the future for many of his clients.

He believes a futuristic perspective should include both a truly global and a specific approach to looking at probable costs, geographies, and movement. “The forward-looking scenario needs further developing, and that means truly understanding the U.S. cost of labor versus cost of labor overseas, the transportation differential, and where to best place manufacturing operations. Some U.S. plants may be in the wrong location.”

Local and global regulation – an environment that’s also changing fast – is another factor to be taken into account in planning for the future of re-shoring. “Variable factors such as the tax situation, from state to state, and the regulatory environment must also be considered.” Mahler continues with long-term concerns about operations planning: “Then there’s the structural standpoint,” he says. “We look for how and where to place the network so that efficiency is maximized.”

“These are the kinds of ideas A.T. Kearney offers,” says Mahler. “But we also say, let’s look across all functions to determine benefits – and to look at how the consumer benefits. Because ultimately, we’re all in this together.”

Which Industries Would Benefit?
Mahler indicates that at least three sectors are unlikely to ever return to American soil – apparel, footwear, and textiles and fabrics. “There are high labor costs and low logistics costs in producing these goods. Products are light, imperishable, and can be shipped in bulk,” he explains. “So, even if China’s labor costs rise dramatically, the differential will still be strong enough to have products made over there and then shipped here.”

And some sectors never really left in the first place. “The energy sector – petroleum and coal, in particular – and the food and beverage sector are still very U.S.-centric,” Mahler says.

But there’s a substantial middle ground, which involves, among other industries, the manufacture of appliances and electronics. “This is an area where the trade-off of labor and transportation could prove favorable,” he says.

Looking Ahead
U.S. manufacturing has fallen behind in the past 20 years, but the nation could leapfrog to a leading global position if it takes the right approach and the right steps now, according to Daniel Mahler. The critical pre-condition for companies is adopting a long-term, transformational mindset. “The short-term fix will result in short-lived benefits,” says Mahler. “Conversely, long-term thinking could lead to the U.S. regaining manufacturing superiority.”

There’s another positive if unseen factor in the mix: many U.S. companies are sitting on cash in an unprecedented amount since the global economic crisis. “Companies became very cautious about spending money after 2008,” says Mahler. “Cash is still relatively cheap, interest rates are low – and that means there are funds, either shelved or going to the bank, which could help make the leapfrogging transformation work. Companies just need the guts to do it. But they must also understand that this is an effort that is going to take 10 to 15 years.”

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