After decades on the backburner, the U.S. manufacturing sector is once again attracting the attention of policymakers in Washington, DC. Various proposals are being debated in the halls of Congress and within various executive agencies on how to help manufacturers survive in a tough global economy. Many solutions currently in play emphasize ramping up exports as a means to boost the sector.
But a new idea is starting to percolate – one that directly contradicts the creeping suspicion that overseas competition may be too much for U.S. manufacturers to handle. The concept is called re-shoring, and it makes a strong case that large U.S. companies often need look no further than right next door when shopping for suppliers. In fact, it may be in their best financial interest to take a second look at sourcing their inputs locally.
Re-shoring offers a non-protectionist, private sector-driven way to reduce imports (and, while we’re at it, our trade deficit) while creating jobs right here in the United States. The move to re-shore production began gaining momentum in the face of higher and more volatile transportation and fuel costs, as well as steadily growing wage rates coupled with often substantial reject rates in developing countries.
Re-shoring is not just American flag waving – it’s all about economics. The concept rests on an analysis of total cost of ownership (TCO).
It’s undeniable that developing countries have a labor cost advantage compared to the United States, but a closer looks suggests that products sourced from these countries may not necessarily provide for the lowest TCO for the buyer. TCO takes the product price and then adds in any additional costs that are jointly incurred by the supplier and the buyer, as well as internal costs incurred by the buyer. The TCO of a manufactured part also includes non-price TCO components such as freight and packaging, inspection labor required to screen a part in the purchaser’s organization, inventory carrying costs, missed customer deliveries due to shipment delays, and travel costs to visit and manage the supplier.
The TCO concept may not work for high-volume, low value-added goods like T-shirts or toys, but it could be a homerun for lower volume, higher mix parts and components whose final destination is the North American market – particularly for items that have shorter lifecycles or require frequent engineering changes, as well as those with relatively lower labor content or that come with higher shipping costs relative to their cost of labor. The economics of “re-shoring” has created real momentum for companies to take a second look at manufacturing in the United States.
Harry Moser is Chairman Emeritus of Agie Charmilles LLC, a leading machine tool supplier. Agie Charmilles is a member of the National Tooling and Machining Association. Visit: www.ntma.org.