February 27, 2014 To Reshore or Not to Reshore: That is the Question

Volume 17 | Issue 1

More and more American manufacturers are reshoring, and the trend has encouraged industrial peers to contemplate doing the same.

But should they? Is it the right call? Or should they pass? Patrick Van den Bossche, a partner at A.T. Kearney, discusses.

In not-so-breaking news, reshoring is skyrocketing in popularity throughout U.S. manufacturing. It hasn’t snowballed into a full-fledged tidal wave of momentum just yet, but it’s getting there, gaining strength month after month, year after year.

Word of mouth is simply making American manufacturers of all sectors second guess where they should make their products in the years ahead.

But word of mouth, as powerfully persuasive as it is, comes with its fair share of warning signs, Patrick Van den Bossche, a partner with A.T. Kearney, says.

“There are many factors that determine whether reshoring is the right solution now and in the future,” he tells Leo Rommel of Industry Today. “All the variables that are tipping manufacturers in favor of reshoring change over time and differ from one company to the next.”

So, according to Van den Bossche, who is also the firm’s Americas Operations Practice lead, there is an element of “How long is this right solution for?” and “Is it even the right solution at all?” when it comes to deciding whether reshoring is the way to go.

“There is a tendency for people to just jump on the bandwagon,” he says. “If others are doing this, then it has to be right for us, especially when others in our industry are doing it too.”

Not necessarily, he adds. “This isn’t as straightforward as you think,” he says.”There are a lot of factors at play.”

With the intent of getting companies to think a bit differently about reshoring, Van den Bossche, along with several colleagues, coauthored a recent report, titled Solving the Reshoring Dilemma, which details a set of factors that all manufacturers should reflect on when assessing whether reshoring is right for them.

The report, which ran in a recent edition of Supply Chain Management Review, was also written by Pramod Gupta, a principal with A.T. Kearney, and Hector Gutierrez and Aakash Gupta, a pair of consultants with A.T. Kearney.

“The report was written to put a little bit more of a nuance around, basically what, in my view, has been a much overhyped topic,” Van den Bossche says of the report.

WHY IS EVERYONE CONSIDERING RESHORING?

Before going into what manufacturers should take into account when deciding whether reshoring operations is the right avenue to go down, it’s first important to rehash why they’re considering it.

There are “a number of macroeconomic factors” that are triggering increases in domestic manufacturing, the report says.

These triggers, it reads, include “the appreciation of China’s currency versus western currencies, China’s labor rate inflation, increased concerns about supply interruption, lower energy costs in the United States as a result of shale gas exploration, and a general push from federal and state governments to reduce the costs and administrative barriers of bringing manufacturing back.”

Van den Bossche says that while the triggers differ by industry, many share common causes. The energy boom, for instance, is one of them.

“The whole energy equation is a big factor,” he says. “By that I mean the rise of shale gas has changed the equation when it comes to the cost of fuel or any kind of energy. Manufacturers that have a big portion of their costs tied to energy have seen quite a drastic change in their overall cost picture.”

Another common thread, he adds, is the issue of the rising labor costs in the regions where American manufactures moved to. “So, the Chinas of the world, Asia in general,” Van den Bossche says.

Labor rates in China used to be a mere fraction of what they were in the U.S. Not anymore. The region’s one time, slam dunk advantage has faded in recent years as Chinese wages have reportedly seen double-digit increased for well over a decade.

“This has spurred people to look back and say, ‘Well, wait a minute, if we’re seeing 20 percent increases in labor costs per year in environments like China, where nobody even bothers to think about the efficiency of that labor, maybe it’s time to start looking back at a country like the U.S., where labor productivity has historically been very high and where the cost of labor has come down a bit,’” Van den Bossche says.

Domestic energy and foreign labor costs are the two most commonly-shared causes behind the reshoring phenomenon, Van den Bossche says. But there is many more, depending on the industry.

“For instance, when you hear about tainted raw materials, whether it’s in dog food or toothpaste, people think twice about the origin of their products,” he says. “By people, I mean consumers, not companies.”

Consequently, there has been an undertone of sorts by consumers to take more interest in “Made in America” products, which are traditionally pricier, Van den Bossche adds.

“It still needs to be tested as to how much more consumers are willing to pay for that ‘Made in America’ label,” he says. “In some cases, they’ll pay more. In other cases, they won’t.”

There is also a stronger desire for manufacturers to be closer to their customers. But most domestic supplier networks, the report explains, have evaporated or followed their manufacturing customers overseas.

“There’s typically a delay of a few years between when companies move and when their supply base follows them,” Van den Bossche says. “So, companies that return their manufacturing operations may still have to rely on suppliers from overseas, at least temporarily.”

Other concerns remain with U.S.’s aforementioned, newfound advantages, Van den Bossche warns. For instance, question marks about the longevity of America’s fracking wells.

“When shale gas first came up, there was, as is often the case, a very positive picture on what this would mean and for how long this would have a positive effect on energy costs,” he says. “As it turns out, that’s maybe a little bit less positive than people had thought, and this is all still happening as we speak.”

Same thing with labor costs in the U.S. “On the one hand, labor costs haven’t come up as high in the U.S. as they have in other recovering sectors, so, there’s the thought that says maybe we’ll be able to sustain our advantage there.”

But?

“Then, at the same time, for certain specialized jobs and manufacturing jobs where there is quite a bit of skills required, we’ve already seen 10 to 15 percent raises in those kind of labor costs,” Van den Bossche says, adding that the nation’s skills gap among more youthful manufacturing workers is another red flag.

“Macroeconomic factors do not provide a complete answer as to whether reshoring is the right thing to do,” he adds. So, what does? Here’s a tip, Van den Bossche says: Management within all American manufacturers that are contemplating reshoring some or all of their operations should ask themselves three critical questions.
They are, in order:

• Is my reshoring decision future-proof?
• Is my company ready to reshore?
• Where is the best reshoring location?

The answers to these questions, he emphasizes, will guide manufacturers into making a decision that they will not regret several years down the road.

IS RESHORING FUTURE-PROOF?

This question, has two sub-questions within itself, according to Van den Bossche.

One sub-question, he says, is whether reshoring is “something I want to do, period?” If the answer is “yes, it’s looking good to do this,” then the follow-up sub-question would be, “Fine, but for how long will this look good?”

“Because you’re putting metal in the ground, it has a certain depreciation period,” Van den Bossche says. “There’s a financial return required in reshoring. If it takes you 15 years to get that metal paid back, then you’d better make sure that reshoring continues to be the right thing to do for the next 15 years. That’s the kind of equation that people need to figure out.”

Van den Bossche says American manufacturing has seen companies reshore without building new plants or facilities.

“They’re coming back to existing facilities or to facilities that can be easily switched on, like mothballed operations,” he says. “It shortens the payback because if you don’t put in as much capital, you get your money back quicker.”

This method, Van den Bossche explains, comes with fewer risks and little capital expenditures, “so that if things do change, three, four, five years from now, the company already has their investment back. Of course, that comes at the cost of not necessarily having the most up-to-date equipment and that may hurt your competitiveness over time.”

ARE YOU READY TO RESHORE?

There are a lot of key ingredients to making reshoring a long-term plus, Van den Bossche says.

“Companies must have the capacity to do it. If they don’t, where are they going to get that capacity?” he says. “Am I going to get it by building new factories? Or am I getting this from an existing facility?”

Or in some cases, he adds, there might even be an option where you say, “You know what? I’m bringing back the volume, but I may not necessarily make it myself. I’ll give it to another party that has an asset set up.”

Other factors come into play, he adds, like whether the area of the U.S. you are going to reshore has the right workforce available.

“How complex of a manufacturing operation am I bringing back? Are the resources I need available in the area that I’m looking?” Van den Bossche says.

In effect, will you have the trained, highly-educated, and vastly-experienced workforce that your newly reshored operations needs? If it does, it’ll cost you, he says.

“You’re going to be paying a premium for talent because other companies are going to flock there as well,” Van den Bossche says.

Manufacturers can take this matter into their own hands, but it “requires extra effort, extra investment,” Van den Bossche says. They can train their own resources.

“But there’s a cost,” he adds. “And you’ve got to be able to execute that plan. You’ve got to have manuals ready. You’ve got to have standard operating procedures well documented. Not every company has that.”

WHERE EXACTLY DO YOU RESHORE?

According to the report, “a thorough location selection exercise must be conducted,” before reshoring is decided upon. This, the article adds, takes in “an evaluation of quantitative cost measures and qualitative capability assessments.”

“One of the things that we think is very important is this whole notion of a business ecosystem,” Van den Bossche says. “What we mean by that is when manufacturing operations started moving over to China, a variety of must-have business elements followed, like suppliers, R&D labs, and talent.”

That has reversed course. Educated talent is sticking around, not heading overseas. But that means all of the suppliers, labs, and personnel that went overseas must now come back.

“You basically have to start recreating that business ecosystem you basically had back in the days before you moved,” Van den Bossche says. “You have to make sure, for instance, that universities and labs are focusing on what can help you become a better manufacturer, and that distribution centers have supply routes to be able to move goods.”

The flow of goods in the U.S. has altered a bit in recent years. Imports from Asia come into West Coast ports, so the bulk of goods flow west to east. But if more goods are manufactured in the U.S., much will be made in non-union southern states, Van den Bossche says.

“So now the flows are going to be from south to east or they’re going to be from south to north in some cases,” he adds. “That means that the distribution network changes, transportation changes, and that’s also part of the ecosystem.”

He adds: “I think that is also something to look for, areas in the U.S. where you’ve already had a kernel of an ecosystem that you can then benefit from and maybe help contribute to.”

NO EASY ANSWER

Ultimately, a clear-cut, straightforward answer on whether to reshore is hard to come by, the report says.

“The equation to determine whether reshoring is right for you, both now and in the foreseeable future, is probably a bit more complicated than you had envisioned,” the article says. There are numerous what ifs, a lot of key components, which must come together.

Otherwise, “multiple pitfalls and headwinds can negatively affect the time, effort required, and even the business case at the root” of many reshoring projects, the report explains.

But the right decision can be made, Van den Bossche says.

“In their own mind, manufacturers have started to figure out how to minimize the risk of reshoring,” he says. “Our approach helps them do this in a more structured way.”

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