This story was written by Keith Dawson for UBM DeusM’s community Web site Business Agility, sponsored by IBM. It is archived here for informational purposes only because the Business Agility site is no more. This material is Copyright 2012 by UBM DeusM.

Bringing Manufacturing Back

The last few decades have seen much of US manufacturing moved offshore. There's a growing movement to "reshore" it.

The proponents of the "reshoring" movement believe the true costs of offshoring have been ignored for decades. After US companies calculate Total Cost of Ownership, some manufacturing jobs are returning.

Companies have been moving manufacturing out of the US for decades. The practice accelerated in the 1990s when the North American Free Trade Agreement was enacted, and again in 2001 when China joined the World Trade Organization. Mostly, companies were seeking lower costs. Especially in the early years labor costs were significantly lower in China. The additional transportation costs that offshoring entailed were less a decade ago than they are now, with fuel costs on the rise.

Advanced manufacturing automation and an overall reduction in part counts combine to reduce labor costs as a percentage of the overall cost of many products, reducing the offshore advantage.

And after years of experience with offshore manufacturing, companies are familiar with the many costs it imposes that were not accounted for in the original decision to go offshore. Inc Magazine points to last year's study by Accenture of 287 US manufacturing executives, which found a significant underestimation of overseas manufacturing costs. "[M]any manufacturers who had offshored their operations likely did so without a complete understanding of the 'total costs,' and thus, the total cost of offshoring was considerably higher than initially thought," the study concluded. "Part of the issue is that not all costs of offshoring roll up directly to manufacturing; rather, they impact many areas of the enterprise."

The accounting metric most often used by supply-chain managers when making offshoring decisions is called "price variance," and it is aimed at quantifying the cost-effectiveness of production. This metric does not incorporate the many costs outside of the supply chain that offshoring entails.

Looking again
More businesses are taking a closer look at all the costs using a Total Cost of Ownership approach. As a result offshoring, while still growing, may be growing at a slower pace, according to Harry Moser, founder of The Reshoring Initiative. At the same time, the rate of bringing manufacturing back to the US is rising. "If it's a trickle, it's a trickle that's headed to become a stream," Moser said.

Moser offered another motivation for offshoring decisions that in hindsight look incompletely thought through. He believes there is a "personal incentive bias to take advantage of [the] price variance mechanism instead of looking at the total cost." When a supply-chain manager looks at an offshoring decision, " can justify a bonus... for cutting $50 million out of the price by offshoring, whereas if you kept it here and worked hard on being lean and doing it a little better and saving $5 million, it's harder to justify giving yourself a bonus, and it's a lot harder to do."

Moser's Reshoring Initiative has developed a Total Cost of Ownership Estimator that combines 29 cost factors to help companies arrive at a valid basis for making manufacturing decisions. Moser is working with members of the House of Representatives to expand the use of TCO calculations within the Commerce Department. He estimates that for as many as 60 percent of US companies, a rigorous TCO calculation would show total costs to be less for manufacturing in the US than in China -- an average of 22 percent less.

The Reshoring Initiative is also working with business schools to get TCO thinking embedded into MBA programs. Perhaps the next generation of business managers will take a broader view of what it takes to be agile in manufacturing.