In 2012 more operations were on-shored or near-shored than in any previous year. Tim Cook, CEO of Apple, has said that his company will spend over $100 million to bring some Mac manufacturing to the U.S. this year. G.E., Lenovo, Caterpillar, Boeing, and Coleman are just a few of the numerous other companies that are contributing to the current wave of on-shoring.
Put simply, the paradigm is shifting. Wages at the majority of Chinese factories have increased 15-20% annually for the last several years, Chinese energy prices have risen 15% since 2010, and industrial space in China is now significantly more expensive than space in the U.S. just outside a major metropolitan area. Combining these facts with the strong preferences for a “Made in USA” label from both American and Chinese consumers, as demonstrated by the Boston Consulting Group report, the on-shoring trend becomes easily understood.
The decision of whether or not to locate manufacturing operations in the U.S. is still going to be unique to each business. However, there are several factors you should be aware of that might encourage you to join the on-shoring movement.
Logistics Cost – Locating a significant portion of your supply chain outside the U.S. will make logistics more complex and costly by several orders of magnitude. Tariffs, shipping, and management costs incurred by the obfuscated process all increase your COGS. Manufacturing might appear cheaper in a foreign country, but a complete analysis of the increased logistics costs may prove otherwise.
Supply Chain Velocity – Supply chains that are not spread across vast distances or multiple borders will obviously move more quickly than those with heavily off-shored operations. The velocity of your supply chain will directly affect your ability to capitalize on demand booms and reduce the cost of slumps. Keeping your supply chain rooted within the U.S. will help keep your organization dynamic and nimble.
Branding – Consumers consider products made in the U.S. far more trustworthy and reliable than products manufactured in foreign countries, especially developing Asian nations. By on-shoring your operations, you will strengthen your brand and boost consumer confidence with regard to the entirety of your organization.
IP Protection – China and other low-cost manufacturing nations are notoriously lax with regard to enforcing intellectual property rights. Regardless of how closely you guard your secrets, if you include partners in your supply chain who do not have the same respect for IP, you are putting the entirety of your company at risk.
Quality – Quality is a highly variable factor between companies. However, quality is far more consistent between U.S. manufacturers than in almost any other country. Rigid standards and very active watchdog groups ensure that everything produced in the U.S. is safe and lives up to expectation. Such rigid standards and communities are not as active in other nations, resulting in less consistent quality standards.
Management Support Costs – The U.S. economy is highly service oriented and dealing with U.S. organizations comes with the expectation that operations will be efficient and ample support will be offered. The nature of business in the U.S. shifts the majority of the oversight burden to the manufacturer which could allow you to reduce management costs. On the other hand, foreign partners will likely require more stringent oversight.
Engineering Supplier Involvement – Projects that are in early phase production may require more engineering support and involvement as design changes are made. Communicating with partners overseas increases the time required to initiate changes and resolve problems. By moving the production on-shore, you can eliminate communication complexity and gain the ability to resolve problems instantaneously.
Political Unrest – The U.S. is one of the most internally stable nations in the world. Developing countries generally offer reduced labor costs at the price of political and legal stability. If an interruption in supply would be catastrophic to your operations, basing your supply chain in the U.S. can mitigate a great deal interruption risk based on political factors.
With the radical changes occurring in the Chinese manufacturing market, it’s likely that a great deal of the cost advantage to offshoring has been eroded. By understanding the less explicit costs, such as increased risk and required oversight, joining the on-shoring trend appears to be a savvy business decision.