I read a great article in Wired magazine this month about the growing trend of Re-Shoring (bringing manufacturing back to the US). It painted a very different picture from what is typically discussed regarding domestic vs. overseas manufacturing. And while it would be overstating things to say “manufacturing is back in the U.S.,” it is fair to say that more companies are taking a closer look at the true economics of their decision to offshore. Take the following excerpt from the article:
“Companies are looking to base their decisions on more than just costs,” says Simon Ellis, head of supply-chain strategies practice at IDC Manufacturing Insights, a market research firm. “They’re looking to shorten lead times, to reduce the inventory they have to carry.” When accounting giant KPMG International recently asked 196 senior executives to list their top concerns for 2011 and 2012, labor costs ranked below product quality and fluctuations in shipping rates and currency values. And 19 percent of the companies that responded to an October survey by MFG.com, an online sourcing marketplace, said they had recently brought all or part of their manufacturing back to North America from overseas, up from 12 percent in the first quarter of 2010. This is one reason US factories managed to add 136,000 jobs last year—the first increase in manufacturing employment since 1997.
There is no denying that labor costs are still significantly lower in China (though the gap appears to be narrowing), but managing an entire supply chain is about more than labor costs. Later in the article, some startling facts are shared:
A January 2010 survey by the consulting firm Grant Thornton found that 44 percent of responders felt they got no benefit from going overseas, while another 7 percent believed that offshoring had actually caused them harm.
And perhaps the shrinking of the labor gap isn’t so inconsequential:
In 2008, three McKinsey consultants analyzed the production of midrange servers, taking into account everything from shipping to quality to exchange rates. They concluded that fabricating such devices in China made sense in 2003, when the required labor was 60 percent cheaper there than in the US. At that time, they estimated, the per-unit savings ran about $64. But this advantage, McKinsey concluded, had vanished by 2008: “After factoring in the higher labor and freight costs, we find that the former offshore savings have turned negative—a burden of an extra $16.”
It’s a very interesting article that does a good job of explaining when off-shoring works well and when it struggles. The entire article can be found here.
Would love to hear your thoughts and response to the article.
Posted by Charlie Agulla