Reshoring: Manufacturers Re-Evaluate Their Supply Chains
It's true that U.S. companies' returning operations from offshore spurs U.S. job growth, but what are the risks these companies face?
John Morris, SIOR, Industrial Services Lead for the Americas, Cushman & Wakefield, Inc. (Fall 2012)
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Using TCO instead of price for sourcing decisions reduces the average U.S. price premium from 89% to 0.4% and increases the percentage of work that would be done in the U.S. from 5% to 48%. Conservatively, 25% of what has been offshored would come back. Source: Reshoring Initiative TCO database
Conversely, when it comes to planning the transfer, reshoring requires changing systems and training new staff, all of which present operational and financial risks. Jeff Immelt, General Electric's chief executive, concedes that the decision to put $1billion into the appliance giant's domestic business is "as risky an investment as we have ever made."
He may be right. The decision by GE to bring hundreds of jobs back to Louisville, Kentucky, that had been outsourced to Mexico and China is emblematic of his strategy for GE. If it fails, it will impact his company for a very long time.
To be sure, more companies like GE are analyzing all of the factors and are indeed deciding to "come home." Fueled in part by reshoring, the United States has added 429,000 factory jobs in the past two years, replacing almost one fifth of the losses during the recession.
For GE, the balance of employment had been shifting away from America, largely as a result of investment overseas. Since 2009, however, the company has announced plans to create 13,500 new U.S. jobs, 11,000 of them in manufacturing.
If the objective is to move closer to markets, the reality is that costs will generally be higher than for competitors who remain offshore. There is also the probability that offshore locations in emerging economies will themselves become important markets in the long term, and importing from a distance could be difficult compared with local manufacturing.
Essentially, the risks in reshoring can be as great as the risks associated with offshoring in the first place, and the balance between offshoring, near-shoring, and reshoring will change continuously. Companies considering reshoring should start by reviewing the drivers and assumptions that caused them to offshore in the first place.
More regionalization of manufacturing, which is basically a matter of keeping manufacturing in "both" places, is worth considering. Regionalization certainly minimizes transportation costs, while increasing market responsiveness or the ability to sell into the market in which a company is manufacturing.
Weighing All the Pros and Cons
Indeed, when all the factors are considered and the decision is made, reshoring can benefit the economy by reducing imports, increasing exports, and bringing jobs back to the United States to reduce the unemployment rate, help balance state and local budgets, and even motivate young people to choose skilled manufacturing as a career - thereby strengthening the country's industrial base.
The bottom line is that there are significant forces driving investment, and the significance of these factors will not be changing. It is incumbent upon today's manufacturers to consider all of the pros and cons, advantages and disadvantages, and risks prior to making what could be a game-changing decision for their companies.