Rebuilding and Reshoring: What Can OEMs and Retailers Do?
The volatility and uncertainty resulting from trade wars and the COVID-19 pandemic are challenging companies to make their supply chains more resilient without undermining their competitiveness in the market. Americans believe that U.S. manufacturing is important for long-term job growth,[i] economic stability[ii] and national security[iii]. Studies[iv] [v] have found an increased preference for U.S.-made products. Manufacturing in the market served i.e. reshoring, is the most efficient way to address these demands. But how can manufacturers increase U.S. competitiveness and turn consumer preference for Made-in-America into purchases?
Operational efficiency The increased consumer demand for faster delivery, customization, and responsiveness is helping to promote reshoring and localization, i.e. U.S.-made goods for the U.S. market. New technology, lean process innovation, and part redesign will yield greater competitiveness making more resilient, localized supply chains profitable for U.S. companies. Automation, a key enabler, can narrow the labor cost differential, reducing the offshore labor cost advantage. Investments in lean factories, and new technologies like Industry 4.0, robotics, and automation will speed production and increase responsiveness[vi]. For example, Jergens Inc., a 78-year-old Cleveland-based manufacturer of standard tooling components, vises, and other workholding equipment, is fully invested in automation. As automation increased production, the company was able to widen its business offerings and hire additional staff.
Reevaluating the Offshoring/Reshoring Decision When discussing sourcing with your company or a customer company, do not argue that companies must fully reshore based on principal. Rather urge reevaluation of sourcing location under the current economy realities to determine objectively which products should be sourced where. Reshoring has two main areas of benefit: the hard economy cost benefit analysis, finding opportunities for improved profitability and risk mitigation, and the societal benefits of strengthening a company’s local community, state, and nation. There is great potential in both these areas as 20 to 30% of products can be produced at an equal or lower total cost when reshored.
Most companies make sourcing decisions based solely on FOB (Free on Board) price, or at most Landed Cost, often resulting in a 15% to 30% understatement of offshoring costs. The Total Cost of Ownership Estimator® (TCO) is a free online tool that can guide companies through a comprehensive system for recognizing and quantifying all of the costs and risks associated with offshoring and reshoring. Leveraging this resource, companies can stay focused on selling against imports based on total cost analysis and on using automation to close any remaining cost gaps. Look for our upcoming article further exploring TCO and its many benefits.
Reshoring Opportunities and Priorities In August 2019, 181 top U.S. corporate CEOs signed a statement that a corporation’s stakeholders now include community, employees, and suppliers, not just shareholders. To live up to these commitments, we believe the corporations should reevaluate past offshoring decisions.
Companies’ top complaint is often skilled workforce availability. The best way to overcome this issue is to reshore. Demonstrate to society that manufacturing is once again a top career. Demonstrate to your employees that the United States is once again your focus. Show loyalty to earn loyalty.
Treat reshoring opportunities like triage. Here are our recommended priorities for work where the U.S. TCO is competitive:
Do not offshore anything more without first calculating TCO.
Reshore work that is outsourced offshore.
If you have a factory offshore and it ships 50% to the local market and the rest to the U.S., repurpose the factory to ship 90% local. Invest in the United States.
Shut the offshore factory and expand in the United States.
Optimizing Find products where the lower overhead of local production more than offsets the higher labor costs, i.e. where the TCO is lower. Based on TCO about 30% of imports are reshorable. Better yet, “leanshore,” i.e. apply lean principles, improve and automate the process, provide more skills training and thereby bring more than 30% home.
U.S. companies have, too often, removed manufacturing from their list of “core competencies,” focusing instead on finance, marketing, and design. Harvard Business School Professors, Gary P. Pisano, Harry E. Figgie, Jr. Professor of Business Administration and William Shih, Ph.D., Professor in the Department of Biological Chemistry and Molecular Pharmacology have shown that separating manufacturing from engineering degrades both[vii].
U.S. corporations’ overly short-term focus makes manufacturing a low priority. The United States has a third as many robots per 1,000 manufacturing workers as does South Korea and invests less than half as much in CNC machine tools as does China. Such investments should have a higher ROI in the country with the highest labor costs and lowest skilled workforce availability. Marketing Made in USA Millennial consumers (24 to 39 years old as of 2020) hunger for environmentally sustainable practices and authenticity. Fast delivery and customization appeal to Gen Z (5-24 years old as of 2020). Fifty eight percent of Gen Z consumers are willing to pay extra for faster delivery. Eighty percent purchase products that have a societal or environmental impact.
The impact on environment, jobs, convenience, efficiency, and quality are four softer benefits of local production. The reduced transport and stricter U.S. environmental standards of localized production, i.e. reshoring, improve the environmental footprint. The positive impact on jobs decreases unemployment, stabilizes the economy, and raises living standards and sales in a company’s home market.
Case studies have also shown an increased interest in US manufactured goods. Google searches for “Made in USA” have climbed sharply over the last few years, suggesting that companies should consider including “Made in USA” in headlines, text, online tags, descriptions, and webpage elements. Made in USA messaging should be paired with authenticity and societal and environmental efforts to create brand loyalty via building an emotional connection with consumers. A study shows that a Made in USA marketing strategy enables more sales and higher prices for domestic products.
Many companies are benefiting from the surge in interest for “Made in USA.” American Blossom Linens, an online retailer of U.S.-made bed sheets fabricated from West Texas-grown organic cotton, saw business grow by 400% during the pandemic. Margarita Mendoza, founder of the madeinamerica.com marketplace saw an 825% increase in consumer interest from March 26-April 22, 2020. Greg Owens, CEO of Liberty Tabletop, the only U.S.-made flatware manufacturer, said Liberty has seen a 50% surge in business since the start of April 2020 compared to last year.
ReEvaluate and ReEngage Now is an especially good time for companies to reevaluate the choice of domestic vs. offshore production. To help quantify those costs, the Reshoring Initiative® website provides tools to help companies decide objectively whether their overhead will come down more than their manufacturing cost goes up when sourcing locally. The Reshoring Initiative’s Import Substitution Program helps supply chain companies find OEMs to convert from importers into customers by using the TCO tool. For help, email: firstname.lastname@example.org
To read more in Harry Moser's Rebuilding & Reshoring series, click here.