Rethinking Reshoring

Reasons for reshoring Total cost accounting Staggering stats are no surprise

For several years U.S. manufacturers and those of us who watch them have been encouraging each other with the effects of “reshoring” — the term that has settled around the apparent phenomenon of domestic manufacturers and OEMs choosing domestic sources of manufactured parts and systems. It’s a positive vibe that has transferred beyond the manufacturing world, into research centers, media, government, and so on.

The development describes cases involving manufacturers or OEMs who previously have sourced products for lower-cost foreign markets, but now find that the transportation costs, product quality, production times, and/or customer service are not acceptable to their supply chains, regardless of any unit cost savings that may be achieved.

We should all be glad for the jolt of confidence that reshoring provides domestic manufacturers, and no one should dispute the factors that contributed to various successful examples. Transportation costs and delivery schedules obviously are a problem between the Pacific Rim and North America. Quality control can be difficult to ensure from 10 time zones away. Changes in designs or production schedules must be verified instantly these days, and that’s a problem of communication as well as distance.

And, consider too that each of these problems represents an affirmative case for domestic manufacturers: they are resourceful, available, responsive, and increasingly cost-competitive. They have worked hard to get their organizations to that point.    

But, to see these individual developments as a trend is a harder case. It’s more plausible that each reshoring success story represents an instance of a domestic manufacturer and a potential customer coming to some new understanding about the terms of supply, an understanding premised on affordability. Indeed, the most persuasive case made by the The Reshoring Initiative — the group that has done so much good work to spread the message about the opportunities for coordinating domestic manufacturers and buyers — is the one about cost-competitiveness. The TCO Estimator it developed and hosts on its website (www.reshorenow.org) customizes the reshoring argument for potential partners.

And so, rather than some virtuous trend confirming the resurgence of domestic manufacturing, I see the reshoring phenomenon as part of the development of a global industrial market, a market in which buyers of manufactured parts and other products are free to roam the world looking for the best price. By making their operations more affordable, more competitive, more available, domestic producers who land reshored purchase orders are doing these customers an enormous favor. But that doesn’t mean they’ve gained any loyalty: the next time that contract comes up for bid it may go back to the Pacific Rim, or to South America, or wherever the TCO Estimator directs it.

No satisfaction

The point is not that domestic manufacturers have not earned the right to cheer. It is that the domestic economy has not improved enough for us to be satisfied.

To offer one specific example, the burden of regulation remains heavy on U.S. businesses, and on manufacturers in particular. Late last year the Manufacturers Alliance for Productivity and Innovation (MAPI) issued the results of a study, “Macroeconomic Impacts of Federal Regulation of the Manufacturing Sector,” which found that since 1998 the cost of major regulations has outpaced by far the growth of the U.S. manufacturing sector, and of overall economic growth. Cumulative inflation-adjusted cost of compliance for major manufacturing-related regulations (e.g., EPA, OSHA) grew by an annualized rate of 7.6%. Over that time, annual growth of the U.S. manufacturing sector output averaged 0.4%/year, and U.S. gross domestic product (GDP, adjusted for inflation) averaged 2.2%/year.

The rough numbers on the increase in the volume and scope of regulations, and the rise in the compliance cost, is staggering — though maybe not surprising to readers who know this story from their own experiences. For NAICS 33 (the product category that encompasses metalcasting) 185 major regulations and 1,423 non-major regulations were implemented between 1981 and April 2012. NAICS 33 manufacturing output could be reduced by up to 5.5% annually over the next decade as a result, the MAPI study estimated.

The manufacturing sector has gained a new image in the past few years – one that emphasizes its efforts at cost control and production efficiency — and it has developed a fan base among government officials: they want to preserve the revenue potential of a strong manufacturing sector, and they know that being in the company of manufacturers helps them maintain a common touch.

But, they should appreciate that all the theories and truisms about a ‘manufacturing’ revival are only as valid as the latest purchase order.

 

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