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To Reshore, Or Not To Reshore

 

The risks and benefits of bringing your manufacturing home

David Iwinski Jr.

Managing Director

david.iwinski@bluewatergrowth.com.

AUTHOR

dave-grafton.jpg

David Grafton

Senior Director

Blue Water Growth

david.grafton@bluewatergrowth.com

US Mobile: +1 412 463 8381

Skype: david.grafton@bluewatergrowth.com

To Reshore, Or Not To Reshore

The risks and benefits of bringing your manufacturing home

By David Grafton

 

In unpredictable times, it is very tempting to react to events as they unfold. However, being reactive is never the right answer. In the current geopolitical environment, one in which a trade dispute can erupt even between the best of friends, it is more important than ever to take a systematic approach to evaluating options to maintain a competitive supply chain and manage risk. As with any choice, there are pluses and minuses to re-shoring your production. Every firm will not realize the benefits, nor will every firm experience every downside of re-shoring. Below is a sampling of questions you should ask yourself to better judge whether re-shoring will work for you.

What type of production processes are necessary to make the product?

 

Due to the expense of automation, your product mix will, to a large extent, drive the available financial benefits. Labor arbitrage drove offshoring, and while there has been some convergence globally there are still significant cost differentials between regions and countries. It is somewhat counter-intuitive, but it is often true that low-mix, high-volume production will be more cost effectively re-shored than highly customized products. The key factor driving this is that hard automation is expensive and capital intensive. By applying capital, the percentage of production cost driven by labor can be significantly reduced. If cost is a driver, understand that in the long-run, additional labor costs must be offset by concurrent gains in productivity to be net-neutral, and productivity gains must exceed additional labor costs to have an actual benefit.

 

In other words, from a product mix perspective, low-mix, high-volume products lend themselves to the large capital investments that fuel the productivity increases required to offset increased domestic labor costs, while at the same time reducing production time and lead times. When producing custom product, or other high-mix, low-volume product, the costs of automation dramatically increase. Therefore, a higher mix typically implies more labor is required to build and manage, and that there will be less benefit per dollar spent on automation as each dollar spent is likely to be applicable to only a subset of products. While there are other reasons to re-shore high-mix, low-volume production, such as lead times, responsiveness to changing market conditions, and reduced inventor, it is unlikely you will find cost savings in production through re-shoring highly custom products despite tariffs and smaller differentials over time in labor rates between nations.

What specialized skills will be required to build your product domestically?

The hollowing out of America’s manufacturing base and subsequent replacement by a service economy has, over the decades, incentivized the workforce to develop skills with high value in this service-based economy. As someone who has led organizations with US production, I can certainly confirm that is easier to find a product manager or a “director of social media” than it is to find a welder or a machinist. One of the consequences of this has been that the necessary pool of talent is not always there and may need to be developed and trained. This adds cost and time to any reshoring effort.

If you plan to re-shore it is important to consider where the types of human resources you will need are clustered. Without a robust labor market for the resources you need in the area you choose, any effort to ramp up production is likely to fail. Developing a skilled workforce can be a long and costly process, and therefore must be a key consideration in decision-making.

Where is your supply chain?

No factory stands alone. You will need suppliers. If you break existing geographic connections through a re-shoring process, you may offset the benefits you were trying to achieve. As described with the labor pool above, the network of suppliers is not as robust as it once was. If you can only find suppliers for certain critical components overseas, you may not realize expected benefits in inventory reduction – or you may realize those benefits, but sacrifice lead-time improvement and market responsiveness. While the benefits may outweigh the costs, it is important to consider the supply chain that feeds your factory to understand whether increased shipping costs and lead times from suppliers, logistical challenges, or increases in safety stock requirements to reduce risk will offset benefits of re-shoring production and/or final assembly.

How custom is your product, and what are the market lead-time requirements?

Market factors such as lead time may generate a decision to re-shore despite some of the pitfalls described. If you are highly custom with short lead-time requirements, you may need to move production closer to your end-customers regardless of increased automation and labor costs or potential supply chain and logistical issues. If the desire to re-shore is driven by market requirements separate and apart from cost it will be important to analyze the entire system end to end when making this decision. For example, moving away from your supply chain may add time to the overall fulfillment process, increasing rather than reducing lead times.  Meeting market requirements is the first job of every firm, but you must be comprehensive in analyzing every bit of your value chain as you gather data to make your decision.

Do you understand risk?

Chaos implies risk, and these are chaotic times. Even the key players in the tariff drama do not know if, when, where, or how it will all end. It is true that in times like these, at precisely the moment when temptation to react is at its zenith, good leaders will earn their keep. As leaders it is our job to ensure that our organizations apply our best practices most rigorously in these times and that we do not get swept up in the moment and make rash decisions based upon the news of the day. In making a re-shoring decision, be sure to include risk identification and mitigation into the process at every step. Eliminate risk when possible and mitigate risk when not. A few examples:

  • What if the tariff issues all were resolved? You may have moved to a higher cost production location, leaving your competition with cost advantage as a result.

  • What if the tariffs drive a key supplier out of the market? You need to understand the risks within your supply chain, including to the extent possible the risk to your key suppliers and develop contingency plans to mitigate the risk.

There are endless examples of how the current environment can drive risk. The key is to rigorously apply the best risk identification and mitigation practices to this endeavor – the more risk there is, the more important it is for us to be systematic in our approach.

In summary, chaos should not lead to reactive decision making. Rather than skipping steps, chaotic times are precisely when a systematic approach and application of best practices have the most value. Keep your head when those about you are losing theirs, understand which factors are core to your business, rigorously apply best practices, and focus on risk - this leads to better outcomes in all times, good or bad.

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