Precision Machining from the Reshoring Perspective

Precision-machined parts production once sent offshore to take advantage of low cost foreign labor is starting to return to the United States. Labor cost savings that drove jobs offshore have narrowed, causing companies to reevaluate total cost.

Companies sourcing precision machining in developing countries face many challenges such as time to market, high freight costs and quality, reliability, and performance concerns. They are finding that localization, producing in the country in which the product will be consumed, often reduces total cost by improving flexibility and responsiveness, minimizing supply chain disruption and promoting the effectiveness of R&D and innovation.

Where We Stand

The Reshoring Initiative, an organization committed to helping manufacturers recognize the profit potential of local sourcing and production, recently published its annual data report on reshoring trends, and the news is positive. More than 60,000 manufacturing jobs were brought to the U.S. by reshoring and foreign direct investment (FDI) combined last year, representing a 400 percent increase since 2003.

Government incentives, the skilled workforce, capitalizing on the value of a “Made in the USA” label, and automation topped the list of reasons companies gave for reshoring. At the same time, companies cited lower quality, long lead times, high freight costs and rising wages as reasons against offshoring.

Additionally, precision machining manufacturers also cited higher productivity and proximity to customers as common reasons for returning home.

The Reshoring Initiative publishes this data annually to show companies that the trend in manufacturing for the United States market is to source domestically. With 3 to 4 million manufacturing jobs still offshore, we see huge potential for even more growth and hope this data will motivate more companies to reevaluate their sourcing and cite decisions.

Many observers of the American precision machining industry say a company should make the low volume, high mix products here in the U.S. and the high volume, low mix in China. However, we have a different assessment. Many times both ends of the distribution make good economic sense to be made here in the states. Low volume does not justify the cost and risk to start-up and monitor supply from a distance and cannot respond to volatile demand. High volume can generally be economically automated thereby taking labor costs to a level that minimizes the benefit of low cost labor.

The largest drivers of the reshoring trend are rising offshore wage rates, the use of the refined metrics of total cost of ownership (TCO) to quantify the hidden costs and risks of offshoring and reducing costs with sustainable strategies such as design for manufacturability, innovation, automation and lean. Reshoring lowers total cost by reducing waste. It enables companies to develop more efficient processes to offset waste.

The Basics of TCO

TCO is defined as the total of all relevant costs associated with making or sourcing a product domestically or offshore. TCO includes current period costs and best estimates of relevant future costs, risks and strategic impacts.

TCO analysis helps companies objectively quantify, forecast and minimize total cost. It takes into account transportation costs, travel expense and time, warranty, IP loss, impact on product innovation, and many other factors such as those associated with the risk of supply chain shocks or disruptions caused by natural disasters, political unrest and dock slowdowns. It also helps to forecast the future impact of wage and currency changes.

Do the Math with a TCO Estimator

The Reshoring Initiative is a not-for-profit organization, dedicated to helping companies understand the true cost of offshoring by using TCO analysis. In order to help companies decide objectively to reshore or offshore, a free online TCO estimator is available on reshorenow.org to help corporations calculate the real profit and loss impact of reshoring or offshoring. The Initiative also offers other resources to help companies make sourcing decisions and sell against offshore competitors.

Making better-informed decisions through the use of TCO and gaining a competitive advantage through sustainable strategies will enable U.S. companies to locate more manufacturing closer to home and strengthen the U.S. economy.