A Look at Total Cost Can Change the View

Is the off-shoring of U.S. manufacturing inevitable or can it be reversed? Well, if Harry Moser, and other like-minded manufacturing boosters, have their way, the answer is the latter. Mr. Moser (chairman emeritus of Agie Charmilles) is a key player behind the Reshoring Initiative, which is getting traction in its effort to bring off-shored jobs back to the United States. 

The timing for this initiative seems to be good and getting better. GE has made headlines earlier this year announcing plans to reverse off-shoring of its appliance manufacturing with a significant investment (about $432 million) in its domestic facilities in Kentucky, Tennessee, Alabama and Indiana. Some of the reasons cited included rising costs for currency exchange, transportation, and labor in countries that were once much less expensive.   

An article printed in “USA Today” in August reported that NCR and Caterpillar are also reversing what seemed to be an unstoppable trend of off-shoring by bringing home some of the production previously lost to foreign countries, especially Asia. Moreover, other U.S. based companies are changing their sourcing of components back to U.S. suppliers. This is all good news for our manufacturing base. My hope is the tide that took so much work away from the U.S. might be swelling in our favor with more such announcements.

If there is one lesson history teaches about domestic manufacturing, it is that it’s a dynamic moving target. Lessons learned are quickly obsolete because the situation is different. Lessons must be continuously re-learned and updated to fit the current problem, not the last one.

And there is a scale to this. Whether it’s a single shop, multiple facilities or a multi-national corporation, the situation on the ground is constantly in a flux. I think in part that is what may be happening with regard to reshoring. With rising costs coupled with questions of quality, reworking, theft of intellectual property and extreme product development and delivery cycles, for many OEMs the bloom may be off the outsourcing rose—at least for a while.

It is this reshoring momentum that Mr. Moser’s initiative is betting on and trying to help nurture. One of the bedrock focuses is to help companies track the true “Total Cost of Ownership” for components acquired overseas. Some of the line items in the TCO calculation include:

Inventory costs—made necessary by stretching the supply chain across an ocean. OEMs may need to keep 3 months or more of inventory in stock to offset component shipping time. And, if the component is changed, that excessive inventory is wasted. Being closer to the source requires less inventory on hand. 

Prototyping costs—usually figured into the job by the potential supplier that is usually U.S. based. If the component production is to be outsourced, prototype costs will be higher since the supplier cannot amortize these costs over the production run.

Materials costs—can be and often are higher, not necessary because of the purchase price, but because of the necessity of factoring in scrap, which tends to run higher in overseas operations.

Shipping—is usually more expensive because of distance and time. However, not often considered is the occasional need to expedite a critical order, which usually involves air shipment.

Quality control—a well known issue especially for higher value components. The added expense comes in the form of inbound checking, rework when necessary, scrap and implementing on-site QC protocols in the foreign supplier’s shop. 

These are just a few of the considerations that Mr. Moser’s TCO initiative is trying to get manufacturers to address. He cites a 2009 survey by Archstone Consulting that shows that manufacturers ignore 20 percent of the cost involved in foreign offshoring. Interestingly, that is about the same percentage often quoted as the U.S. global competitive disadvantage, which includes our higher costs for taxes, labor, litigation and energy.

Mr. Moser’s group developed a TCO calculator that is available on the group’s website, reshoringnow.org. I suggest you take a look at it, print it out, and use it in discussions with any of your customers that are considering taking higher value work overseas. It might help you stem the tide of outsourcing and keep valuable domestic work where it belongs.