FMA economist says companies are increasingly abandoning offshoring because assumptions were premature, not accurate
Jul 1, 2010 12:00 PM, By Rick Weber
“There are two factors: (1) You used to be able to see solid migration from areas where they were losing jobs to where they were growing. As jobs were eliminated in Michigan or Ohio or Nevada, people would move to a new location. This time, they're not able to do it. They can't sell their homes. The recession has corresponded with the housing collapse. (2) The family dynamic has changed. In 40% of families, women are the major wage earner. This is a dramatic change from 10 or 20 years ago. About 70% of jobs lost in this recession were those of males.”
Kuehl said that the satisfaction level with offshore services has been steadily declining between 2008 and this year. Those saying they “were satisfied” have gone from 46% to 39%, while those “not satisfied” have gone from 19% to 26%.
“There's less and less excitement around offshoring,” he said. “In 2008, transportation costs increased when oil was $150 a barrel. There will be a point where we'll be back in the $100, $120, $130 range. Every time fuel costs go up, the reasons for keeping manufacturing near your base are more compelling.
“Our wage standards are high, but have stabilized, and other parts of the world are catching up. If you're trying to lure a good, talented manager into a Chinese company, it's not cheap anymore. They know they have a valuable commodity. Same thing in India and Brazil. The country most likely to give an immediate boost in nearshoring is Mexico. Labor costs are low, there are lower production costs and it has the advantage of being close to us. But doing business in Mexico, in the middle of a major drug war, is not a fun place to be. It's difficult for a lot of companies to even get insurance. The cost of disruptions and countermeasures as compared to reliability means you can't offshore as much as inshore. It's becoming more expensive.”
What sectors of the manufacturing industry are trending toward nearshoring? He said most of the data is anecdotal, mostly from the transportation groups FMA works with.
“Automotive is still predominantly being outsourced, though a little bit is coming back into us,” he said.
Harry Moser, Chairman Emeritus of Agie Charmilles, said the “Re-Shoring Initiative” has been launched, but the organizers face a “major challenge” to change the mindset of big companies that offshoring is cheaper.
“We're trying to change the mindset to, ‘Local reduces the total cost of ownership,’ ” he said. “To do that is going to take millions of viewer exposures. We have to get CEOs, board members, and supply-chain managers to significantly change.” He said they have been doing that through various fairs and media coverage and by publishing case histories. They also have a Total Cost of Ownership (TCO) estimator for customer and vendor use that allows them to create an “apples-to-apples comparison.”
Their Manufacturing Purchasing Fair earlier this year was a one-stop for OEMs to find competitive US-based suppliers and receive the message that they can reduce pipeline and surge inventory impacts on Just-in-Time (JIT) operations; improve the quality and consistency of inputs; localize manufacturing near R&D, strengthening innovation; reduce regulatory compliance risk; avoid foreign wage and currency surprises; and minimize carbon footprint, all while staying cost competitive.
“Everybody wants to be JIT, but it's very hard to be JIT with a really long pipeline, especially if you have any variability in demand,” Moser said. “To me, it's advantageous for a company to have marketing, R&D, and manufacturing close together. The three parties of product development get together and work on a design for manufacturability and assembly, and optimize the total system. It's quite easy to do if that outsourced shop is local. It's very difficult to do if it's 12,000 miles and 12 time zones away, and has two language barriers.
“Most companies talk green, but they source in China, and electricity is mainly made with the dirtiest coal. Producing of product takes more of a carbon footprint than ours. And the boat bringing it over here is an additional carbon footprint. And the boats go back half-empty because we import twice as much as we export.”
He presented the argument that the TCO of stainless steel gear is actually more in China than in the US.
“When you add overhead and profit in, along with packaging, freight and inventory, additional quality costs associated with more auditing of the vendor and metallurgical testing to make sure the material that arrived is what was promised, the end-of-life and prototype costs (TCO), the US total cost is 8% lower than the Chinese cost in comparison to 15% higher at FOB (Freight on Board) price,” he said. “And yet, the typical purchasing agent, supply-chain fellow in the US at the big company is making his decision based on a 15% savings rather than a 15% actual US advantage. They should be thinking about total cost of ownership rather than strictly FOB price.”
He said that according to a January survey by Supply Chain Solutions, 51% of the companies found no financial benefit in offshoring and 20% brought sourcing closer in 2009 (of which 59% nearshored).
“We believe this trend is real, but it's still in a sort of seedling stage and needs fertilizing and water, and that's what we're doing,” Moser said. “President Obama has had a major emphasis on increasing exports. He has pledged that the US will double exports in five years. He's putting his money on the wrong horse. There are distinct advantages for US companies to compete here rather than offshore: absence of duty, freight, and ocean packing; no interest on pipeline and contingency inventory; familiar legal and regulatory system; fixed costs of overseas sales and support versus the simplicity of selling into a huge home market; no exchange-rate issues; and timing in the form of quick impact, because you're already selling here.”
Acceptable Use Policy blog comments powered by Disqus
