There's been a lot of talking lately about off-shoring and on-shoring. My colleagues Monique Rupert and Trevor Miles have both weighed on this subject. You can view their posts here. There was an interesting article in Industry Week last month suggesting that the US was becoming a low-cost country for manufacturing. Well, I guess it all comes down to how you spin it. Let’s look at what’s happening;
- According to the article, Chinese wages are rising by 17 percent per year.
- The value of the Yuan is increasing.
- Many states are offering incentives to bring manufacturing into the state.
- Unions and workers are more willing to provide concessions in order to get back to work.
- The estimate from the article is that net labor costs in China and in the US will converge by 2015.
The article goes on to point out that several companies including Caterpillar, NCR, and Wham-O are bringing production back into the US from Mexico and China. Given these factors alone, you might make the argument that the US is becoming a low-cost country for manufacturing. I don’t think that is a fair assessment because the next logical step in the argument would be that if the US were becoming a low-cost manufacturing center, other countries will start manufacturing their goods in the US. I don’t think that is likely to happen. I think what really is happening is that China is pricing themselves out of the low-cost advantage they’ve had for years. As we start coming close to cost parity, other factors are making local manufacturing more attractive. The on-shoring or near-shoring movement is gaining speed. This is the idea of bringing manufacturing back to where the demand is. A blog post in Plastics Today points out that according to management consulting firm Accenture, “Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers' expectations across a wide spectrum of areas, such as being able to rapidly meeting increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs,” and that “managing supply operations that are separated far from where demand occurs has weakened their overall operational planning, forecasting and general flexibility, while in some cases driving up costs with the need for complex network management. In some cases, this situation has limited the companies' competitive advantage.” Let’s look at some advantages of putting manufacturing where the demand is;
- Time to market can be significantly improved
- Less risk to intellectual property
- Lead times are reduced and are more consistent
- Given reduced and more consistent lead times means inventory levels can also be reduced.
- With fuel prices going through the roof, reducing the overall distance traveled for our manufactured goods can only help the bottom line.
- Reduced product travel also impacts the overall carbon footprint for the product, a factor that is starting to become more and more important in the eyes of the consumer and governments.
I’ve always been in favor of manufacturing near where the majority of the demand is (See my blog post from last year here). I think when companies look at the overall costs associated with offshore manufacturing, more will realize that manufacturing where their market is just makes sense (and dollars too). Are you currently manufacturing offshore? Are you considering moving your manufacturing back to North America? Have you moved already? Comment back and let us know!