Made in America is Making its Way Back via Re-Shoring
In recent years, American companies have been increasing their re-shoring efforts, and the trend appears to be here to stay.
Re-shoring is defined as the act of returning manufacturing to America. In 1791, Alexander Hamilton, our Nation’s first Secretary of the Treasury, presented a report on our Nation’s manufacturers before the House of Representatives. He stated, “not only the wealth, but the independence and security of a country, appears to be materially connected with prosperity of manufacturers.” After years of experience and difficult times in growing the Republic, he later wrote “The experience has taught me that manufacturers are now as necessary to our independence as to our comfort,” and that America “must endeavor to make everything we want within ourselves.”
The American manufacturing sector has experienced many changes in the two hundred plus years since Hamilton’s remarks, from the American Industrial Revolution to the Age of Globalization. All these changes have had both a positive and negative impact on manufacturing in America. The end result is today’s American manufacturers are more sophisticated, innovative, creative and technologically enabled.
As the global competitors desired to increase their share of the manufacturing pie, and American consumers wanted less expensive products, American manufacturers were forced to explore other manufacturing options and less expensive labor in order to remain competitive in this global environment. Thus, American manufacturers ventured into off-shoring (the process of relocating manufacturing overseas in order to reduce labor costs to countries who were emerging and willing to produce at lower cost) without a complete understanding of all the associated costs. Most manufacturers were attracted by a lower labor rate, which contributed greatly to the high unemployment in both the manufacturing sector and shoulder industries. In addition, manufacturers engaged in Lean, Supply Chain Management, and Six Sigma to increase their global competitiveness with a minimum amount of resources.
Today, American manufacturing is making a strong, slow but steady recovery. They have made great strides in many areas associated with manufacturing such as increased through put, process improvements, increased quality and cost reduction, as well as others. American manufacturers have been so successful in making these positive changes that they are now re-shoring their products for even greater savings and benefits. In addition, the global community is turning to “Made in America” products due to their lower cost, higher quality, and advanced technology content.
This resurgence for American products has now created a need for a more skilled and trained work force, which will take additional time to develop. This is now a very active subject between the educational community and manufacturers to ensure those entering the work force have the skills and knowledge required to produce the products in demand. To this end, America is still the leading manufacturing country.
Is re-shoring for all manufacturing companies? The answer is No! It depends greatly on the size of the company and the type of product being manufactured, and their ability to absorb the manufacturing process and keep the costs and other factors in the pricing equation. Therefore, manufacturers today need to make a thorough cost-benefit analysis before making their final decision to outsource product manufacturing. Off-shore manufacturing may be the method to use if the business is in a start-up mode, with capital constraints to purchase equipment and hire employees, but in performing their analysis, they should consider local manufacturing or near-shoring to assist in inventory control and supply chain management, both of which could be costly to a small or start-up manufacturer.
The following is additional information to help increase your understanding of re-shoring.
Some of the reasons why government needs to support re-shoring:
- To provide for the manufacturing of products which contribute to and support our national defense.
- To protect our global interests as well as the IP and other assets of American companies engaged in international commerce and military-type products.
- To show support of the need to improve overseas working conditions and human rights in developing nations.
Some of the reasons why companies are re-shoring:
- To reduce lead time, labor cost/logistics costs and supply chain disruptions.
- Lower inventories/safety stock resulting in additional operating capital.
- Increased product quality due to low/inferior overseas quality policies/procedures.
- Reduce risk associated with dealing with overseas manufacturing.
- Protect Intellectual Property theft/violations and theft of new product development.
- Changing international tax policies and lack of stable governance in many countries, as well as cultural issues.
- More rapid response to product and process changes.
- As the American view of the world changes due to various reasons, companies feel it’s the patriotic and politically correct thing to do.
What government can do to assist in re-shoring?
- Reduce the various associated business taxes.
- Reduce corporate tax rates (U.S. has the highest in the world).
- Reduce regulations.
- Reduce the process time to establish a business.
- Provide incentives to invest in the U.S.
- Place additional pressure on China to increase the valuation of their currency.
- Provide increased manufacturing-type skills training in schools.
- Reduce corporate tax as an incentive for companies to invest in America.
- Continue to provide incentives to re-shore manufacturing jobs.
The hard questions companies must ask themselves prior to re-shoring their products:
- Do we have a re-shoring strategy in place?
- Do we have the skilled work force required to support the additional work?
- Do we have the equipment and other assets required? If not, what are the additional capital requirements?
- Do we have the facility space?
- Do we have the supporting talents required?
- What is the capital and cash flow required?
- Have we analyzed each product being considered for re-shoring to ensure we are able to manufacture it at a lower landed cost?
In conclusion, the United States continues to be the world’s number one manufacturer, generating $1.8 trillion annually. Just imagine what this amount can grow to by increasing manufacturing at home and exporting more globally. In addition, a survey conducted by the Boston Consulting Group is suggesting job gains of 2.5 to 5 million based on cost advantages that will shift in favor of U.S. production as well.
Additionally, as stated above, re-shoring is not for all products manufactured overseas. Therefore, manufacturers must have a re-shoring strategy in place, which considers all the landing costs and other associated costs involved, to ensure the best possible decision is made. Once these re-shoring products return to the United States, our Gross Domestic Product (GDP) will benefit, and additional jobs will be created in both the manufacturing and service sectors.
Joseph F. Mignone, Managing Partner
The Global Institute of Business Acumen