Monday, September 23, 2013
Exploring the Idea of Re-locating Links in the Supply Chain
After reading the “Time to rethink offshoring?” and “Supply Chain for iPhone Highlights Costs in China” articles for Week 5, I began to question the widely held assumption that the costs of production in China are much lower than those in the United States – costs that are low enough to justify developing a supply chain that spans across the globe. Instead, what these articles pointed out is that the conditions that first attracted organizations to China are now changing – labor costs are increasing greatly which is negatively affecting the bottom line of companies who rely on labor from this country. Since the “Time to rethink offshoring?” article pointed out that their may be numerous factors that may actually make production in China more expensive that domestic production, I was interested in exploring this idea to see whether the cost differential actually pushed a significant number of companies to re-locate production efforts.
In an article titled “Coming Home” that was published in The Economist in January 2013, the author writes about a small 2005 startup called ET Water that analyzed the cost of production in America versus that of China by taking into consideration shipping and customs fees as well as labor costs. Ultimately, production in California would only be 10% more expensive than production in China and this calculation is unable to take into account other non-quantifiable benefits that may come from “re-shoring.”
Though the article cites that less than 100 U.S. companies have made this move, the author makes the case that many more companies are preparing to follow suit. He cites labor costs as a major reason specified by companies who have made the decision to bring some operations back to America.
The following is an excerpt from the article that details this possible future “re-shoring” shift:
“In a survey of American manufacturing companies by the Boston Consulting Group (BCG) in April 2012, 37% of those with annual sales above $1 billion said they were planning or actively considering shifting production facilities from China to America. Of the very biggest firms, with sales above $10 billion, 48% came out as reshorers. The most common reason given was higher Chinese labour costs. The Massachusetts Institute of Technology looked at 108 American manufacturing firms with multinational operations last summer. It found that 14% of them had firm plans to bring some manufacturing back to America and one-third were actively considering such a move. A study last year by the Hackett Group, a Florida-based firm that advises companies on offshoring and outsourcing, produced similar results. It expects the outflow of manufacturing from high- to low-cost countries to slow over the next two years and the reshoring to double over the previous two years. “The offshoring of manufacturing is now rapidly moving towards equilibrium [zero net offshoring],” says Michel Janssen, the firm’s head of research.”
The article closes with a very interesting point – that corporations may be more able to re-locate production back to America due to the increased use of technologies and other innovations that reduce the need for human capital in the production process. By utilizing machines that can complete work in a more standardized fashion and do not require that employers pay for benefits or face rising wages, introducing more capital into the production process may be an additional alternative to solving the issue of rising labor costs.
What toll would this sort of shift to more capital-intensive production have on the labor market in this industry? Would employees be forced to take lower wages in the face of lower demand for their skills? Would the trade-offs between human and machine labor be worth the switch?
Source: Coming Home (2013, January 19). The Economist. Retrieved from http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united