Wednesday, September 24, 2014

Onshoring is the new Black!

Apple, Motorola, Ford, Intel have all done it. Every month, an increasing number are jumping on to bandwagon; that of bringing back some or all of their manufacturing productions to America. To quote the title of a report by BCG,

Made In America, Again!

Over the past decade or so, countries like China, Vietnam and India were attractive avenues for offshoring manufacturing processes, owing to the cheap labor and set up costs in these countries. China especially, was a major prospect for helping companies cut costs. Companies exploited these favorable conditions and began offshoring a majority of their activities to these countries. Finding competent labor in the US that was cheap was a fantasy. To add to that, other compensations made it more expensive to hire American labor.   

However, the manufacturing clout held by China over the past years is slowly beginning to wane. The cost advantage that made China such an eye-catching opportunity is now dwindling. The primary reason for this being the increase in wages of Chinese workers. It is expected that the benefits and wage increase will be in the range of 18-20% per year in the next couple of years, up from 10% between 2005-2005. This makes China at par with low cost US states in terms of labor costs. Land prices in China are growing ten fold and with a global rise in fuel prices, transporting goods back to the US is becoming even more expensive. Additionally, China and other Asian countries are developing rapidly. Hence, most of the resources in the coming years will focus on serving the needs of the people in these regions instead of assisting vendors abroad fulfill their needs.

Apart from the issue of rising costs, another factor that is attracting manufacturing back to the States is the productivity of the US workforce. The manufacturing output in the US today is almost 2.5 times that of what it was back in 1972. Heavy investments in IT and automation, along with the adoption of supply chain best practices like Total Quality Management and Lean Manufacturing are some of the reasons why  
Most companies have realized that labor forms a small part of total costs. Other factors like loss of complete manufacturing control and quality issues are playing a major role in the decision of companies to pursue onshoring. North American companies must factor in a complete analysis of all their products in the supply chain network to understand if offshoring is indeed advantageous. Manufacturing items closer to home, along with the advantage of not having to overcome operational and cultural barriers is certainly lucrative for organizations.

With the gaps between the labor advantages of China and the US narrowing down, could America look into the possibility of turning the tables and becoming a go-to market for outsourcing for companies in other countries in the future?

Will the weakening US Dollar play any role in the decision made by corporations when it comes to on shoring manufacturing again?





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