Reshoring and TCO – Supply & Demand Chain Executive

Reshoring is the most direct solution for many of the hottest supply chain issues.  Drastically shortened lead time dramatically reduces the complexity of monitoring all levels of a global supply chain and the importance of longer-term forecasting. Shorter distance and lead-time also dramatically improve inventory turns and reduce the risk of supply chain disruption. Increasingly, companies are using Total Cost of Ownership (TCO) or similar sourcing metrics and seeing that these benefits are, in many cases, achievable without sacrificing profitability.

Reshoring Background

Data from the Reshoring Initiative shows that offshoring of U.S. manufacturing is now in balance with reshoring. Since 2003, new offshoring is down by 70 to 80 percent and new reshoring is up by 1,500 percent. The most important accomplishment is that the net-loss of 100,000-plus manufacturing jobs each year has ended. New reshoring is now balancing new offshoring at about 40,000 manufacturing jobs/year, resulting in the first neutral year of offshoring job loss/gain in the last 20—the bleeding has stopped!

As of October 2014, about 170,000 manufacturing jobs have been brought to the U.S. from offshore (400,000 total jobs when including the manufacturing multiplier effect of approximately 1.4). That job gain is the result of both new reshoring—the return of manufacturing work that was previously produced offshore—and FDI (Foreign Direct Investment) in the manufacturing sector. These trends represent about 25 percent of the total increase in U.S. manufacturing jobs since the low in February 2010[1]. For the economy, the continued challenge is to bring back another 3-4 million manufacturing jobs that are still offshore. Meeting this challenge requires that the positive trends that are already bringing work back, such as rising costs offshore and lower energy costs at home, continue. Additionally, the U.S. can improve its competitiveness, in the following manner:

First, in the short to medium term, use of TCO (Total Cost of Ownership) or similar comprehensive metrics—getting companies to recognize all of the benefits of local production and adopt a more comprehensive total cost analysis—is the most effective action to accelerate the return of manufacturing and balance the trade deficit. Increased use of TCO, alone, could cut the trade deficit by 25 percent and bring back one million manufacturing jobs. This requires educating companies to use TCO, and is entirely under the control of our society and corporate culture. Detailed, objective reporting on reshoring successes is a necessary element to motivate companies to reevaluate offshoring.

Second, in the longer term, to get the other 75 percent requires improved competitiveness with political and societal actions: tax reform, currency/tariffs, skilled workforce expansion, etc. All involve politics, most are cultural and endemic. Currency/tariffs are subject to WTO rules, and are influenced by other countries’ actions. There must be much more progress on these fronts in decades to come than there has been in the past.

Ideally, it is best to do both sets of actions.  We should be enthusiastic about reshoring as an important element of the manufacturing renaissance but not optimistic about the renaissance until all companies are using TCO for their sourcing decisions and the longer-term actions are being implemented.

Implications for Supply Chains

Here is a list of important supply chain and related issues and how each is mitigated by local sourcing, especially in a developed country. These advantages should be enough to motivate companies to reevaluate offshoring to see whether the overhead, risk and strategic benefits of reshoring now offset the, typically higher, domestic cost of goods sold.