|Technician inspects a circuit assembly after selective solder processing. Re-shoring electronic assemblies has become a hot button for the industry. |
"Reshoring" is the act of moving manufacturing back to the United States, in contrast to "offshoring" which is the process of shifting manufacturing overseas to areas of lower-cost labor. Offshore manufacturing at one time was a natural progression for electronic and other companies to reduce their labor costs by taking advantage of available labor pools and lower labor rates in other countries. But in recent years, for various reasons, production is being moved back or closer to the United States, with expressions such as "onshoring," "backshoring," "homeshoring," and "inshoring" also being applied to the switch, and a term like "nearshoring" referring to cases where production might be moved close to the U.S., such as to Mexico.
Numerous reasons can be given for moving production from overseas back to the U.S., and these include the effects of the 2009 recession, such as near-record-high unemployment rates in the U.S. and a lack of manufacturing jobs to support the economy. In 2009, unemployment in the U.S. hit a 26-year high of 10 percent, remaining between 8 percent and 10 percent ever since. The last time that unemployment in this country was 10 percent was during the 1981-1982 recession, which had been the highest point since World War II. As overseas labor forces have been worked to the bone to meet demanding production schedules, and as those labor forces have pushed for wage increases averaging 20 percent per year, the advantages of using overseas production facilities are no longer so clearcut, and many electronics companies have recognized more and more benefits to reshoring their production facilities.
Rising Labor Costs
The initial reason for shifting production overseas the gap between offshore and U.S. labor costs — is no longer quite so evident. As Harold L. Sirkin, a Managing Director at Boston Consulting Group, noted: "At 58 cents an hour, bringing manufacturing back was impossible, but at $3 to $6 an hour, where wages are today in coastal China, all of a sudden the equation changes."
In addition, strikes at production facilities have impacted the capabilities of some major companies to deliver their products. Computer giants Apple and IBM, for example, were affected in November 2011 by strikes at a keyboard manufacturer, as workers protected low pay with inflation driving up the cost of living. In January 2012, 300 Chinese workers building Xbox consoles for Foxconn went on strike because of low pay and poor conditions. The poor security for intellectual property (IP) overseas is another factor against offshore facilities and in favor of reshoring.
Companies that have moved manufacturing onshore after working with offshore operations have given a number of different reasons for the switch, including a need to have more control over their processes and quality, a need to reduce lead times, and a high cost of protecting their IP. Representatives at these companies also felt that maintaining effective communications with offshore facilities was difficult, and that working with offshore facilities left too much inventory in transit. By means of onshoring, engineering and manufacturing teams could once again be under the same roof for more efficient teamwork and less time-consuming meetings between these and other groups were needed over long distances. In addition, some of those company representatives note that offshore salaries are steadily increasing, wiping out the labor cost advantages of offshore facilities, and that offshore labor is not always dependable, not always returning following a major holiday.
The rising costs, instability, lack of security, and various other reasons are causing many companies to reconsider the costs of maintaining production offshore. The Reshoring Initiative® organization and website (www.reshorenow.org) were started by Harry Moser and others several years ago to help companies weigh the costs of using production facilities overseas versus in the U.S.. With more than 45 years of manufacturing experience, Moser is on the board of the National Institute for Metalworking Skills (NIMS) and is President of the Swiss Machine Tool Society (SMTS). He participated in President Barack Obama's 2012 Insourcing Forum and has been featured in leading business publications, such as The Wall Street Journal and Business week. He has consistently warned of hidden costs connected with offshore manufacturing: "These companies most commonly overlook emergency airfreight, travel, and the negative impact on innovation of separating manufacturing from engineering. These could account for 20 to 30 percent of the total cost of offshoring."
The Reshoring Initiative website offers a useful calculator, the Total Cost of Ownership (TCO) Estimator for original equipment manufacturers (OEMs) and other users. TCO can be defined as the full cost to design, build, store, package, ship, sell, and maintain a product. TCO also assumes end-of-life material purchases and expenses associated with discontinued materials (such as obsolete components). The online TCO Estimator works with a user's inputs and requirements to help them compute their costs of production at different locations. It provides an on-line analysis with plots and graphs to show which production location makes the most sense. The TCO Estimator even provides formulas to show how cost comparisons are made for different locations versus U.S. dollars, and allows users to modify inputs and factors in the formulas if a user feels the conversion factors need adjustments. For any costs or charges not accounted for, the tool provides fields to add standard and additional charges as needed.
The TCO Estimator is an effective computer program for performing production cost analyses, but it cannot predict potential issues with overseas suppliers. Some of these issues include quality problems when first starting up a production facility, the time and effort to train personnel, logistics of preparing paperwork (such as commercial invoices, packing lists, detail sheets, and bill of lading) for shipments from an overseas facility, finding a reliable Customs Agent for a reasonable cost, securing legal aid and legal contracts with overseas suppliers, and obtaining an import license if needed.
Choosing a production location is not a trivial decision, but it can have significant long-term impact on the financial health of a business. Reshoring has proven to be a viable option for many companies, and the TCO Estimator is a useful tool that can make that decision somewhat easier by reducing the chances of overlooking hidden costs associated with offshore manufacturing.
A number of well-known companies have discovered the benefits of reshoring in recent years. The most common switch has been from China back to the U.S. For example, General Electric has transferred production of water heaters from China to Louisville, KY, and Whirlpool brought manufacturing of appliances from China to Greenville, OH, while Master Lock moved production of combination locks from China to Milwaukee, WI. Musical equipment manufacturer Pigtronix switched production of guitar pedals from China to Port Jefferson, NY while Seesmart shifted production of light-emitting-diode (LED) lights from China to Simi Valley, CA. In addition to moving production from China, some companies, such as automotive manufacturer Ford, brought production of different automotive parts from India, Japan, and Mexico back to the U.S.
For companies currently operating with offshore manufacturing facilities and interested in reshoring, working with a custom contract manufacturer such as BTW, Inc. can help speed and simplify the decision-making process of whether to stay offshore or to reshore. This custom contract manufacturer offers a wide range of manufacturing services, including PCB assembly, clean-room manufacturing, product life-cycle support, global supply-chain management, mechanical assembly and integration, and testing and test development. BTW has worked with clients from concept through final production to help them decide on the best sourcing solution for their products. The company has been involved in numerous formal presentations on reshoring, and has provided direct customer training on the use of the TCO Estimator tool and how it can be applied to an OEM's specific products and projects.
Contact: BTW, Inc., 11551 Eagle St. NW, Suite 3, Coon Rapids, MN 55448 763-767-4625, fax: 763-767-4635 E-mail: email@example.com Web: http://www.btw-inc.com