A fter 30 years of losing American manufacturing jobs due to off-shoring, many companies are increasing their U.S.-based workforce and are bringing production jobs back from overseas. This trend is known as “reshoring.” Procurement and Human Resource professionals should keep an eye on this situation as it will affect the way firms do business.
“Made In America”, a term rarely heard over the past 25 years, is once again cropping up in conversation due to a growth in regional and local sourcing as economies grow. With the global economy remaining turbulent, many companies, large and small, are using contingent labor for a variety of reasons such as flexibility in workforce planning and “trying before buying” employees.
What’s driving the reshoring trend?
In the past, many businesses moved production to China based on cost per unit, which allowed them to offer consumers a lower cost. As overseas labor costs and logistics fees continue to rise, this may no longer be the most cost-effective strategy, causing some firms to reshore operations to locations where they can better serve their customers.
According to Boston Consulting Group data, in 2000, factory wages in China averaged 3 percent of what U.S. factory workers earned (about 52 cents an hour for Chinese labor). Since then, Chinese wages and benefits have risen by double digits each year, with an average increase of 19 percent between 2005 and 2010. During the same period, fully loaded costs of U.S. production workers rose less than 4 percent and labor unions became more flexible in wage negotiations.
Firms in many different industries are bringing their production back to the U.S., citing rising labor costs in emerging countries, poor quality, and long lead times as driving factors.
Other reasons for the shift include the increasing need to utilize skill sets specific to the U.S., increased costs of overseas operations, and a desire for a more stable workforce – even when using contingent labor. In fact, 80% of companies who use temporary staff see it as a great way to try out candidates for permanent positions.
The strengthening of the Chinese currency, the weakened U.S. dollar, and rising fuel and freight container costs are also important factors driving re-shoring decisions. Offshoring caused some businesses to experience high levels of inventory and potential waste, as well as exposing them to cash flow disadvantages and quality control issues.
These factors plus have lead procurement managers and business leaders to reexamine American manufacturing.
What are the benefits of reshoring?
The Reshoring Initiative, a U.S. manufacturing industry initiative to bring manufacturing jobs back home, tracks all reported cases of reshoring and estimates that 80,000 manufacturing jobs have been reshored since 2010.
Vehicle manufacturers and companies like American Apparel, GE, Apple, and Siemens have led the market in reshoring. One prominent example is Yamaha planning to bring the majority of its worldwide ATV manufacturing operations back to Georgia by 2013.
Other companies are beginning to see the advantages of reshoring as well.
Reshoring helps manufacturers combat the poor quality, regulatory compliance risk, trade secret theft, supply chain disruptions and lengthy delivery times that have become the norm with offshoring. Reshoring allows U.S. firms to achieve larger efficiencies on the assembly line, maintain the skills of domestic workers, and more closely oversee the design process. Not to mention firms have the added responsiveness of being able to correct manufacturing errors faster.
Currently, manufacturing costs in the United States are still higher than China, but the U.S. has other advantages, like lower energy costs and sophisticated trade logistics. Worker productivity is higher in the U.S., and labor costs are lower than in countries like Europe and Japan. These factors will become increasingly more important as life cycles of consumer goods continue to accelerate and U.S. consumers are willing to pay more for American-made goods.
The Boston Consulting Group released a report titled, “Made in America, Again: U.S. Manufacturing Nears the Tipping Point — Which Industries, Why and How Much?” This report identified seven industries approaching the “tipping point”— the stage where it no longer makes economic sense to maintain operations overseas— transportation goods, computers and electronics, appliances, machinery, furniture, fabricated metals, and plastics and rubber.
What can Procurement and Human Resource professionals expect?
If the reshoring trend continues as expected, it will affect contingent labor in a few important ways.
- US firms will need lower-skilled labor and higher-skilled manufacturing labor as well as tools to manage their increased workforce.
- Although they haven’t reached the tipping point yet, many clothing brands and retailers are considering reshoring. Industry consultant Margaret Bishop predicts as many as 200,000 apparel-making jobs could return stateside over the next decade.
- Re-shoring jobs back to America is likely to cause a boom in temporary labor. With businesses seeking cost-effective, local workers, project-based work is liable to appeal to employers, since using a temporary labor strategy offers flexibility in staffing as well as local expertise.
- Chinese labor costs are expected to continue rising.
- The Boston Consulting Group forecasts that China’s manufacturing cost advantage over the U.S. will continue to shrink and that within five years, the gap will close for many goods consumed in North America.
- Metropolitan areas will benefit the most from the reshoring trend since firms will choose strategic locations that reduce transportation costs place the business operations closer to consumers and skilled labor.