But most comment I read seemed to center on rhetoric about Free Trade. The commentators all blandly accept without question the premise that off-shore automatically equals cheaper than “Made in the USA”. And that is just not so, in every case. It can be true, don’t dispute that but it is not necessarily true; your company must crunch the numbers to know. Labor is not the only product cost and certainly is not the largest.
A good mantra for moves is, “There will be costs, there may be benefits.”
The ReShoring Initiative lists hundreds of companies (https://drive.google.com/file/d/0B6EKVqt-UZHIbFpleGM5WlBSQmc/view) who have re-shored jobs to the USA, including 3M, ABB, Alcoa, Airbus, Amway, Apple, Boeing, Bausch + Lomb one of my alma maters. Baxter, Bayer, you get the idea. The number of companies and the many locations to which the jobs returned indicates that reshoring is a common strategy, even if not well publicized. It appears that sophisticated companies are watching closely their costs by product, location, specific circumstances; good work. That is what cost control is all about, not broad-brush but targeted.
My web site http://jacksonproductivity.com/offshore.htm is a comprehensive look at offshore cost. This blog will summarize the points, please look there for further detail.
How much will you save?
For most manufacturers, direct labor cost is typically less than 10% of the cost of goods sold. If you move to South East Asia where labor is one–third U. S. cost, you might save 7% of the cost of goods sold.
But cost per hour is not the only consideration; there are also benefits to workers, mandated holidays, housing, meals, transportation and 13th month benefits.
Next, consider the two types of labor variance, price and usage. Although your labor price may well go down, what about the usage variation and hours worked?
Move or acquire equipment to fit into someone’s building; startup costs and perhaps a stateside write-down. Import duty on manufacturing process equipment?
What will the learning curve be like for an offshore facility with respect to labor and material losses while it is still below steady state?
What will the steady state output be? What about utilization, efficiency, productivity, material usage? Don’t forget direct to indirect labor factors, expatriate workers and their costs, turnover rates, theft and security. How well will equipment be maintained; how much down time can be anticipated?
Materials tend to be priced at a worldwide level, and so may not vary much. (There are exceptions: raw sugar is priced much higher in the U. S.)
Will you pay import duties for raw materials?
Freight, insurance, product damage, obsolescence, tariffs, and brokers fees all contribute to the cost of the landed product. The cost of fuel to return the goods to the USA is low in 2016 but appears to be on the way back up.
Out of market conditions, Product recalls and Shipping Interruption
When a company has no products on the market, wage rate savings are quickly lost. Off-shore manufacturing introduces two factors that recent history tells us pull product off the market, recalls and shipping interruption.
Regulation within the United States, and Canada, is frequently the target of criticism. But realize how many recalls the regulation prevents. Count the number of recalls from foreign sources, and realize that a recall on your product washes out any possible labor savings.
United States and Canadian regulation does not allow the use of unauthorized materials; lead based paints and industrial grade chemicals in food products, and outlawed antibiotics for instance.
Interruption comes from production problems such as bird flu strains and SARS which have affected workers, shut plants, stopped production
Shipping just recently has been held up because of the Hanjin crisis and Long Beach labor dispute. Just-in-time factories normally operate on reduced inventories, but they don’t do well in earthquakes and epidemics.
My crystal ball is not clear enough to predict when and where in the world the next major health issue will arise, and the overall impact may well be much greater than missed shipments. But history of the first part of the 21st century indicates that North America will not be the center of the problem.
How will your U. S. operations change?
There is a long list of overhead costs that will occur as you operate offshore.
Cost to phase out a North American facility, relocate equipment and technology.
Executive and technician travel to support the offshore location as well as special mail and priority shipments of documents, models, specs and products. Modern communications technology can only do so much to mitigate distance, language barriers and the lack of face to face meetings.
Who in the organization will perform product design, new product development and engineering; what about the model shop and pilot plant? Remember, too, that new product transition is problematic even when headquarters is in the building next door.
Who will perform Human Relations oversight. Who will exercise quality oversight and how?
What about procurement and the quality of components? Will you see the product and its components for the first time when the product is in the stores or your warehouse?
Who will provide financial oversight within the new company? How about independent auditing? Although US auditors hardly have a pristine record, they do function under a (more or less) transparent regulatory regime?
Lastly, consider the political vagaries of U. S. tax law. What happens if the deduction of expenses to transfer jobs offshore is disallowed?
Can you continue your business strategy?
Can you practice Just in Time with product on the high seas, subject to port work stoppage? (Not just Asian; Long Beach had recent problems.) Have you planned additional inventory to cover transportation lead times? With extended inventories, will scrap and obsolescence costs increase?
What is the label “Made in the USA” worth to your company and to good will?
Can the new overseas employees and vendors purchase your products on par with your former employees and former vendors who may feel disinclined to buy more?
Will you be able to integrate vertically in an offshore setting as easily as you can here in the US?
How will your Time-To-Market change? Stateside manufacture offers the shortest time-to-market, from product design to prototype to test run to manufacture to ship to customer, especially considering reaction times to changes inherent in the process. If your product depends on style and design and quick reaction to customer whims, watch out.
For a company in apparel for instance where style and change are everyday issues, the advantages of vertical integration, lower shipping costs and the ability to advertise “sweatshop free” can be decisive in choosing a manufacturing site.
Off shore legal and political considerations.
Will practices and laws in the new country limit executive actions?
Can you eliminate jobs in the future? Move plants? At what cost? Emerging nations tend to be much more protective of jobs than the U. S. Even Italy is criticized for the high cost of eliminating jobs.
How will you establish and defend your real and intellectual property rights?
Is foreign ownership possible? Are you ready to partner with a local entity? Remember, disputes will most likely be adjudicated in the offshore country.
Is the local banking system healthy and vigorous?
Is the legal system friendly to investors?
Tax and Accounting issues
What are profit repatriation tax rules in both the host country and the U. S.?
Whose rules will apply to inter-company accounts such as transfer pricing?
Has there been approval by your CPA considering the Sarbanes – Oxley Act?
Are your ready and able to predict accurately and respond effectively to fluctuations in exchange rates that affect raw materials and operations? Do you plan to use common currency hedging strategies to minimize exposure? How much will it cost to be sure you obey rule #1, don’t run out of cash?
Although JPR declines on principal to aid clients seeking to move U. S. jobs offshore, JPR is pleased to advise companies seeking to open new and / or expanded operations in North America, and to return manufacturing.
Check out recent news about other companies who are re-shoring. Companies as varied as furniture manufacturing, small appliances, batteries, and steel have brought manufacturing back to the U. S. from China. Thanks for the time. Jack Greene 843-422-1298