The True Cost of Offshoring

One way to critically analyze the benefits of bringing your manufacturing process back to the U.S. or Canada has been developed by The Reshoring Initiative. This non-profit, industry-led organization takes direct action by helping U.S. manufacturers realize that local production and sourcing often reduce their total cost of ownership of purchased parts and tooling. The Initiative also trains suppliers to demonstrate to these manufacturers the economic advantages of local sourcing.

Founder Harry Moser grew up experiencing the glory of U.S. manufacturing. His father and grandfather worked for the once sprawling Singer Sewing Machine Company factory in Elizabeth, New Jersey. Moser himself spent summer vacations during high school and college working at the plant. But now, like so many other manufacturing plants, the Singer factory is long gone, and Moser decided to start the Reshoring Initiative to show companies that U.S. manufacturing is still profitable.

Cost is More Than Labor and Materials

The Total Cost of Ownership (TCO) Estimator is a free online tool created by the Reshoring Initiative that helps manufacturers get a more accurate picture of the financial ramifications of a decision to move manufacturing offshore. “We ask them to think about the total cost, and when they do that, they find that they should have looked at the total cost in the first place, and maybe a fraction of what left shouldn’t have gone. The offshore labor costs have gone up, especially in China, and the material cost is always about the same. So if the labor cost is converging enough on the cost of labor in the U.S., when you look at total cost, it will soon make more sense to make it here rather than make it there.”

Using this ownership model enables aggregation of all cost and risk factors into one cost for simpler, more objective decision making. “Our analysis of data suggests that 25% of what has been off-shored should come back if companies use the TCO instead of price for sourcing decisions,” said Moser. “Imagine a valve manufacturer. To the extent they’re buying castings, forgings, molds or whatever component offshore, we encourage them to use the calculations. They could well find that they will be overall more profitable if they bring some of that back.”

Using the TCO is free, and confidential. While the Reshoring Initiative retains data for statistical purposes, the system does not ask for the company name. Moser gave this example of how the data is used. “We took a sample of companies comparing costs of a U.S. source vs. a Chinese source. When considering only price, the U.S. price was 142% higher. That’s a big difference. But when we looked at the total cost, the average cost was only 23% higher. Other studies have shown that because the Chinese labor rates expressed in dollars are going up 20 to 25% per year, much faster than productivity, this difference over time will grow. More work can competitively come back here.”

Selling American

Moser believes valve manufacturers could use the calculator in sales. He explained. “So when sales people selling to somebody in the oil field or refinery, and they’re competing with an offshore source of valves, they could also encourage the customer to use the TCO and make the decision not based just on price, but based on total cost and considering all of the implications of total cost in comparison. So some companies can use the TCO in making supply or sourcing decisions, and some as a sales tool, some both.”

According to Moser, so far, smaller companies are responding best to the notion of reshoring because they are domestically focused and therefore their success depends on a strong U.S. economy. “The larger companies, like GM and GE and others, now, 50, 60, even 70% of their sales are offshore and they’re not so dependent on U.S. economy. They depend on the world economy and therefore they are not as emotionally and economically tied to the success of the U.S. economy. Also, smaller companies are more likely to use this as a sales tool.”

270 people have used the TCO system online, and some say they’re doing real analysis, actually making decisions based on the tool. Others are simply experimenting. Moser encourages anyone to experiment, and to use the tool even for theoretical purposes.

Research

“We encourage your VMA members to contact us, to use the TCO,” said Moser. “It’s free, and if they want more direct help, they can come to me. We can provide help for sourcing and selling.” There is also an extensive library on the site, containing articles on re-shoring. Some have real cases, others are analytical discussions, so if someone is looking for information on particular industries or in particular parts of the countries, there is a search function that will provide quick access to the information.

Moser also encouraged manufacturers to submit case studies. “Early in June, there will be on the website a standardized template, where manufacturers can fill in the blanks. The valve manufacturer could then use this on its own website, and the end user could also put it up. If we got hundreds of these each posted in 3 or 4 places, when the biggest companies go through the internet, they will see that everybody’s reshoring. We’re working hard to bring back manufacturing to the U.S.”

Harry Moser has a 45 year career in manufacturing and is Founder and President of the Reshoring Initiative. Moser was an active participant in President Obama’s January 2012 Insourcing Forum and testified at the March 2012 Congressional hearing on reshoring and manufacturing.

Kate Kunkel is Senior Editor of Valve Magazine. Reach her at kkunkel@vma.org.