Posted April 21, 2020

What the Rise of Reshoring Means for Your Bottom Line

The Changing Geography of Manufacturing

Overseas production used to guarantee bottom line savings for North American companies. Unfortunately, that's no longer the case.

To adapt to the rapid economic changes expected over the next decade, successful enterprise companies will need to re-evaluate their global manufacturing value chain.

What's driving this seismic change? And how will domestic operations adapt to demands of modern manufacturing?

In this analysis, we'll explore:

  • The shifting manufacturing landscape
  • Challenges facing revitalized North American manufacturing
  • The era of Manufacturing as a Service (MaaS)
  • The future of manufacturing

The Shifting Manufacturing Landscape

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North American manufacturing has been steadily declining for over 40 years. Companies looking to reduce costs have shifted production offshore, mostly driven by the low cost of labor in manufacturing countries like China, Malaysia, and Taiwan.

But this is quickly changing. There are several issues prompting sourcing professionals to take a closer look at their company’s sourcing strategies:

  • Rising labor costs in Asia
  • Technological advancements
  • Disruptions from regional and global health crises
  • The potential for intellectual property theft
  • Changing political climates with uncertain trade policies

Many are finding it more efficient to bring large portions of their manufacturing back to North America. That means that jobs that were once sent overseas are now returning home.

This is good news for the North American manufacturing sector and our economy as a whole. Increased domestic competition will drive innovation and process improvements—changes that will benefit our manufacturing sector for decades to come.

That said, domestic manufacturing still has some challenges ahead. Decades of offshoring have taken their toll on our production capabilities. Manufacturers, particularly those in advanced industries, are having a hard time finding skilled labor. And the aging workforce will only widen the skills gap.

The capital investment needed to bring manufacturing back home can also be overwhelming. For many organizations, manufacturing in-house is simply cost prohibitive.

As the financial realities of manufacturing in North America change, outsourcing their domestic manufacturing can help companies succeed in this shifting landscape.

Measuring the Cost of Change

Cheap labor was the driving force behind offshore manufacturing. Countries like China and Taiwan became the world’s factories by offering an economic alternative to highly paid domestic workers.

But the math has changed.

The Chinese economy has changed significantly over the last decades, driven in part by the influx of manufacturing from North America. China’s economic growth has led to better representation and rising wages for Chinese workers, eroding the “cheap labor” competitive advantage. From 2008 through 2018, average worker wage growth in China grew 22%. In 2017 alone, emerging market wages grew over 10 times faster than wages in G20 countries (4.3% compared to 0.4%).

Overseas manufacturing is changingBeyond wages, other factors can influence the total cost of sourcing overseas. Today, sourcing professionals must weigh the costs and risks associated with:

  • Shipping and freight
  • Tariffs
  • Warehousing
  • Potential shipping delays
  • Capital tied up in safety or obsolete stock

As a result, more North American companies are transitioning away from offshore manufacturing, seeking sourcing partners back in North America. This isn’t a short-term reaction to labor costs, but a long-term strategy to build a more competitive supply chain and mitigate risk.

The Culture of Change

We live in unpredictable times. Trade wars and tariffs, political wrangling, environmental impact, unforeseen global events like the coronavirus—the number of external factors that can impact your supply chain are only increasing.

The effort to rebalance trade between China and the US has affected the global manufacturing sector. American tariffs on imported goods are driving up prices for businesses that rely on offshore manufacturing. These organizations need to consider the impact of these policies on their current and future bottom lines.

Some businesses are reconsidering the location of their operations to help adapt to the changing manufacturing climate. According to recent research conducted by the American Chamber of Commerce in China, approximately 39.7% of American companies surveyed are either considering relocating or have already relocated their manufacturing facilities outside of China. Though only 6% have identified the US as their new hub for manufacturing, that number is likely to increase, especially once we overcome our technological and skills challenges.

In many sectors, increased awareness of environmental impact and working conditions are driving consumer preferences toward ethically sourced products. And while an emphasis on fair trade, organic, and free-range food has had the greatest impact on the grocery industry’s supply chain, durable goods aren’t far behind.

The coronavirus outbreak of 2020 demonstrates how global events directly impact sourcing and manufacturing. As the pandemic escalated, governments took drastic steps to halt the spread of the disease. Entire cities were shut down. Workers were asked to stay at home. Ports halted incoming and outgoing shipments. This is exactly the kind of unexpected incident that organizations fear—one that has a severe impact on shipping times, supply chains, and bottom lines.

Made in North America: The Challenges Facing Revitalized Domestic Manufacturing

Research by The McKinsey Global Institute concluded that US manufacturing could create an economic windfall worth $530 billion by 2025. While the report paints an optimistic picture for the future, it cautions that the industry will need to address the issues that are currently holding it back.

Mind the Skills Gap

There’s a growing skills gap in North America. Current estimates suggest as many as 2.4 million manufacturing jobs may go unfilled between now and 2028. This shortage is likely to have the greatest impact on high-skill sectors like aerospace, defense, and medical.

That gap will only widen as more workers retire. The median age of the manufacturing workforce is over 45, and current estimates suggest that 10% of the industry’s workforce will retire over the next five years.

This poses a significant challenge for organizations looking to reshore their manufacturing. They’ll need to invest heavily to train the next generation
of workers, collectively footing a $26.2 billion-a-year bill in the process. In the meantime, the scarcity of qualified workers means that competition for highly-skilled manufacturing professionals will be fierce.

The Changing Role of Technology

A lot has changed since the industry’s heyday in the 1960s and 70s. Improved efficiency and capacity have come with the cost of greater complexity.

There are now more ways than ever to manufacture a part, and a broader range of materials to choose from. With this growth comes an ever- expanding knowledge base of capabilities, material properties, specialties, and dependencies related to materials, processes, and machinery.

In other words, designing parts and manufacturing parts are now two distinct skill sets. For organizations looking to reshore their operations, keeping pace with the continuous improvements to hardware, firmware, software, and best practices can be daunting.

Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, refers to this blurring of lines between the physical and digital world as the "fourth industrial revolution":

“The speed of current breakthroughs has no historical precedent. When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. Moreover, it is disrupting almost every industry in every country. And the breadth and depth of these changes herald the transformation of entire systems of production, management, and governance."

Even modest in-house machining capabilities with a single 5-axis mill can easily cost over $350,000 per year—before even making your first part. A large-scale machine shop, with five 5-axis mills, two 3-axis mills, and two lathes with live tooling, can cost upwards of $2,000,000 annually to operate. Just over half of that goes into capital expenses, including the machines and the space to set up the operation.

When you compound the high operational costs with rapidly changing technology, it’s easy to see why bringing manufacturing in-house may not be a viable option for most companies.

The Era of Manufacturing as a Service (MaaS)

vent-sleeve-drawingMaaS combines external manufacturing engineers, outsourced production, and Just in Time (JIT) inventory management to reduce the time and cost needed to produce quality products.

MaaS partners can help companies of all sizes scale their production capabilities, accelerate product development, and successfully bring new products to market.

Some organizations leverage MaaS marketplace platforms for their production speed and variety of service options. Others strive to form a deeper relationship with a MaaS partner to improve quality, consolidate logistics, and reduce total cost of ownership.

MaaS companies typically work with a broad range of industries, applications, and production methods. They apply their vast experience to complement the design-focused approach used by original equipment manufacturers (OEMs), product designers, product engineers, and design firms. This offers their clients the best of both worlds—well designed products that are efficient to manufacture and deliver.

Because MaaS vendors work with hundreds of clients, they are able to maximize the return on their own capital equipment investments, while still offering services at a lower cost than an in-house operation. They can also invest in the training, technology, certifications, and continuous improvements needed to stay on the cutting edge of the industry.

The Benefits of MaaS

Faster cycle times

Domestic production turnaround is far faster than with overseas manufacturing. Rapid prototyping also dramatically reduces cycle times, helping you get to market more quickly.

Higher Quality

MaaS providers like Plethora leverage state of the art equipment, the ability to scale production, access to top talent, and ongoing training to ensure higher quality than with in-house manufacturing.

Lower Costs

With no overhead tied up in their workforce, facilities, or machinery, many organizations find it more economical to outsource domestic manufacturing rather than handle their production in-house.

Just In Time (JIT) Manufacturing

Overseas manufacturing requires additional shipping, supply chain management, and warehousing costs. With JIT inventory management, MaaS providers help reduce excess inventory by producing goods as they’re needed. JIT is lean, low risk, and eco-friendly. It also keeps production runs short and helps organizations preserve more capital to invest elsewhere.

Custom Build For Complex Products

Simple parts produced in high quantities and with few changes over their lifecycle are often more economical to produce overseas. But for technical parts with complex specifications and multiple iterations over the course of the product lifecycle, outsourced domestic production provides far greater flexibility and efficiency.

The Future of Manufacturing

The manufacturing landscape is changing. As the cost of overseas labor, international tensions, and supply chain risk continue to increase, there’s no denying that domestic manufacturing is poised for major growth over the next decade.

The North American manufacturing industry of 2030 will be unrecognizable compared to the domestic heyday of the 1960s and 70s. In-house operations will no longer be a viable option for many organizations, and mass production
as we know it will be a thing of the past. The future of manufacturing will demand greater agility, customization, technological proficiency, and supply chain efficiency than ever before.

Navigating this changing manufacturing landscape will require new ways of working—and finding partners who can help you plot a course to success.

Plethora was custom-built to make modern manufacturing accessible to companies of all sizes. Founded in 2012 and with locations on both coasts, Plethora’s MaaS-driven business model has become the go-to resource for organizations across a variety of industries, including robotics, automotive, aerospace, medical devices, and consumer packaged goods.

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Topics: Manufacturing, sourcing

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