Reshoring is a red herring

Google the term “reshoring” and you’ll find eager articles from the Idaho Statesman, Cleveland Plain Dealer, Milwaukee Sentinel and USA Today. All point to trends that are well understood, including the rising cost of labour and overheads in China, volatility in energy prices and increasing risks attached to massively extended supply chains. The implication that American citizens are supposed to embrace is that manufacturing jobs will soon be returning to their country. According to Harry Moser, founder of the Reshoring Initiative and a fervent cheerleader for the movement, 50,000 US jobs have already been created with many more on the way. The news looks good to a job-hungry American public.

Not as simple as it sounds

It is good, but unfortunately it is also misleading in two important ways. First is by creating a false sense of security in anyone (unions, government, regular working folks) hoping that “good manufacturing jobs” will once again bless the nation with middle-class lifestyles in return for a willingness to punch in on time and put in the hours. The Americana of high-school graduates working their way towards a nice ranch house and eventual retirement with benefits will never return. Those jobs were a slice in time reflective much more of the US monopoly on economic power after World War II than of any sustainable underlying business model. Jobs that are returning now will be impossible unless the workers holding them are well educated and prepared to keep on learning indefinitely. The bar is much higher now than it was in 1955. The second misleading thing about reshoring is the implication that supply chain strategists are about to reshuffle the deck in terms of low-cost country sourcing. Interviews with a couple of dozen senior supply chain executives around this topic over the past few weeks suggest that most are several years into sophisticated programmes that look at manufacturing holistically. Chinese manufacturing is still cheaper for many classes of product, plus capabilities and capital in many cases overwhelm the alternatives. One such example (see the Wall Street Journal, 15-17 March) is BYD Electronic, a Shenzhen-based contract manufacturer that reportedly will be manufacturing Hewlett-Packard’s new Android tablet. HP has plenty of experience in China and might be expected to know better than to double-down in the country, but instead it sees a winning deal. So does Warren Buffett who owns 10% of BYD. Manufacturing is still increasing in China even as some comes back to the US.

It’s still good news

Nostalgia aside, the return of manufacturing to the US is real. Caterpillar, General Electric, Whirlpool and a host of other big-name companies are making the move. Part of the reason is shifting total cost calculations away from low-cost countries, but the more important reasons are deeper. Proximity to markets and channels speeds the rate at which manufacturers learn what customers really want. This works wonders for consumer products companies, for instance, which synchronise production with retailers’ promotional activities. It also helps capital equipment manufacturers that often configure or engineer to order big-ticket items that require extensive after-sales service. Zara in Spain and New Balance in the US prove that even apparel can benefit from producing close to customers. On the other hand, proximity to R&D, engineering and product development clearly helps debug the scale-up of new products. Intel has never forgotten this fact and has the technology and supply chain results to prove it. Stories from those whose manufacturing and design operate half a world away put teeth to this argument, including the agonising image of grainy videoconferences in broken English trying to resolve yield problems while production ramps up. Among the most interesting metrics not discussed in the debate about reshoring is engineering change management (ECM) cycle time. As a classic metric underpinning excellence in new product development and launch, ECM cycle time may be the biggest improvement won by companies that bring manufacturing back to their home bases. The real payback here, as in the case of getting closer to customers, is accelerated organisational learning.

Data from last year’s Chief Supply Chain Officer Survey (shown in the chart above) points to the obvious, but often overlooked, conclusion that supply chain creates value in more ways than just driving down costs. Reshoring is real and it is good, but not because rising wages in China make for cheaper production in the US or other developed nations. It is good because the factory may once again be just down the hall from engineering and sales.

Organisational and individual learning will be more important than ever.

Kevin O’Marah
Chief Content Officer
SCM World

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