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Onshoring: Is the Time Right For You?

Posted by David Caines


Onshoring for U.S. businesses appears to be gaining momentum. Though there is some disagreement about the origin and stability of stronger North American manufacturing; most experts agree it is happening. Regardless of the cause, the implications of onshoring for your supply chain can be profound.

The appeal of China used to be: limitless cheap labor, growing amount of engineers, fixed currency, inexpensive land, free infrastructure, and financial incentives.

Factors eroding China’s appeal are:

  • Rising wages - In the next five years, pay rates will rise on average by 18% to about $6.31 per hour.
  • Increasing Transpacific shipping rates -The doubling of bunker-fuel prices since early 2009 is causing rates to go up.
  • Climbing cost of land - National average for land in China is $10.22 per square foot. Average for land in US varies between $1.30 (Tennessee) to $7.43 (Alabama) per square foot.
  • Soaring utility rates - The price of operating cost (electricity) has surged by 15%. 74% of China’s electricity is consumed by the industrial sector.

Moving manufacturing outside of China to another Asian Pacifica Country (APAC) may result with lower worker productivity, corruption, and increased risk to personal safety. Additionally, overextended supply chains offshore can create problems: inventory expenses, quality control problems, unanticipated travel needs, and threat of supply chain disruptions due to port closures or natural disasters.

According to Jennifer Booton of Fox Business, “The reshoring move comes as average manufacturing costs continue to fall in the US. The Boston Consulting Group (BCG) estimates the (US) will be 8% lower than the UK, 15% lower than Germany and France, 21% lower than Japan, and 22% lower than Italy. China will still be 7% cheaper than the US, but that doesn’t include the high cost of shipping and duties/taxes.”

Manufacturing in North America gives U.S. businesses faster shipping times, allowing for a more rapid response to changing market conditions by either deploying products or modifying products more quickly. It is estimated North American manufacturers will decrease in-transit time for U.S. markets by up to 25 days when compared to Asian manufacturing locations.

David Luhnow from the Wall Street Journal states, “Mexico may already be a less-expensive place to make an array of products for the U.S. market, which estimates China's average manufacturing wage topped Mexico's this year (2012), when accounting for differences in productivity.”

Mexico could be an option with their close proximity to the US border, duty free trade status, and lower wages than their Chinese counterpart. Although the gains will be limited due to growing concerns over personal safety, skill shortages, and poor infrastructure.

The types of companies more likely to engage in onshoring manufacturing are those with products that are high-value, high-weight, high-volume, or quickly change with innovation (auto parts, construction equipment, and appliances). For instance, a major consumer goods manufacturer, which had been opening facilities in Mexico, is now building a plant in the southeastern United States.

Analysis of BCG by Harold Sirkin and Michael Zinser, and Douglas Hohner; concludes, “within five years the total landed cost of production for many products will only be about 10 to 15 percent less in Chinese coastal cities than in some parts of the US. (Essentially) the cost gap between sourcing in China and manufacturing in the US will be minimal.”

Shifting your supply chain to a new continent doesn’t happen without careful planning. Converting an Asian-based supply chain to one in North America requires a new strategic approach in order to realize the benefits. The opportunities for improved performance include the full range of supply chain interactions, such as inventory distribution systems, production distribution, and supplier networks. If each of these aspects of your supply chain are fully optimized, then the benefits attributable to moving manufacturing to North America can be much greater than simply reducing cycle times and inventory costs.

How do you determine if onshoring makes sense for your supply chain? This is where the science of supply chain management can be leveraged to maximum effect. Thanks to decades of innovation and education, the logistics industry can now provide solutions to supply chain management problems through problem solving and analysis that delivers world class results with high reliability. There are many well-established consultants and 3PLs who can responsibly guide you through the complexities of supply chain redesign.

We can’t predict how fast onshoring will grow and stabilize, but we do know many manufacturers we talk with are either planning or implementing onshoring strategies now.

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David Caines

Written by David Caines

David Caines is the Chief Operating Officer (COO) for Kenco


We'd like to hear about your supply chain and discuss ways Kenco can help address your business needs.

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