Offshoring: What’s the Total Cost of Ownership?

Reshoring Initiative urges companies to reevaluate production strategies

Published: Wednesday, September 21, 2011 - 16:08

The nonprofit Reshoring Initiative enables U.S. companies to close the cost gap with offshore manufacturing by helping each company understand the true cost of offshoring—as well as the total cost of ownership.

When they combine reshoring with cost-saving and customer value-enhancing techniques such as lean, quick response manufacturing, theory of constraints, and design for manufacture and assembly, companies discover they can improve their customer responsiveness, product innovation, and profitability.

Boston Consulting Group and Accenture recently reported that Chinese net manufacturing costs are rapidly converging on U.S. costs. For this economic trend to have a rapid impact on the behavior of major U.S. companies, the companies will have to calculate their total cost of ownership.

Unfortunately, most companies’ calculations are rudimentary, mainly comparing prices rather than the entire cost of offshoring. In fact, Archstone Consulting’s 2009 survey showed that 60 percent of manufacturers ignore 20 percent or more of the cost of offshoring. (Accenture’s 2011 report raised the percentage to 61 percent.) These companies are offshoring more than what is in their own self interest.

To help companies make better sourcing decisions, the Reshoring Initiative offers free total cost of ownership (TCO) estimator software. With clear evidence of the fragility of global supply chains, Chinese wages rising rapidly, the U.S. dollar declining, and oil prices soaring, this is the perfect time for U.S. companies to reevaluate offshoring strategies and bring some of the sourcing home.

Part of the total cost of ownership from offshoring includes how it negatively affects innovation. Professors Gary Pisano and Willy Shih of Harvard Business School recently reaffirmed that U.S. innovation declines when manufacturing is offshored because the partnership of manufacturing and engineering is weakened. Keeping manufacturing in the United States also reduces the likelihood that engineering is offshored.

The Reshoring Initiative offers a nonprotectionist, efficient way to reduce our imports, increase our net exports, and regain manufacturing jobs. To help companies make better sourcing decisions the initiative provides:
• Free TCO software that helps calculate the true impact that offshoring has on profit and loss
• Publicity to drive the reshoring trend
• An online library of 98 articles about successful reshorings
• Access to NTMA/PMA Contract Manufacturing Purchasing Fairs to help find competitive U.S. sources

An integrated five-step Illinois Reshoring Initiative has been launched to demonstrate the initiative’s effectiveness. One step is the NTMA/PMA Contract Manufacturing Purchasing Fair where manufacturers can cold-find competitive U.S. sources, which can improve companies’ profitability while bringing “permanent” manufacturing jobs back at a cost of $1,000 each, less than 1 percent of the cost of one-year stimulus program jobs.

The current U.S. trade deficit is about $550 billion per year. Balancing the trade deficit by reshoring will:
• Bring back about 3 million manufacturing jobs and 4 to 5 million multiplier-effect jobs for companies that supply materials and services —at least 7 million jobs total
• Reduce unemployment from about 9 to less than 5 percent
• Reduce federal, state, and local budget deficits by increasing tax revenue and reducing unemployment and other expenditures
• Strengthen defense industry capability

To help the reshoring trend, consider the following:
• Large companies, please reevaluate offshoring decisions
• Suppliers, try using the TCO estimator to convince customers to reshore
• Ask for help from the initiative, propose local reshoring initiatives, and send in successful reshoring cases to be publicized.

The Reshoring Initiative is supported by the Association for Manufacturing Technology, Sescoi, GF AgieCharmilles, the Association for Manufacturing Excellence, the National Tooling and Machining Association, BIGKaiser, Mazak, TCI Precision Metals, Science of Business, Doosan, the Swiss Machine Tool Society, Hand Tools Institute, IBS, and the Steel Founders Society of America.

About The Author

Reshoring Initiative

The objective of the Reshoring Initiative is to help U.S. companies find competitive U.S sources and to increase the reshoring trend. The move to reshore production (also known as homeshoring, onshoring, backshoring, and repatriating) has grown due to higher transportation /fuel costs, higher wage rates, and reject rates. The Total Cost of Ownership (TCO) Estimator software—which is free—helps OEMs and manufacturers compare the true total cost of ownership. The Reshoring Manufacturing Initiative website consolidates reshoring materials: the TCO Estimator, webinars, articles, reports, and links to help manufactures and OEMs make the best sourcing decision.