by Renaud Anjoran
Recently there has been a lot of talk about a “reshoring” movement from China to North America.
The BCG announced last year that more than a third of large American manufacturers (more than $1 billion in sales) are considering reshoring production from China.
More recently, the “Reshoring Initiative” claimed that 50,000 jobs have been reshored since 2010. I haven’t found any details about their calculation method, so I don’t trust that number.
Is it really happening?
Or is it simply a few anecdotes that are amplified by journalists in search of a new trend?
Several of my clients manufacture both in the US and in China. They make large series that can be highly automated in the US, and smaller runs that require more manual work in China, for example. Or they produce on the East Coast, and they supply the West Coast with made-in-China goods, simply because of trucking costs. I haven’t seen vast changes in their strategies lately.
A few weeks ago, I talked about this with Steve Dickinson, a lawyer who works with lots of American SMEs sourcing in China. He told me he didn’t see any evidence of a strong reshoring trend.
I have no doubt that higher labor costs in China, coupled with more expensive freight, will drive reshoring. Not right now, but probably in a few years.
The truth is, many American and European companies would do better if they produced much closer to their market.
The authors of Lean Thinking propose to apply the following mathematical formula to determine the exact price of products made in Asia and sold in developed countries:
- Start with the piece part cost of making your product near your current customers in high-wage countries – that is: the US, Western Europe, Japan. Compare this number with the piece part cost of making the same item at the global point of lowest factor cost (probably dominated by wage cost). The low factor cost location will almost always have a much lower piece part cost.
- Add the cost of slow fright, to get the product to your customer.
You’ve now done all the math that purchasing departments seem to perform. Let’s call this “mass production math”. To get to “lean math”, you need to add additional costs to piece part + slow fright cost, in order to make the calculations more realistic.
- First, add the overhead costs allocated to production in the high-wage location — costs which usually don’t disappear when production is transferred. Instead, they are re-allocated to remaining products, raising their apparent cost.
- Then add the cost of the additional inventory of goods in transit over long distances, from the low-wage location to your customer. Then, add the cost of additional safety stocks, to ensure uninterrupted supply.
- Next, add the cost of expensive expedited shipments. You need to be careful here, because the plan for the product in question typically assumes that there aren’t any expediting costs, when a bit of casual empiricism will show that there almost always are.
- Then add the cost of warranty claims, if the new supplier has a long learning curve.
- Next, add the cost of engineer visits, or of a resident engineer at the supplier, to get the process right so the product is made at the correct specification with acceptable quality.
- Then add the cost of senior executive visits, to set up the operation, or to straighten up relationships with managers and suppliers operating in a very different business environment. Note that this may include all manner of payments and considerations, depending on local business practices.
- Then add the costs of out-of-stocks and lost sales, caused by the long lead times to obtain the correct specifications of the product, if demand changes.
- Now add the cost of remainder goods, or of scrapped stocks, ordered to a long range forecast and never actually needed.
- Then add the potential cost, if you are using a contract manufacturer in the low-cost location, of your supplier quickly becoming your competitor.
This is becoming quite a list! And note that these additional costs are hardly ever visible to the senior executives and purchasing managers who relocate production of an item to a low-wage location based solely on piece part price + slow freight.
However, “lean math” requires adding three more costs to be complete.
- First, currency risks. These can strike quite suddenly when the currency of either the supplying or the receiving country shifts.
- Second, country risk. These can also emerge very suddenly when the shipping country encounters political instability or when there is a political reaction in the receiving country, as trade deficits and unemployment emerge as political issues.
- Third, connectivity costs. These are the many costs in managing product hand-offs and information flows in highly complex supply chains across long distances, in countries with different business practices.
This formula seems pretty well thought out.
What do you think?