Reshoring

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Reshor ing

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Welcome home: Why companies are br inging business back to the U.S.

There’s no place like home. That’s what companies like Apple®, Ford®, Whirlpool®

and others are discovering. The trend is a growing number of organizations

clicking their heels and bringing overseas operations back to the U.S. According

to Harold Sirkin, a senior partner from the Boston Consulting Group®, in the

upcoming years 20 to 25 percent of products that were sent offshore will

eventually return to the United States.1 Even more telling, research shows that

more than half of executives at manufacturing companies with sales exceeding

$1 billion either plan to, or are thinking about, bringing overseas operations

back to the United States from China. Since 2012, there’s been roughly a 15

percent increase in companies that return to the U.S.2 It’s a global trend—one

study found that in the past three years a surprising one in six companies

from the United Kingdom returned home.3 The practice is called “reshoring,”

and more and more corporations are putting out welcome mats for foreign

operations to return home.

Manufacturing.Net® went so far as to call 2013 “the year of reshoring.”4

According to the global consulting firm A.T. Kearney®, there are a number of

macroeconomic factors that tip the balance in favor of domestic manufacturing.

Some of the reasons cited for the shift include labor rate inflation and lower

energy costs in the United States.5 A few years ago, the Obama Administration

launched a “Make it in America” campaign designed to make manufacturing in

the U.S. more appealing. The idea is to shift manufacturing back home to create

jobs and increase the competitiveness of the United States on the international

stage. And since more than 500,000 U.S.-based manufacturing jobs have been

added since 2010, one could say the strategy is working.6

What is the root cause of this movement? For one, it’s not as cheap as it used to

be to go global. Overseas costs for labor, distribution and manufacturing are on

the rise and many companies find that it’s not as economically beneficial as it once

was to do business abroad. In China, for example, wage and benefit increases are

1 Northam, Jackie. “As Overseas Costs Rise, More U.S. Companies Are ‘Reshoring’” NPR. NPR, 27 Jan. 2014. Web. 16 Apr. 2014. <http://www.npr.org/blogs/parallels/2014/01/22/265080779/as-overseas-costs-rise-more-u-s-companies-are-reshoring>.

2 Schwartz, Nelson. “More Manufacturing Coming Back to the U.S.” The New York Times, 23 Sept. 2013. Web. 16 Apr. 2014. <http://economix.blogs.nytimes.com/2013/09/23/more-manufacturing-coming-back-to-the-u-s/?_php=true&_type=blogs&_r=0>.

3 “Why Are UK Firms Bringing Manufacturing Back Home?” The Telegraph. Telegraph Media Group, 01 Dec. 2003. Web. 16 Apr. 2014. <http://www.telegraph.co.uk/finance/jobs/10671738/Why-are-UK-firms-bringing-manufacturing-back-home.html>.

4 Hans, Joel. “Top 13 In 2013; A Year Of Re-shoring.” Manufacturing . Net. N.p., 19 Dec. 2013. Web. 20 Apr. 2014.5 Ibid.6 Ibid.


15 to 20 percent annually, on average.7 While companies used to enjoy a labor

cost advantage of about 55 percent, by 2015 economists believe this number will

decline to just 29 percent.8

Global sourcing has also declined because hidden costs are taking a toll on

profitably, possibly because companies didn’t do their homework in advance. In a

Forbes® article, Steve Denning called global outsourcing “the most short-sighted

business decision in history.”9 Estimates show that 60 percent of companies that

embraced offshore manufacturing didn’t conduct a full cost savings analysis,

instead they focused only on reduced labor rates.10 Now companies are learning

that other costs outweigh labor savings and are returning to home base.

This Blue Paper® examines the reshoring phenomena, starting with an

explanation of why global sourcing is being reevaluated at some organizations.

It will also summarize some of the benefits you might realize if you pull business

back home. Finally, it will help companies decide whether or not reshoring is the

right move for the organization and identify key questions to explore. While

a welcome home party might be in your future, before you make a move it’s

important to look at the bigger picture and weigh the risks as well as rewards.

Reshor ing—why the shift?

To be clear, global outsourcing is not dead. In fact, global outsourcing will

continue; some Asian countries are even expected to see a surge in demand.

A 2012 study by research firm Oxford Economics and co-sponsored by Towers

Watson & Co. projects that during the next five to 10 years demand for industrial

talent will rise 37.7 percent and demand for business services workers will grow

40 percent in developing Asian countries.11 Additionally, some companies will

maintain global outsourcing as they expand domestic operations. Caterpillar®, for

example, opened a new factory in Texas, but at the same time announced it will

expand research and development activities in China.12

7 Frauenheim, Ed. “Bringing the Jobs Back Home: How ‘Re-shoring’ Is Coming to America.” Bringing the Jobs Back Home: How ‘Re-shoring’ Is Coming to America. N.p., 7 Feb. 2013. Web. 16 Apr. 2014. <http://www.workforce.com/articles/bringing-the-jobs-back-home-how-re-shoring-is-coming-to-america>.

8 Frauenheim, Ed. “Bringing the Jobs Back Home: How ‘Reshoring’ Is Coming to America.” Bringing the Jobs Back Home: How ‘Re-shoring’ Is Coming to America. N.p., 7 Feb. 2013. Web. 16 Apr. 2014. <http://www.workforce.com/articles/bringing-the-jobs-back-home-how-re-shoring-is-coming-to-america>.

9 Denning, Steve. “Why Apple And GE Are Bringing Back Manufacturing.” Forbes. Forbes Magazine, 07 Dec. 2012. Web. 16 Apr. 2014. <http://www.forbes.com/sites/stevedenning/2012/12/07/why-apple-and-ge-are-bringing-manufacturing-back/>.



12 “Coming Home.” The Economist. The Economist Newspaper, 19 Jan. 2013. Web. 16 Apr. 2014. <http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united>.


That said, the challenges encountered over the past few years suggest global

outsourcing isn’t always what it’s cracked up to be, forcing companies to exercise

greater caution.13 As noted, energy and labor are two costs that have increased

in the past few years. As the global economy took a downturn, natural resources

became more expensive abroad, thus reducing cost savings. Oil prices, for

example, are now three times what they were in 2000 and it is often cheaper

in the U.S. Likewise, natural gas is actually 75 percent cheaper in the U.S. than

China.14 In many cases, companies find that domestic energy costs are lower

than those abroad.

As previously mentioned, labor costs have also increased abroad, particularly in

China. Chinese labor costs are five times what they were in 2000 and are expected

to continue rising.15 Although reduced labor costs made outsourcing attractive in

early years, today, low-cost labor is not as prevalent due to greater attention to

global labor laws and an emphasis on fair wages.

Still, there are other reasons why companies are reshoring. Companies are

discovering that the virtual workplace has its weaknesses and that global

collaboration has limits. At some organizations, the cultural challenges of

outsourcing were overwhelming and required the constant presence of managers

to keep operations on task. Managers, in turn, were forced to increase the

amount of travel required to make the partnership work, and that had a greater

impact on finances and resources than anticipated.

What else changed? Over the years, recalls and product safety questions led

many consumers to crave the “Made in the U.S.A.” label, and that impacted

some decisions to reshore. As the desire to purchase American-made products

increased, companies decided to increase domestic presence, which also had the

added advantage of being closer to their customer base. Some companies find

that being closer to the customer enables greater product customization as well

as supply chain improvements.

Finally, some manufacturers have ethical motives for reshoring, such as reducing

carbon footprints, creating domestic jobs, and reducing concerns over foreign

labor conditions. In the United States, new legislation and incentives are making

it even easier to return and an added bonus is that it can reflect positively on

your organization.

13 “Reshoring’s a Reality: Manufacturing’s Coming Back.” Design News. N.p., 4 Feb. 2014. Web. 16 Apr. 2014. <http://www.designnews.com/author.asp?doc_id=271389>.


15 Ibid.


Reshor ing success stor ies

If you’re looking for a reshoring success story, look no further than General

Electric®. So far, the company has invested $800 million to bring back operations

to the U.S.16 Specifically, GE® returned Chinese manufacturing operations for its

hybrid water heaters to its Kentucky-based factory, despite earlier beliefs that it

would be more expensive. But after doing the math and factoring in rising wages

and transportation costs, the company decided to bring production back

to the U.S.

To do this, GE repurposed one of its existing factories to accommodate a water

heater assembly line. At the same time, the company developed new, lower

wage structures for employees and relied on input from experts to reduce

waste and time to market. Overall, the effort resulted in lower transportation,

material and labor costs, plus significant quality improvements. Before

reshoring, product delivery time took a minimum of four weeks by boat

from China and one week to clear customs. Now, the total time from factory

to warehouse is just 30 minutes.17 Even energy efficiency improved, and in

the final analysis, whereas the China-made product retailed at $1,599, the

Kentucky-made product retailed for just $1,299. If you do the math, that adds

up to an impressive 20 percent cost reduction.18

GE is not the only company reducing overseas operations. Last year, Apple® CEO

Tim Cook announced it will resume domestic manufacturing across multiple

locations and will spend $100 million to bring back existing Mac® lines to

the United States.19 In 2013, Walmart® announced it will increase sourcing of

American-made products by $50 billion over a 10-year period by purchasing goods

already made in the U.S. and helping vendors bring back overseas production.20

One of Walmart’s largest bicycle suppliers, Kent International®, moved operations

to South Carolina and anticipates it will assemble half a million bikes annually by

2016, creating 175 domestic jobs along the way.

In another example, HCL Technologies® announced this year that it will increase

the U.S. workforce closer to its Sunnyvale, California headquarters. The company

reported that a sense of responsibility to U.S. communities impacted the decision.

Prithvi Shergill, HCL’s chief human resources officer said: “We are committed to

16 Ibid.17 Denning, Steve. “Why Apple And GE Are Bringing Back Manufacturing.” Forbes. Forbes Magazine, 07 Dec.

2012. Web. 16 Apr. 2014. <http://www.forbes.com/sites/stevedenning/2012/12/07/why-apple-and-ge-are-bringing-manufacturing-back/>.

18 Ibid.19 Ibid.20 Huetteman, Emmarie, and Elizabeth A. Harris. “Walmart Fund to Support U.S. Manufacturing.” The New York

Times. The New York Times, 23 Jan. 2014. Web. 21 Apr. 2014. <http://www.nytimes.com/2014/01/24/business/walmart-creates-10-million-fund-to-stimulate-american-manufacturing.html?_r=1>.


expanding local talent pools in the communities where we operate to ensure

we staff the right skills, in the right place, at the right time, for the right cost.”21

Shergill also reiterated that the plan was part of a socially responsible business

model that is more sustainable long term.

Both big and small companies are reshoring with success. National Cash Register®

(NCR®) moved back to Georgia, while the smaller company Farouk Systems®

moved 1,500 jobs back from China to the U.S.22 Overall, reshoring examples are

abundant and telling—companies are not only coming home, but are finding

success on their journey.

Should you put out the welcome mat? Reshor ing benef i ts

A number of factors make reshoring an attractive option. According to the

consulting firm A.T. Kearney, some of the benefits of reshoring may include:

•improved delivery time,

•reduced freight costs,

•increased customer responsiveness,

•lower wage costs,

•improved quality controls,

•reduced risks to intellectual property,

•improved productivity,

•enhanced innovation, and

•better inventory controls.23

Some of these potential benefits are simply a reflection of proximity and math.

It’s a not rocket science; moving operations close to home can obviously reduce

delivery times. Accordingly, 34 percent of companies that reshore cite improved

delivery time as a major benefit as well.24 Plus, when operations are closer

there’s an obvious reduction in freight and delivery costs because products don’t

need to travel as far. Likewise, customer responsiveness might improve when

manufacturing isn’t separated by oceans. Moreover, as already mentioned, there

may be an opportunity to reduce labor costs by moving home, since labor prices

abroad continue to rise.


22 “A New Chinese Export - Jobs.” Time, 12 Apr. 2012. Web. 25 Apr. 2014. <http://business.time.com/2012/04/12/a-new-chinese-export-jobs/>.




But what about the other benefits if you reshore? Some claim that by reshoring,

companies are able to institute higher quality control standards and reduce

intellectual property risks. Bringing operations home also enables companies to

manage the supply chain. Tighter, leaner supply chains are not easily obtained

when manufacturing plans are thousands of miles away.

Reshoring is also good for domestic economies. Not only does it bring jobs back to

the U.S., but it can stimulate state and local budgets. It can lead to growth in the

manufacturing workforce, promoting both academic and recruiting opportunities.

Ready to c l ick your heels and head home? How to determine i f reshor ing is the r ight move.

If your company is considering reshoring you have to do more than simply follow

the yellow brick road. It’s usually not a simple yes or no response—there’s a lot

of evaluation that needs to happen before you make a decision. To determine if

reshoring is the right choice, companies must engage in some critical activities,

including a comprehensive cost and benefit analysis, a review of customer

satisfaction and retention, and an innovation assessment to evaluate the impact

of global sourcing on innovation.

The first step is to conduct a full cost analysis. Companies should examine the

costs associated with labor, raw materials, shipping, natural resources, energy

use, or any other costs incurred with outsourcing. It’s important to evaluate the

full landscape of offshoring costs, especially since surveys from Accenture® and

Archstone Consulting® claim that 60 percent of companies fail to recognize 20 to

30 percent of outsourcing costs.25 At a minimum, companies should examine:

•transportation costs,

•direct shipping prices,

•overall labor costs,

•travel costs,

•tax incentives.

Once you’ve uncovered the total costs associated with sourcing, you’ll need to

evaluate it against costs in the U.S. Will a number of costs be lower? If some costs

are higher domestically, consider whether or not lower costs in other areas will

eventually outweigh global costs over time. For example, if labor costs are still

lower in the sourcing country, identify whether or not the costs savings associated

with transportation will outweigh lower wages abroad long term.

25 The Reshoring Initiative: Welcome. N.p., n.d. Web. 22 Apr. 2014. <http://www.reshorenow.org/news/successStories.cfm>.


To further analyze domestic versus global costs you might conduct a cost/benefit

analysis. If you need help, visit the Reshoring Initiative, which is an industry-led

effort with the goal of bringing manufacturing jobs back to the United States.

The initiative works with U.S. manufacturers to help them recognize the potential

profits that come with reshoring. One of the resources provided by the effort is

the Total Cost of Ownership Estimator™, which is a free tool that can aggregate all

associated cost and risk factors for easier and objective decision making. Basically,

total cost of ownership (TCO) refers to the measure of direct and indirect costs

of a product or system. TCO components look at a wide range of metrics, such as

freight and packaging, inventory carrying costs, missed customer deliveries due

to shipment delays, and travel costs to visit and manage the supplier. After data is

inputted, you receive a report highlighting:

•calculations of each source’s cost;

•an accumulation of all costs into cost categories;

• charts showing each source’s current price, total cost of ownership and

five-year forecast

•line charts showing cumulative cost by category.

Next, estimate the TCO in the U.S. versus abroad. It will give you a comprehensive

picture of costs for both domestic and global operations and whether or not

you’ll obtain TCO costs savings. Don’t forget to take a look at recent legislation,

tax and other financial incentives that are now offered by state and local

governments—it’s important to include these in your analysis to consider the total

financial picture.

How much will it cost to physically relocate operations? Will you be able to recoup

those costs over time? How long will it take to realize a payback? It goes without

saying that relocation can be expensive. You might engage in scenario planning

to determine if the cost and capital required for reshoring have acceptable

returns, or if you can even afford relocation in the first place. Define “if/then”

scenarios that weigh the costs of relocation against domestic savings over time.

For example, you might come to the conclusion that if labor wages continue to

decrease in the U.S. and energy prices continue to rise abroad, then the costs

associated with moving are financially justified.

However, it’s important to remember to scrutinize all costs incurred through

global sourcing, not just the obvious ones. For instance, customer satisfaction and

retention should also be included in the decision making process. Are shipping

times and quality issues having a negative impact on customer satisfaction and

retention? If the answer is yes, then reshoring might be the right move. Another

issue to address is the “mass customization” trend, which refers to product


modifications that reflect customer preferences. At some organizations, product

customization requirements have increased, and it’s easier to make products

that reflect customer preferences when plants are closer to markets and research

and development units. As an additional benefit, manufacturing close to

customers allows companies to reduce lead times and keep up with ever-changing

market demands.

There are other key questions related to innovation that must be explored.

Specifically, companies should conduct an assessment on the impact of global

sourcing on innovation, because some research indicates that separating

manufacturing from engineering can have a negative impact on innovation.26

According to GE spokesman Sebastien Duchamp, greater opportunity for

innovation and collaboration was a primary driver for GE’s domestic relocation.

Duchamp recently noted that “Today, innovation has to be in the markets you

play in, close to your customers, and close to access the best talent wherever it

exists in the world.”27

Companies should also evaluate the impact that reshoring can have on

production. Is distance causing a company’s U.S.-based R&D department to miss

chances to improve production methods that may reduce costs? Again, if the

answer is yes, reshoring might be beneficial. Companies should also evaluate

whether or not they are maximizing new and innovative manufacturing methods,

such as 3D printing. Thanks to 3D printing, some companies are able to replace

part of the manufacturing line to produce more savings.

Determining whether reshoring is the right move is probably more complicated

than most companies envision. Yet before you reshore, it’s important to consider

the big picture, including tangible and non-tangible costs, and weigh them

against the benefits.

Use caut ion on the yel low br ick road

Of course, the reshoring debate is not without criticism. In the article, “Don’t

Drink the Kool-Aid” author Stephen Marshall cautions against reshoring

and asserts that despite good intentions, reshoring is not always feasible or

profitable.28 He notes that “unlike Dorothy’s ruby slippers in the Wizard of Oz,

26 The Reshoring Initiative: Welcome. N.p., n.d. Web. 22 Apr. 2014. <http://www.reshorenow.org/news/successStories.cfm>.

27 Khan, Mubin S. “US Manufacturing and the Troubled Promise of Reshoring.” Theguardian.com. Guardian News and Media, 24 July 2013. Web. 22 Apr. 2014. <http://www.theguardian.com/business/2013/jul/24/us-manufacturing-troubled-promise-reshoring>.

28 Marshall, Stephen. “Reshoring - Don’t Drink the Kool-Aid!” World’s Largest Professional Network. N.p., 4 Apr. 2014. Web. 20 Apr. 2014. <http://www.linkedin.com/today/post/article/20140404145158-96141041-reshoring-don-t-drink-the-kool-aid>.


clicking our heels together and chanting ‘there’s no place like home’ will not

bring manufacturing home to the USA.”29

Marshall and others believe that organizations should carefully evaluate the pros

and cons of reshoring before making a move. Since reshoring essentially means

moving operations from one country to another, capital expenses associated with

the move can be quite high. Plus, the costs to build or update a manufacturing

facility can be exorbitant and take years to recoup.

There’s also some debate as to whether or not global increases in labor costs truly

impact the bottom line. Despite labor increases across China, for example, there

is still a significant gap between average U.S. wages and Chinese wages. Critics

argue that even if Chinese labor costs continue to rise, companies will still find

lower rates in places like India, Bangladesh and Africa and choose to relocate to

one of these regions before coming home.30

Reshoring opponents also point out that reshoring simply to reduce energy and

labor costs is misguided. These types of costs are inherently cyclical and change

over time because they are influenced by the global economy. It’s a better idea to

ask how long manufacturing in the U.S. will be attractive, and whether or not it

justifies the effort to relocate.

In addition, critics point out that after decades of outsourcing, there’s an inter-

dependency across global markets that needs to be considered. It’s not so easy

to sever ties with foreign counterparts, especially if the company relied on

access to raw materials and foreign exports. Along these lines, companies might

experience a disruption in production, simply because operations can’t be moved

overnight, making it difficult to keep up with consumer demand.

The domestic skills gap might present another challenge to reshoring, according

to those that make the case against it. When companies move operations back

to the U.S. they might be surprised to discover that there’s no longer a strong

pool of talent to fill open positions. For years, many qualified and experienced

workers either left or were forced out of the industry, diminishing the availability

of domestic workers. Not to mention that moving back requires companies to hire

and train a new workforce, and that’s only if you assume you can find employees

with the skills you need. For this reason, some argue that labor costs will actually

increase in the long run.

29 Ibid.30 Khan, Mubin S. “US Manufacturing and the Troubled Promise of Reshoring.” Theguardian.com. Guardian

News and Media, 24 July 2013. Web. 22 Apr. 2014. <http://www.theguardian.com/business/2013/jul/24/us-manufacturing-troubled-promise-reshoring>.


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Finally, those that caution against reshoring cite that despite legislation and

incentives aimed to bring manufacturing back, America’s government still is

not making it attractive enough for companies to return.31 In many cases, the

incentives and tax breaks available globally far exceed those available in the U.S.,

even with improved legislation.

I s a welcome home party in your future?

As reshoring gains momentum, many companies are tempted to jump on

the bandwagon. But before you make a move, it’s important to consider all

factors that impact the decision, and weigh the risks against the rewards.

Only then can you fully determine if it’s time to invest in some party hats

and throw a welcome home party.

31 “Coming Home.” The Economist. The Economist Newspaper, 19 Jan. 2013. Web. 16 Apr. 2014. <http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united>.

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Reshoring

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