Making the Decision to “Reshore”

AUGUST 27, 2014

reshoring-5_0“Recently, rising energy prices, wage inflation and customer demand for shorter lead times have led many U.S. companies to consider “reshoring” the production of goods bound for domestic markets back to America,” writesIndustry Week (Aug.5, 2014). But getting it right can be tricky. A decision to reshore needs to consider the following 7 issues:

1. A focus on total costs instead of unit costs: By focusing on unit costs instead of the total cost of ownership – which includes costs such as transportation, intellectual property risks and inventory carrying costs – manufacturers are overestimating potential savings from overseas operations by 20%- 30%.

2. Invest time to understand domestic labor markets: Supply, quality, and cost of labor are critical to the success of almost all reshoring projects. Plant closures and an aging workforce have depleted the pool of skilled manufacturing workers in some parts of the country.

3. Pursue government incentives to offset costs: local, state, and federal governments have actively supported the resurgence of American manufacturing.

4. Analyze transportation cost differentials: In- and out-bound transportation costs, including the delivery of raw materials and the shipment of finished product, can comprise a major share of the cost of goods sold in the U.S., and can vary widely depending on the location.

5. Carefully assess product demand: Spurred by efforts such as Walmart’s $250 billion “Buy American” campaign, locally produced goods are in high demand. However, miscalculations can lead to lost investment and time.

6. A review of utility services and rates: Reliable, cost-competitive electric power is critical for many manufacturing operations. Power prices can vary from below 4¢ to above 12¢ per kWh.

7. Consider tax climates: State and local tax rates and structures vary greatly across the country. Carefully assess the potential impact of corporate income taxes and taxes on the purchase of production equipment, real estate, machinery, and inventory.

In short, deciding whether and/or where to reshore a manufacturing operation in the U.S. is a complex decision involving many considerations.

This post provided courtesy of Jay and Barry’s OM Blog at www.heizerrenderom.wordpress.comProfessors Jay Heizer and Barry Render are authors of Operations Management , the world’s top selling textbook in its field, published by Pearson.

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