Bringing Spend (and Production Back Home) — An Economic Case for Re-Shoring

Just as the economics for global sourcing don't always add up when you begin to factor in total cost, the same can be said for bringing spend back onshore as well. Such a move can sound like the right thing in the media -- and potentially even on paper -- but does the total cost outweigh the risks and potential downside? In more and more cases, it appears such re-shoring equations are adding up. Consider the case of Bailey Hyrdopower which opened a "100,000-square-foot manufacturing plant in Chennai, India," to produce "hydraulic cylinders for Knoxville parent company Bailey International" back in 2000. Of course along with this decision came the need to buy raw and semi-finished materials, parts and plant MRO in India as well. Yet flash forward less than a decade and the parent company has sold the plant "and started moving production back to Knoxville." Why, do you ask?

Total cost, that's why. In part, the organization has become more operationally efficient and has been able to shorten "its cylinder production line from 6,100 to 550 feet" reducing production costs. But when shipping from overseas, previously unanticipated costs, such as rework and extended lead times, began to add up. As an example, the company found that "Controlling quality from the other side of the globe ... was a problem. On one occasion, the company received a shipment of cylinders with defects that had to be corrected at its Knox County facility before sending them to a customer ... But at the same time [they] were correcting the defects, there were two or three more containers on the water headed here with the exact same problem."

Moreover, "Customs taken for granted in the United States often don't apply overseas." In the most egregious cases, "Asian companies will sign most any agreement because they expect to bargain for what they want later," Baily found. Granted, this type of risk is something companies building overseas sourcing and production operations can ameliorate in a number of ways through building tighter relationships with their supply base. But it's one of the many unexpected additional cost factors that companies often get wrong when calculating their multi-year NPV on global sourcing and production decisions.

What type of spend is best suited for re-shoring from a production perspective? In our view, a basic screen should first focus on whether or not a domestic supply base can still serve a production facility (or whether the cost of holding globally sourced inventory makes sense). In addition, it's important to look at how the cost of production may have changed since the time a decision was made (e.g., has overall efficiency improved, what can the impact of lean programs be, etc.)?

And then, of course, it's critical to examine the total cost and risk issues of dealing with overseas productions and suppliers (e.g., labor cost increases, quality, tariffs/duties, landed shipping costs, lead times/added inventory requirements, lost orders due to cycle time increases, etc.). Companies should also, of course, factor into account why they went to a low cost country in the first place (e.g., to access the market as well as source from it or simply to take advantage of labor and related cost arbitrage opportunities).

Jason Busch

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