The Hard Dollar Costs of the Re-Shoring Procurement and Manufacturing Debate (Part 1)

I credit Michael Lamoureux with surfacing and contributing to an important discussion around the topic of manufacturing re-shoring. Over on Sourcing Innovation, he recently captured the key points from an article from Knowledge @ Wharton, that in turn borrowed from a BCG analysis of the topic. The gist of the story is that, if you believe the research and numbers, "2 Million to 3 Million manufacturing jobs will come back to the U.S. because of the fundamental shift in economics between China and the United States." The primary reason for this is "the wage differential [between the countries] will drop from the 22X it was in 2000 to 4X in 2015, not adjusted for productivity."

Further, as Michael summarizes, manufacturers are seeking out even lower cost countries than China including "Vietnam, Indonesia, and Cambodia." This is true even in China, which is actively looking to outsource to these areas. In addition, we've seen "higher transportation/logistics costs, extra inventory costs, and quality control costs" as a result of our global sourcing efforts with China. Further, "improved lean manufacturing processes can often cut production times per unit considerably, up to 65% in one instance at GE." Perhaps this is why even Lenovo, a PC maker, is building a facility in North America. And last, in Michael's synopsis, is that "more than 60% of the cost of manufactured goods can be attributed to goods and services that the average firm buys from its suppliers."

These points all hit the nail on the head. But one that is somewhat overlooked is that we're becoming more and more focused on local sourcing for local production (and ultimately local consumption). This is a trend happening across industries. One of the major reasons for the hassles involved are the different standards that global suppliers apply to quality, worker safety, environmental compliance, product compliance, materials compliance, etc. in varying locales. Even though many companies would not admit it, the supplier management work done to manage a supplier exporting from China to the US is often significantly higher than the same level of work that would be done if the same organization were buying for a local facility selling into that market.

Stay tuned as our discussion continues.

- Jason Busch

First Voice

  1. Charles Dominick, SPSM, SPSM2:

    I would like to add one point to your last sentence: "Even though many companies would not admit it, the supplier management work done to manage a supplier exporting from China to the US is often significantly higher than the same level of work that would be done if the same organization were buying for a local facility selling into that market. And when that’s not the case, you are likely to hear about it in the news in stories about forced overtime in excess of legal limits, unsafe working conditions, child labor violations, and so forth."

    Good points…looking forward to Part 2!

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