Returning Manufacturing
to America Using
Total Cost Analysis
by
Michele Nash
Nash-Hoff
Hoff
President, ElectroFab Sales
A manufacturers rep agency


From 2000 to 2011, the U. S. lost 5.8
million manufacturing jobs and 57,000
manufacturing
g firms closed.
U.S. Department of Commerce shows
that “U.S. multinational corporations…
cut their work forces in the U.S. by 2.9
million during the 2000s while
inc easing employment
increasing
emplo ment overseas
o e seas b
by 2
2.4
4
million.”
1

Offshoring has been major cause of:
 Slow economic growth after Great
Recession
 Federal and state budget deficits
 High unemployment
 Shrinking middle-class
 Declining innovation
 Lack of recovery in home
construction industry
Offshoring: partially herd behavior


A ‘herd’ mentality to participate in the
‘Chinese miracle’ developed among
global
l b l giant
i
corporations
i
--{Peter
{P
Nolan; University of Cambridge; - 9/03)
People tell their bosses what they want
to hear—(going to China) gives a boost
to the stock valuation,
valuation but you really
have to do the analysis on a case by
case basis.” (Technology Forecasters
10/03 )
Source: Stone & Associates
2
How Can We Return More
Manufacturing to U. S.?



Utilize Design for Manufacturing &
Assembly (DFMA)TM – Boothroyd
Dewhurst, Inc.
Learn & implement Lean Six Sigma
tools, especially Lean Accounting
Help Customers/Prospects Understand
Total Cost of Ownership
Gartner Group originated TCO analysis
and there are different methodologies
& software for different industries.
60% of manufacturers:
 Apply “rudimentary” total cost models
 Ignore 20% or more of the total cost
of offshored products*
 51% of companies
p
found no financial
benefit in offshoring**
Source:
* Archstone Consulting survey, American Machinist Mag., 7/16/09
3


Total Cost of Ownership (TCO) is an
estimate of direct and indirect costs
13th edition APICS dictionary says:



"In supply chain management, the total cost
of ownership of the supply delivery system
is the sum of all the costs associated with
every activity of the supply stream.
Most companies don’t
don t look beyond
quoted unit price to make decision of
which vendor to select.
TCO should include the physical length
of the entire supply chain and the lead
times associated with the entire process,
such
h as:






Transportation alternatives
Inventory costs and control
Cost of quality controls
Reserve capacity
Responsiveness
Technological depth
4




Decision to outsource offshore is often
based on faulty assumptions
 Longer lead times won’t affect costs
much
 Overseas laws will protect IP
 Communication won’t be a problem
 Travel won’t add much cost
 Delivery
e e y & qua
quality
ty costs won’t
o t be
significant
 Can teach Lean manufacturing tools
to suppliers
Case studies show these assumptions are far
off from reality.
Accountants don’t often measure intangible
costs - called hidden factories because keep
p
everyone busy generating nothing tangible or
of measurable value.
Hidden factories indirectly can produce “soft”
costs:
 Loss of g
good will
 Loss of competitiveness
 Extended warranty costs
 Legal costs
5



Some hidden costs are:
 Currency fluctuations
 Managing offshore contract
 Design changes
 Quality problems
 Legal liabilities
 Travel expenses
 Time and effort to make transition
 Poor communication
 Intellectual Property infringement
 Cost of inventory
Some business started returning
manufacturing about six years ago
Main p
problems encountered were:
 Substitution of materials
 Inconsistent or poor quality
 Stretched out deliveries
 Communication problems
p
 Inability to modify designs easily &
rapidly
6
Offshore Supply Chain Dynamics Changing








Oil prices - tripled between 2007 - 2013 raising
logistics costs
Labor rates rose 300% in China from 2007-2013
Component/material prices increasing
Automation increased U.S. productivity
Political instability in China - Labor riots/strikes
Exchange rate variables
Risk of disruption from natural disasters
U.S. $ declining
Indexed Unit Labor Costs in the
Manufacturing Sector of Selected Countries
14
7




There is a growing realization that when
it comes to quality and location,
location may be best guarantee of all
It’s hard to outsource quality
A growing number of manufacturers
realize “you get what you pay for”
Applying good quality principles takes
money, education,
d
ti
and
d experience,
i
which are in short supply in low-wage
countries.
Less Offshoring would have
occurred if had applied
Deming’s
Deming
s Principle
“End the practice of awarding business
on the basis of price tag. Instead,
minimize total cost.”
S
Source:
“4th Key
K Principle
P i i l for
f
Management,” Out of the Crisis,
W. Edwards Deming

8
New Realization that Offshoring
Impacts Innovation
“an
an economy that lacks an
infrastructure for advanced process
engineering and manufacturing will
lose its ability to innovate.”
Professors Gary Pisano and Willy Shih
Source: Restoring American Competitiveness,
Harvard Business Review, July-August 2009
“Renaissance in Manufacturing”



“We expect net labor costs for
manufacturing in China and the U.S.
U S to
converge by around 2015”
Companies need to “take a hard look at
the total costs”
If labor is 20-30% of unit costs,, China’s
prices will be only 30% below U.S. level &
savings will exceeded by other offshoring
costs.
Source: Boston Consulting Group press release 5/5/11
9


Seven industries sectors had reached “tipping
point” of returning to U.S.
 Transportation goods
 Electrical equipment/appliances
 Furniture
 Fabricated metal products
 Plastics and rubber products
 Computer/electronics
p
Sectors account for 70% of U.S. imports & $2
trillion in U.S. consumption

Source Boston Consulting Group Press Release, 10/11/11
Reshoring Initiative
 The Reshoring Initiative is a way to
return manufacturing jobs to the U. S.
 Initiative was founded
f
by Harry
Moser, Chairman Emeritus of GF Agie
Charmilles in 2010
Contact:
Harry Moser
847-726-2975
harry.moser@comcast.net
www.reshorenow.org
10
A non-profit with 35 sponsors,
Platinum
Gold
Gold
Gold
G
Silver
Silver
A non-profit with 35 sponsors
Bronze
BronzeB
ronzeBro
B
nze
SteeelSStSteeleel
Steel
I
Iron
Iron
11




Reshoring Initiative’s Objectives
Change the Sourcing Mindset: From
“Offshored is Cheaper” to “Local Reduces
the Total Cost of Ownership.”
Ownership ”
Train:
 OEMs on why to source local and how to use
TCO Calculator.
 Suppliers on how to “sell” local sourcing.
Encourage production near the customer
Do the best we can on the unlevel field now as
partial alternative to protectionism.
The Industry-Led Initiative Provides
 Free Total Cost of Ownership EstimatorTM
software for companies & suppliers
 Objective
Obj ti tools
t l provided
id d
 Online Library of reshoring articles
 Media coverage of the trend
 Regional Initiatives
 A solution to today
today’ss supply chain
problems
 Motivation for skilled manufacturing
careers for youth
12
TCO Estimator Benefits

Free software for:







Companies for sourcing
Suppliers of parts and equipment for selling
Online Library of 1,500+ reshoring
articles
Statistics from TCO & Library databases
Case Study template for posting cases
cases.
Solutions to major supply chain problems
Motivation for skilled manufacturing
careers
Example: some Assumptions: a Part
Chinese unit price
U S unit price
U.S.
# units/year
$70
$100
2
Shipments/year
6
product life, yrs
5
Payment on shipment
Quality*
0.5%
IP risk*
1.9%
Innovation*
0.5%
12,000
unit weight, lbs
Packaging*
Packaging
Product liability risk*
1%
Yes
2%
Trips/yr
Prototype cost*
C
Country
t political
liti l iinstability
t bilit risk*
i k*
2
$5,000
0 4%
0.4%
Wage inflation, annual*
8%
Currency appreciation, annual*
5%
* Chinese differential vs. U.S.
13
TCO Comparison Example
Reshoring More Effective than
Exporting: U.S. is Much More
Competitive at Home!
Where Sold
Where Sold
U.S. China
Where U.S. $100 $115
Made China $100 $85
Difference
0
30%
Based on TCO being 15% higher for exports
14
Just using TCO could bring back 25% of offshoring
Comparison
Basis
Price
U.S. % of
China price
or TCO,
TCO
average
169%
% of cases
where U.S.
has the
advantage
15%
TCO
96%
56%*
Difference
73%
41%**
* For the 56%, the average U.S. TCO was 32% below China
**Conservatively 25% might return
Source: TCO user database 27 “real” 2012 cases China vs. U.S.
Total Cost of Ownership Estimator™


General Information: Company Name
For Calculations: Is your data a real case or are you
experimenting with the TCO Estimator?




U.S.
Offshore
Is or would the work being analyzed be produced:


Experimenting
p
g
Which of the sources you are analyzing is currently a
source and thus your data is based on experience not
conjecture: (check one or both)


Real case
Offshore: In
In-house
house (in your own facility), or outsourced
(sourced from a supplier)
U.S.: In-house (in your own facility), or outsourced (sourced
from a supplier)
Industry
Product Description
15
Sourcing Moving Home Slowly



61% of larger companies surveyed “are
considering bringing manufacturing back to the
US”
U.S.”
15.3% of U.S. companies stated that they are
"definitively" planning to re-shore activities to
the U.S. Source: 2012 MIT FORUM FOR SUPPLY CHAIN
INNOVATION REHORING STUDY


40% of contract manufacturers have
done reshoring work this year
Source: MFG.com 4/12
Top six decision drivers for companies to
reshore are:
1. Time-to-Market (73.7%)
2. Cost Reductions (63.9%)
3. Product Quality (62.2%)
4. More Control (56.8%)
5. Hidden Supply Chain Management
Costs (51.4%)
6. Protect IP (48.5%)
Source: 2012 MIT FORUM FOR SUPPLY CHAIN INNOVATION
REHORING STUDY
16
Bleeding has stopped!
Manufacturing Jobs/Year
2003
2013
% Change 2016***
New ~150,000* 30‐
‐70%
20,000
offshoring
50,000*
New 30‐
+1,500%
70,000
reshoring
2,000* 40,000**
‐148,000 0
‐100% +50,000
Net reshoringg
Reshoring’s share of mfg. job growth since Jan. 2010:
Job growth: ≈500,000
Reshored jobs: ≈80,000
Reshoring % of total: ≈15%
*Estimated ** Calculated ***Feasible
Consumers Want Made in America Products
78% of U.S. consumers view p
products
Made in America very favorably (2012)
 Up from 58% (2010)

AAM June 28-July 2, 2012)
76% are more likely to buy U.S. product
 57% less likely to buy Chinese product

(Perception
Research Services Intl. survey 7/12, 1400
consumers)
17
Some Reshorers
Industries
Reshored
Industry
Cases
Electronics/Appliances/Components
41
Computer/Electronic
26
Apparel
24
Hobbies
23
Transportation
22
Plastic/Rubber
18
Fabricated Metal
18
Machinery
16
Medical
15
Wood Products
14
Energy
8
Chemicals
4
Castings
3
Primary metal
2
Non‐metallic mineral products
1
Other: primarily food, services,
and home and office products
20
Source: Reshoring Initiative
Library, March 2014.
18
Jobs Reshored by State
Avg. Jobs/
Jobs/
State Jobs Companies Facility State Jobs Companies Facility State Jobs
SC
7780
7
1111
AZ 700
2
350
RI
200
MI 6721
13
517
FL 611
12
51
IA
193
CA 6014
28
215
MA 598
10
60
WA 150
MO 150
KY 4612
5
922
MS
540
5
108
TX 3712
12
309
UT 464
6
77
MD 90
OH 3611
18
201
AL 397
4
99
MN 64
GA 3005
7
429
WI 342
11
31
MT
25
TN 2490
11
226
NJ 335
3
112
DE
0
NY 1089
17
64
IN 320
5
64
VA
0
NC 1020
14
73
PA 279
11
25
CT
0
ID
1000
2
500
AR 210
4
53
ME
0
KS 1000
2
500
IL
205
9
23
VT
0
CO
738
6
123
NH 200
1
200
ND
0
Companies
2
2
3
6
6
9
1
2
1
2
1
2
1
Avg. Jobs/
Facility
100
97
50
25
15
7
25
0
0
0
0
0
0
Sources: Reshoring Initiative Library, August 31, 2014.
Cases 2007 through 8/31/14.
Bailey Manufacturing LP


Moved from100,000 ft² in
Chennai, India to 60,000
ft.2 in West Knoxville, TN
Reasons:



Fast delivery vs. 5 wks on
the water
Fewer supply chain
problems
No more bad units in route
Source: Knoxvillebiz.com Ed Marcum 8/7/10
19
ATMs
Returned
R
t
d from
f
Chi
China tto 350
350,000
000 sq.
ft. factory in Columbus, GA
Hired 900 employees
Reasons:
Slow response from contract suppliers
Chinese wages up
Have mfg.
mfg near engineering and
customers
Appliances
Bringing Production back from China:




Water-heaters, fridges, and washing machines
Unionized facility in Louisville, KY
1300 jobs, renovated facility, $800 million invested
Reasons:






Tax incentives
High-tech new model
Ease of design
g collaboration with workers: retail price
p
20%
2 tier contract
Chinese cost: -30% becomes +6% considering inventory
and delivery problems
Will move a “significant piece” of appliance
production back
40
20
Wind Turbine Assembly
●China to Henderson, NV
●1000 jobs
●“Multi-million” dollar investment
●Reasons:
 Lower real-estate cost
 Skilled workforce
●"We are committed to clean energy
development ...A-Power highly values the
opportunities in renewable energy in America."
Sources: http://www.areadevelopment.com/newsitems/5-2-2011/apower-wind-turbine-assembly-nevada-5555002.shtml
http://www.prnewswire.com/news-releases/the-us-renewable-energy-group-a-power-energy-generation-systems-ltd--american-nevadagroup-to-develop-a-wind-turbine-production-and-assembly-plant-expected-to-create-more-than-1000-jobs-in-nevada-87326867.html
Solatube International







Sett up mfg.
S
f off T
Tubular
b l Daylighting
D li hti Devices
D i
in
i EPZ in
i
China in 2008 - cheaper for 20 new plastic molding dies
Moved mfg. back to their plant in Vista, CA at end of
2011
Reasons:
Rising
g direct labor and indirect overhead costs
Rising shipping costs
Cost of quality problems
More efficient in USA
21
Tractors & Excavators



JJapan to
t Bogart,
B
t GA
1,400 production jobs
Reasons:
 Freight cost
 U.S. energy price
Sources: “Production Lines to Roll Soon at CAT Plant.” Manufacturing.net. October 23, 2013.
Harry Bradford, “11 American Companies That Brought Jobs Back Home.” Huffington Post. May 31, 2014.
Reshoring is fastest & most efficient
way to strengthen U.S. economy
● Breaks out of tax/borrow and spend.

●
●
●
●
Eliminates relying solely on currency changes.
Assures that the pie grows, to the advantage of
all Americans.
Grows the pie by taking back what we earlier
lost.
Focuses on the
h manufacturing
f
i sector which
hi h has
h
suffered so many job losses for decades.
More efficient than exporting, stimulus
programs or tax reductions.
22

Walmart’s plan to increase Made in U.S.
purchases:







$250 Billion over 10 years
$50 Billion in the 10th year
In the 10th year:
y
 Approx. 300,000 manufacturing jobs
 Approx. 1 million total jobs (Boston Consulting Group)
Walmart Actions:
“Increase what we already buy of U.S. manufactured goods
manufactured goods
Source “new to Walmart” U.S. manufactured goods
Reshore manufacturing of goods we currently buy by facilitating & accelerating efforts of suppliers”
Potential Reshoring Benefits


For the U.S.:
 Eliminate trade deficit ~ $600B/year
 Add 3 million manufacturing jobs
 9-12M total jobs ► 4% unemployment
 Cut U.S. budget deficit by about 50%
 25% increase in manufacturing
 If spread over 20 years: 25% extra annual
capital
i l equipment
i
investment
i
For U.S. companies:
 Stronger home market
 Increased sales of “Made in USA” products
23




Outsourcing will Continue
Offshoring will continue for multinational global companies
Desirable” locations for outsourcing
will change over time
Purely financial benefits of lower cost
will erode over time
Ch ll
Challenge
is
i to keep
k
as much
h
manufacturing as possible within the
United States
What can you do?






Use the TCO tools Free at www.reshorenow.org
Use the Reshoring Initiative’s archived webinars
to inform colleagues and clients
Work with groups being trained on TCO (MEP’s)
Prepare your company’s workforce for reshoring
Submit case studies of reshoring for publication
and posting using Reshoring Initiative template
to add visibilityy to yyour company,
p y, industryy and
state
Encourage your company to sponsor the
Reshoring Initiative
24
Michele Nash-Hoff is available to consult on how
to use the TCO spreadsheet and to speak to
professional societies and trade organizations on
this topic.
Contact: Michele Nash-Hoff
Email: michele@savingusmanufacturing.com
Phone: 619-265-7607
Author of Can American Manufacturing Be
Saved? Why we Should and How we Can
www.savingusmanufacturing.com
Columnist for Industry Week
25