Why U.S. Manufacturers Are Turning Their Attention to 'Reshoring'
|Author: Inc. – Leigh Buchanan: 10-26-17|
Date: Monday, November 6th, 2017
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Companies around the country are increasingly cashing in on 'reshoring' opportunities.
(Inc. – Leigh Buchanan: 10-26-17) Just two years after Tim Zimmerman learned American manufacturing was fleeing overseas, he tried to bring it back.
In 1990, Zimmerman, then the new salesperson at contract manufacturer Mitchell Metal Products, persuaded a maker of kids' furniture to repatriate its production of hinges from China to his employer's Merrill, Wisconsin, plant. "What boosted our effort was Tiananmen Square," says Zimmerman, now co-owner and president of the $12 million company. Mitchell couldn't match Asian prices, but the uncertainty the political protests caused made his prospective client nervous.
Zimmerman encouraged the furniture maker to conduct a risk analysis and calculate the financial exposure of missing a quarterly shipment. The numbers won the day. Working with Mitchell, the company began receiving parts shipments every three or four weeks, compared with quarterly shipments from the Chinese supplier. That stoked the customer's growth, and it shifted more production to Mitchell.
But Mitchell benefited less from that early reshoring effort than did its client. Over more than two decades, the company successfully lured just a handful of small accounts from China. "There was a corporate mandate: We take cost out," says Zimmerman. "It was an automatic attitude. 'Sorry, Mitchell Metal Products. You can't even compete.'"
In 2012, that started to change. Today, 8% to 10% of Mitchell's volume comprises jobs captured from Asian manufacturers, a number Zimmerman expects will rise to 25% in five years. The increase is part of a tide of production flowing back to U.S. shores. In 2014, the number of American manufacturing jobs heading overseas and the number coming back reached rough parity, according to the Reshoring Initiative, a nonprofit based in Kildeer, Illinois. In 2016, the United States added a net positive 30,000 manufacturing jobs as a result of reshoring, that organization reports.
Some percentage of those jobs return in-house, as corporations like Ford and Boeing boost production at their domestic plants or open new ones. But small and midsize companies frequently offload at least some production to others. A study of close to 900 reshoring companies found that roughly 60 percent bestow their repatriated business on U.S. contract manufacturers or other third-party vendors. For companies like Mitchell Metal Products, the trend dangles juicy opportunities.
"I think U.S. manufacturers have learned a lot since the 2008 recession," says Zimmerman. "Before, they had a lot of cash tied up in processes that were not fully efficient." Widespread improvements in things like inventory management, Zimmerman says, "have set the stage for companies to effectively reshore."
Getting more competitive
The most common explanation for an increase in reshoring is rising costs in China, where wages for manufacturing jobs tripled between 2005 and 2016, according to Euromonitor. But disenchantment with offshoring is broader than that.
Savings, for example, are often less spectacular than anticipated. Companies that focused on a per-piece rate may have missed a slew of additional costs, from shipping to auditing to travel. (The Reshoring Initiative offers a free online tool that helps companies calculate their total cost of offshoring. Many contract manufacturers use it in their pitches.)
In addition, "there is a recognition of risks that people did not recognize when they first offshored," says John Gray, an associate professor of operations at Ohio State University's Fisher College of Business. In a study conducted by Gray and two other researchers, small to midsize companies cited a litany of reasons they had chosen to bring home production. Among them: Asian factories' use of unapproved suppliers or components, finished products that differed from samples, poor quality, intellectual property theft, and lack of responsiveness to problems.
"It's not just that they offshored something that maybe they shouldn't have because they did not think about hidden costs," says Gray. "But they also did not think about how it would affect their ability to be responsive, deal with problems, and develop new products together."
Customer expectations have also changed since 2001, when China's entry into the World Trade Organization ratcheted production east. "The customers want it now," says Harry Moser, president of the Reshoring Initiative.
"Amazon can deliver it today or tomorrow, which means Amazon has to be able to receive inventory very quickly if there's a surge in demand. If you are getting the product from somebody here, then that supply chain is feasible."
Kathleen Sarniak, the CEO and owner of Jeannette Specialty Glass, has won back some customers' offshored business by building organizational muscle where her Asian competitors are weak. The 65-employee company, which is based in Jeannette, Pennsylvania, makes glass for use in commercial and industrial light fixtures. In 2003, 30 percent of that business waltzed off to China.
Sarniak made up some of the loss by creating a branded line of glass sinks, a new category not easily replicated overseas. When the housing market crashed in 2008, she aggressively wooed the few lighting customers that still kept some small-volume work at Jeannette to bring back larger jobs they'd offshored.
Like Zimmerman at Mitchell Metal, Sarniak drilled down on cost of inventory, buying a 60,000-foot warehouse in 2010 where the company stocks large customer orders and then ships as needed. She also significantly beefed up its R&D and quality assurance functions, areas in which Chinese manufacturers often lag. Team members visit customer locations--something overseas producers can't do--to help improve efficiency on their assembly lines. They also handle troubleshooting.
As a result of her efforts, five customers have reshored substantial orders to Jeanette, and Sarniak recently landed two new ones bringing back production from China. One of those accounts may amp her company's growth by 30 percent. "It was costly, but we've made a lot of changes that allowed us to compete," says Sarniak. "If you find out what is not being offered by the Asian vendor, then you can offer it and move ahead."
Offshore companies do maintain one significant edge over their U.S. counterparts: They are more likely to produce complete products, soup to nuts. "When they went to China, a lot of U.S. companies did not want to do their own assembly because of all the language and legal and other complications," says Moser. "So it was advantageous for manufacturers there to develop a complete capability to take over a whole project."
Moser says that Chinese companies are starting to buy U.S. injection molders, tool and dye makers, and other contract manufacturers in order to replicate those capabilities here. The appetite for such inclusive services and the potentially large-scale employment they promise is evident in the ardent pursuit of Taiwanese behemoth Foxconn by the states of Wisconsin and Michigan. Moser would like more U.S. manufacturers to develop skillsets to handle complete assemblies. He sees opportunities to build more companies like Jabil, an $18 billion global manufacturer started in 1966 by a couple of guys in Florida.
Zentech, a Baltimore-based contract manufacturer, is one company that handles projects from design through testing. It has successfully taken on two complete-assembly reshored projects since 2010: a wireless printer for coupons and a wearable device for volleyball players. But the company, with 200 employees and north of $50 million in revenue, has parted ways with four or five other reshoring customers over price.
One of those customers went back to China. The others cut bait for very low-priced manufacturers in the United States.
"The reason they were in Asia to begin with was that they were in price-sensitive markets," says Zentech's president Matt Turpin. "Products that are low complexity or have a low-reliability requirement have a low barrier to entry for people making them." U.S. manufacturers in inexpensive regions with smaller, moderately skilled work forces are well positioned to pick up that work, says Turpin. For companies like Zentech, which specializes in complex military and medical products that affect lives, such jobs "became a race to the bottom."
Although most reshoring isn't right for Zentech, Turpin believes it will help the economy overall. "I would not pretend you are going to set up a manufacturing business focused on reshoring and be the darling of Wall Street," he says. "But from a societal standpoint, reshoring is going to create jobs and generate economic activity. For the U.S., this is a growth area."
(Leigh Buchanan is an editor-at-large for Inc. magazine. A former editor at Harvard Business Review and founding editor of Webmaster magazine, she writes regular columns on leadership and workplace culture.)
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