5 things to consider when Reshoring – Cost Increases
Do you have systems and measurements in place to monitor your manufacturing cost components?
Costs in offshore locations have dramatically increased over the last five years. In an earlier Blog, “5 things to consider when Reshoring”, we identified cost increases as critical to impacting your manufacturing location decisions. In today’s blog we look at three cost areas – labor, energy and materials – as examples of how to review and monitor your manufacturing choices.
Chinese labor costs are five times higher than in 2000 in some locations, and continue to rise at an annual rate of 15-20%. Even with these large percentage increases, Chinese labor rates remain low when directly compared to US labor rates. As the wage gap narrows the emphasis shifts to the amount of labor per product and worker productivity. Labor may account for only 20-30% of the total product cost and as the gap continues to decrease net labor savings quickly evaporate. Add to this the steady increase in US worker productivity levels and the labor advantage can become very small.
Labor costs are not the whole story in reshoring. GE found redesigning the product with a joint product development and manufacturing team provided even larger labor savings and automation opportunities. Plus, States are starting to offer tax incentives and other assistance to attract manufacturing, further offsetting labor cost differences. We suggest you evaluate other low-cost countries only when there is a high labor content to production.
Oil prices are at least three times what they were five years ago. Increasing oil prices put pressure on manufacturing and transportation costs for ocean-going cargo vessel delivering product to the US, transport from factory locations to docks and from docks to warehouses. As energy costs continue to increase we suggest the unique view of product value concentration – the relative product value to the weight of product. This measure provides another way to view your transport costs and determine a tipping point.
On the bright side of energy for reshoring potential is the natural gas boom. With new technologies, such as fracking, the US is enjoying low natural gas prices along with an abundant supply. US manufacturing locations can create real energy savings when compared with offshore locations.
It may come as a surprise to many companies that the supply base has disappeared from the US and will have to be rebuilt to support domestic manufacturing. Your raw materials supply base is likely to now be clustered around your offshore manufacturing sites. When considering reshoring, the availability of suppliers and tier 2 and 3 manufacturers near your proposed US facility is a critical component of your costs. This is an often-overlooked cost that may drive up the price of your raw materials and will certainly add to the complexity of the supply processes.
These are just a few cost examples. No one factor can be considered in isolation. Determining your costs and a tipping point where alternate manufacturing locations may be more cost effective is the first step in considering reshoring.