President, M2 Global Inc.
Great companies are forged in the harshest of economic climates. Those that weather tough winters enjoy the most robust resurgence when spring finally arrives. Inspired by challenging conditions, such companies thrive because they respond to variable demands and compress delivery times through innovation and best practices.
By now, if you haven’t heard about re-shoring—the repatriation of manufacturing to America from offshore–you’ve been living under a rock. The trend has been building for about three years, and much of U.S. manufacturing has been buzzing since. Many companies that had considered going offshore for their production are changing their minds and bringing the jobs back to America.
Here’s a look at why this is happening.
What is Reshoring?
Over the past few decades, factories—and the manufacturing jobs that go with them—have been moving abroad to countries in Asia, Latin America, and Africa, where labor and materials were cheaper. In the past ten years, however, this trend has been reversing as companies are building new factories in the U.S. or updating and reopening existing factories. The movement of manufacturing out of the U.S. was called off-shoring, which is the basis for the terms re-shoring and on-shoring to describe the current phenomenon.
Why are companies re-shoring?
When American companies began to produce goods abroad, they did so because the costs of materials and labor were lower, allowing them to produce goods for less money and leaving more room for competitive prices and profits. However, the reality of the situation has changed due to changes in the global marketplace, unforeseen issues, and the difficulties of doing business from a great distance. Some of the reasons companies have chosen to re-shore include increased costs, inconveniences associated with distance, and financial incentives.
Increased costs of offshore production
As the economic climate has changed over the past decade, it has become more expensive to produce goods abroad than it was when companies first decided to do so.
Prices have increased in almost every facet of manufacturing, including raw materials. Foreign countries used lower prices to encourage established international companies to set up facilities—but once the companies built those facilities, the prices for those materials steadily increased.
Increased labor costs
Workers (such as those in China) have demanded higher wages, adding costs to production abroad.
Increased shipping costs
As shippers saw greater potential for profits, they increased their prices. In addition, rising fuel costs have made this process more expensive.
Another issue that plagues foreign production is the difficulty of doing business with a facility that is so far away. For local companies producing components abroad, the obstacles are numerous:
• Time differences that make communication challenging
• International trips to meet with producers
• Issues with intellectual property protection, which can be harder to enforce abroad
• Delayed product delivery
Despite the rising costs and complications of conducting business with a partner halfway around the globe, businesses might still choose to produce their goods abroad if there were not additional financial incentives for producing goods in the U.S. These incentives can be direct, such as those offered by the government in the form of tax breaks for companies that do business in the U.S.
The benefits can also be indirect. Companies that struggle with inconsistent quality between shipments from the same manufacturer many pay a lower per-unit cost, but if they have to discard inferior products, that price rises overall. If they sell the inferior products the brand’s image might suffer, costing the company money.
Also, a great deal of capital is tied up each time a company places a large order abroad, and they are unable to change that order or to use the money for other opportunities that arise. These limitations make it harder to respond to market demands or shifts.
M2 Global Technology has been manufacturing radio-frequency electronic components and aerospace precision parts in the U.S. because we value the ability to offer our customers the best possible service and consistent, high-quality goods created through our flexible and lean manufacturing process. While other companies try to play catch-up by moving production back to the U.S., M2 Global is growing our market share by continuing to be competitive and growing its business is to a great extent due to the philosophy of lean enterprise thinking.
Lean is about driving waste out of you business that then results in being more profitable, better quality and delivery and ultimately a lower cost for the customer.
You can too, if you embrace the lean concepts and principals.