Second Thoughts On Foreign Sourcing

A study by Archstone Consulting recently concluded that the “offshoring” of manufacturing work to lower-wage countries is far less attractive today than it was several years ago. In a survey of executives from U.S. and European companies, nearly 90 percent of respondents said they are now considering or have already implemented plans to rebalance manufacturing away from foreign sourcing toward greater use of domestic capacity.

Master WorkHolding, based in Morganton, North Carolina, is seeing the same trend. The maker of custom workholding has seen both quoting activity and recent new business that it can directly attribute to machining operations coming back to the United States. The president of the company offers a take on this phenomenon in a quote that is reproduced below.

According to the Archstone report, the work shifting back to the United States is making this move because the apparent cost savings of offshoring have steadily declined. In lower-wage parts of the world, manufacturing wages have steadily increased. Shipping costs have increased, too—and so has the value of the Chinese Yuan relative to the U.S. dollar (increasing 18 percent in the last 3 years). All of these increases undermine the savings from overseas manufacturing.

And these are just the apparent costs. The study also points out that as the apparent margins of cost savings get smaller, the costs that usually are not noticed grow more visible by comparison. Companies are now taking greater notice of the “soft” costs of foreign outsourcing, including high inventories, the difficulty of maintaining quality, additional overhead burdens and the poor market responsiveness that comes from an inflexible supply chain.

Certain costs have lessened. For example, the shipping costs that have been steadily increasing have plummeted in recent months. Yet such rapid change in any direction is unnerving. Faced with the price volatility, businesses reliant on manufacturing are aiming to minimize uncertainty by peforming more production close to home.

To obtain a copy of Archstone’s report, visit www.archstoneconsulting.com.

Here is the quote from Mike Powell of Master WorkHolding, who attests to the “onshoring” trend:

“In the third and fourth quarters of 2008, we began to see an increase in RFQs for projects that manufacturers were considering bringing back to the United States,” Mr. Powell says. “Some of the products in question were being machined in Asia and some in Mexico. In all instances, the products were going to be assembled in the United States and primarily sold in the United States. The products include vehicles, industrial systems and machinery. This year, we continue to see even more of the ‘onshoring’ RFQ activity.

“I believe there are a variety of reasons for this trend. They include excess machine capacity in the United States, increased transportation costs, logistical complications and quality issues.

“Recently, I had a conversation with a customer who said that much of the quality from his company’s offshore machining did not measure up to that of the U.S.-based operation. But he went on to explain that even if the quality was equal, the very nature of offshoring compounds quality problems if the product is assembled in the United States, because of the need to batch shipments.

“If machining and assembly occur in the same plant, he explained, then there is only a short line of scrap if a machining quality problem occurs. New or corrected parts can flow quickly to the assembly line.

“But in offshoring operations, any quality issues are much more difficult to recover from and more expensive to correct. Our customer told us, ‘Much of the decision-making leading to offshoring was based on faulty cost-cutting assumptions and a vision of quick near-term profits.’”