reshoring – Page 2 – The OM Blog by Heizer, Render, & Munson

OM in the News: Decoupling of Supply Chains

“Covid-19, Russia’s invasion of Ukraine, and rising geopolitical risks in Asia have thrown a wrench into global supply chains,” writes The Wall Street Journal (Sept. 20, 2022). That has reinvigorated the push to put key supply links back onshore—particularly those currently located in China. A full “decoupling,” meaning the breaking of economic links with China, remains unlikely, but supply chains would become less integrated than in the past.

Two proposed laws in Europe are the latest case in point. The EU just set forth a ban on products made using forced labor. (It doesn’t name China but forced labor in the Xinjiang region is clearly a main target.) Recent U.S. legislation puts the onus on importers to prove that products from Xinjiang aren’t made with forced labor—an incredibly high bar. Such rearrangements could be challenging in some cases: For example in the solar supply chain, which is dominated by China. Xinjiang is a major producer of polysilicon, a crucial precursor of solar cells.

Another proposal from Europe tries to directly address such dominance, which also extends to the processing of lithium and other minerals critical for green energy applications. That law would attempt to speed up domestic production, processing and recycling of such raw materials. “Lithium and rare earths will soon be more important than oil and gas,” said EU’s Commission president. China processes almost 90% of rare earths and 60% of lithium.

All of this follows similar moves in the U.S. A recent law provides incentives for domestic manufacturing of clean-energy products such as batteries and solar panels. The U.S. is also implementing policies to encourage the onshoring of semiconductors and biotechnology. Such onshoring will take years and a full-scale relocation of manufacturing jobs back to the West is unrealistic. Friendlier or closer countries such as Vietnam and Mexico will probably be big beneficiaries—particularly those that already have free-trade agreements with the U.S. or the EU.

The rapid globalization of the past few decades seems likely to take a pause. Businesses, consumers and governments will gain a measure of reliability and peace of mind—but they should be prepared to pay up too.

Classroom discussion questions:

What are the benefits and dangers of the new U.S. and EU laws?
Is the globalization era ending?

OM in the News: Bringing Supply Chains Home

Large U.S. companies are increasingly talking up bringing workforces and supply chains back home—known as “reshoring,” reports The Wall Street Journal (July 26, 2022) “Companies’ mentions of reshoring skyrocketed recently amid supply chain challenges and we believe the 2020s will mark the beginning of de-globalization,” writes Bank of America. Executives have been using the buzzwords onshoring, reshoring or nearshoring at a greater clip this year than they did in early in the pandemic.

It’s the latest sign that companies are looking to move away from the globalized supply chains that have boosted profits and productivity for decades as worries about shipping delays and increased costs have changed the equation. The new focus on reshoring, combined with increased spending on capital expenditures, suggests many companies could be looking to replace overseas workers with technology rather than U.S.-based workers. Companies in the S&P 500, led by industrial firms, are increasing capital expenditures by 24% from the year prior year.

The construction of new manufacturing facilities in the US has soared 116% over the past year. There are massive chip factories going up in Phoenix. Intel is building two just outside the city. Taiwan Semiconductor Manufacturing is constructing one in it. And aluminum and steel plants that are being erected across the south, including in Alabama (Novelis); Arkansas (US Steel); and Kentucky (Nucor).

The tight labor market also points to companies’ need to automate. Historically, high wage inflation has led to increased labor productivity (i.e. automation) on a lagged basis. The pandemic and Ukraine war have demonstrated the vulnerabilities of global interdependence. They all point to the same thing — a major re-assessment of supply chains in the wake of port bottlenecks, parts shortages and skyrocketing shipping costs that have wreaked havoc on corporate budgets in the US and across the globe.

“Globalization is in retreat,” writes UK-based Barclays. “Governments and firms are examining connections to minimize exposure to possible causes of economic damage and social turmoil.” Barclays also found that large companies are recruiting more in their home countries, and that cross-border M&A activity has been cooling.

Classroom discussion questions:

What problems do firms face in bringing their manufacturing home?
Why is reshoring becoming a hot topic in OM?

OM in the News: Cutting the China Supply Chain

For two months, millions of dollars worth of designer perfume and cologne sat untouched in a Shanghai warehouse as Covid-related lockdowns rendered the building inaccessible. For Jean Madar, chairman of Inter Parfums, the lost sales validated his decision to break up with China. “We’re doing this even though China is way cheaper,” he said. “How good is it to have cheaper components when you cannot get them? You need to have super stability in supply.”

Inter Parfums cologne bottles are filled in New Jersey.

The NY-based fragrance seller is one of many companies permanently shifting operations back to the U.S. from China and other countries where cheap labor and easy access to factory capacity had far outweighed costs of shipping products across the ocean. Inter Parfums has doubled supplier contracts with U.S. companies; nearly 70% of parts now come from U.S. suppliers, rather than having to depend on Chinese suppliers for glass, metal and pumps. (There is enough profit made on a $50 or $100 bottle of perfume to absorb the higher expense incurred to give priority to reliable supply, even as inflation mounts).

“The pandemic and ensuing global supply-chain meltdown have made businesses—from beauty companies and auto manufacturers to global retailers and small businesses—rethink low-cost importing,” writes The Wall Street Journal (July 11, 2022). Close to 20% of supply-chain executives said they had brought some production back to a nearby country in the past year, double the number from a year earlier. “The equation has changed,” said a McKinsey supply chain exec.

Amid the pandemic, ocean shipping costs skyrocketed. Factory shutdowns and logjams led to major delays and shortages. Demand became difficult to accurately predict as consumers rapidly shifted buying patterns. All those dynamics compounded longer-term shifts already under way: rising cost of labor in China, higher tariffs and worries about theft of intellectual property.

But betting against China carries risk and remains out of reach for industries with narrow profit margins. Companies such as Peloton that set out in the pandemic to uproot their China-based factories and supply chains found doing so was harder in practice. The exercise-bike maker has since scrapped plans for a $400 million factory in Ohio.

Classroom discussion questions:

In Table 11.3 in your Heizer/Render/Munson text, 10 supply chain risks and tactics are provided. Which impacted Inter Parfums decision?
List several reasons why it makes sense to reshore now.

OM in the News: France “Reshores” Sneaker Production

After 15 years of manufacturing entirely in Asia, French sportswear firm Salomon SAS, decided it was time to start making its sports shoes at home. The challenge, in a country where shoemaking died out years ago, was how to build the necessary supply chain, writes The Wall Street Journal (May 7-8, 2022).

The Salomon Meta Cross produced in France

The first phase was to build an automated sneaker factory in France. It also redesigned its shoes, drastically shrinking its supply chain by slashing the number of components in each sneaker by 2/3. (Salomon’s redesigned shoe has 26 parts, down from over 70 in its other models). That still left the matter of sourcing materials in a region largely devoid of suppliers. Until now it has sourced soles and other parts primarily from China and Vietnam, two of the main centers of shoemaking.

For decades, Western companies have made everything from clothes to toys in Asia or Latin America, taking advantage of cheaper labor and highly developed supply chains. But the business case for that practice has eroded in recent years amid repeated shocks to the global economy, prompting many companies into a rethink. Then from 2020 onward the pandemic brought waves of factory closures, as well as port blockages and truck shortages, disrupting supply chains and pushing up freight costs. Russia’s invasion of Ukraine rattled global systems anew.

These crises have made “reshoring”— the return of production to a company’s home country—increasingly attractive. Some 2/3 of U.S. and European manufacturers say they will bring some of their Asian production home by 2025, with 1/5 saying they will bring back most or all of it.

Footwear production is particularly tricky to repatriate, because Asian shoemakers use cheap, plentiful, low-skilled labor. That model can’t be recreated in the West, prompting companies to turn to automation. The France-made shoes will be as profitable as those made in Asia, thanks to savings from lower transportation costs and the elimination of customs duties.

The new Salomon plant requires only 15 humans a shift; a typical shoe factory in Asia would require 5 times as many to match its output. Some operate sewing machines—this intricate work is still best done by hand—while others monitor the automated production lines. If the French project is successful, Salomon wants to build a similar automated plant in the U.S. to meet demand there.

Classroom discussion questions:
1. Why is this reshoring effort difficult?

2. Of the 10 OM decisions in your Heizer/Render/Munson text, which directly relate to reshoring shoe manufacturing?

OM in the News: Will “Reshoring” Fix Supply Chain Woes?

Efforts by the U.S. and other countries to fix supply-chain problems by boosting domestic production aren’t likely to be effective, according to a report from the International Monetary Fund, which says diversifying sourcing is a better solution. “Policy proposals to reduce dependence on foreign suppliers, especially in strategic sectors, have gained prominence, including in major markets such as Europe and the U.S.” reports The Wall Street Journal (April 13, 2022).

Such policies “are likely misguided,” IMF economists said, and “supply chain resilience to shocks is better built by increasing diversification away from domestic sourcing of inputs. The resilience of trade through the pandemic suggests that such proposals may be premature, if not misguided.” The IMF noted that trade has bounced back remarkably quickly, and that countries unaffected by shutdowns were often able to quickly increase their capacity to supply other regions.

The Biden administration wants to boost domestic production and encourage the reshoring of industries that have moved overseas, saying it will both create U.S. jobs and better insulate the nation against shortages from goods imported from other countries, such as semiconductors.

The IMF suggests a severe crisis in a single large global supplier (one roughly the size of China) would cause the average country’s economy to shrink by 0.8%. However, if that country had diverse supply chains running through a large number of countries, the economic damage would only be half as large.

Even the country at the heart of such a crisis would be better off with diverse supply chains, they said. By doubling down on domestic production, the country’s factories may have their own domestic suppliers disappear in a crisis, whereas if they had diverse international suppliers they would have a fallback option. Also important, the IMF said, is making sure that supplies in one country can be quickly substituted for another.

Some companies have already begun undertaking such efforts, like GM, which is seeking to reduce the number of different types of semiconductors that it uses so supplies that are disrupted from one factory can more easily be substituted by production elsewhere, or Toyota, which has sought to make more of the components of its cars easily substituted across different models.

Classroom discussion questions:

Why does the IMF say that reshoring is not a perfect solution?
What difficulties does the U.S. face in reshoring attempts?

OM in the News: The Furniture Supply Chain Crisis

Big, bulky and heavy. Furniture has been one of the biggest casualties of the global shipping and supply chain crisis as costs to transport a sofa or table are much higher than an iPhone or a pair of sneakers. In some instances, container costs for sofas, tables and chairs have risen as much as 1,200% since the start of the pandemic, forcing furniture retailers to raise prices.

If you think about the size of an cell phone and how many of those you could fit in a container and you think of the size of furniture, the cost per product really does shoot up. It means companies largely face an unenviable choice — absorb the extra costs and take a hit to profit margins or increase prices, which could weaken demand for their products.

The main problem for European and US retailers, reports Financial Times (Feb. 14, 2022), has been their reliance on China, which manufactures everything from cheap sofas and garden tables to flat-pack items made from chipboard. The rocketing transport costs have prompted some European and US retailers to move some of their manufacturing operations closer to home and their customers, known in Chapter 2 as “nearshoring” or “reshoring.”

British-based furniture retailer DFS, which makes 40% of its sofas in England, is also increasing the amount of automation in its domestic factories, citing benefits of higher quality, greater control over the supply chain and lower lead times. Other European retailers, hit by long delivery times from Asia, have relocated production to countries nearer home such as Poland, Lithuania and Latvia, which have advantages because of the low cost of labor and access to raw materials such as wood.

“If you’re looking at nearshoring of wood products, then you’re looking at countries with a lot of forests,” said one industry expert. Sweden’s Ikea, the world’s biggest furniture retailer, sources many of its goods from Poland, where a fifth of its products are made, and other countries nearby. However, even Ikea has been forced to plug gaps in the availability of some of products by using trains and chartering ships from China.

Classroom discussion questions:

If nearshoring is so important, why did furniture imports from China increase 30% last year?
Click to enlarge the furniture value chain graphic above. How does it relate to the concept of nearshoring?

Guest Post: Why Are Supply Chains Disrupted?

Our Guest Post today comes from Professor Purushottam Meena at the College of Charleston. Dr. Meena teaches in the supply chain management program.

We have noticed empty shelves and shortages of many items, including PPE in healthcare, sanitizer, and facemasks at some points since the Covid-19 outbreak. The majority of Fortune 1,000 companies have experienced supply chain disruptions due to Covid. It’s important to ask why that happened.

Many overlapping factors are the root cause of the ongoing supply chain disruptions. Today’s supply chains are global, complex, and longer than ever. Manufacturers have to source components and raw materials from around the world to make any product. If there is a disruption in any component’s supply, the whole supply chain is shaken.

This pandemic has exposed the over-emphasis on the traditional cost-cutting, lean philosophy, and single-sourcing approaches that are being practiced in modern supply chains. This is why companies must analyze their supply chains beyond just cost-cutting opportunities. In a global environment, it’s difficult to predict what will happen to one aspect of a supply chain. There are always geopolitical factors and occasionally major disasters such as earthquakes or hurricanes that can disrupt the supply chain. If companies plan for disruptions, they can have other backup suppliers ready.

Apart from the pandemic, other factors behind supply chain disruptions are:

Unstable inventory-to-sales ratios,
Bottlenecks across the supply chain network,
Record high labor shortages,
A globally connected complex supply network, and
Panic buying

In terms of solutions, the ongoing supply chain crisis will take some time to fix–at least a year down the line– if we do not face another lockdown because of new Covid variants. Firms will be forced to redesign/restructure their supply chain networks–and more emphasis will be on reshoring, nearshoring, and multiple sourcing. As a result, the future supply chains will be more regionalized and less complex.

Apart from all the negatives, the ongoing disruptions have brought the supply chain field into the limelight once again, offering our students many opportunities. Students trained in the latest technologies like artificial intelligence, blockchain, and data analytics will have key advantages in the supply chain field because there will be increasing demand for jobs with such skillsets.

OM in the News: Chinks in China’s Armor Create Opportunities for U.S. Industrial Recovery

China is facing a number of domestic issues including labor shortage, shipping and electricity. Prices there are rising at a record pace as a result of the inflationary forces hitting economies across the globe, including increasing wages and soaring energy costs. China’s official producer price index for the month of September showed a 10.7% increase over a year ago, following a 9.5% jump in August– the fastest increase since the mid-1990s.The U.S.-China relationship is facing additional issues: Taiwan and the possibility of decoupling.

While these issues will continue to cause problems for U.S. global supply chains, they are also propelling a long overdue push in the U.S. toward greater self-sufficiency. The U.S. trade deficit continues to rise. The deficit with China is up 10% from 2020, projected to reach $340 billion, which represents about 2.5 million manufacturing jobs. Recent reports from the Reshoring Initiative (Nov. 2021) indicate that the U.S. is starting to focus on key actions to pivot away from dependence on China.

Reshoring Initiative indicates that logistics managers are now beginning to pivot towards regional/domestic supply chains. The manufacturing industry plans to limit future disruptions by using advancements in technology, reshoring of production, and growth of the supply chain as-a-service business model. In the wake of ongoing global supply chain disruptions, a consortium of North American manufacturers has launched a new endeavor with the express intent to reverse the 5-decade trend toward offshoring. Its goal is intended to help the U.S. achieve balance with China.

Manufacturing executives expect the following five skills to increase significantly within the next 3 years: (1) technology/computer skills; (2) digital skills; (3) programming skills for robots/automation; (4) working with tools and technology; and (5) critical-thinking skills.

Shopping “Made in America” and sustainability are also found to be top of mind for consumers of all generations by Reshoring Initiative, with new data revealing: (1) that consumers are gravitating toward local shopping and American-made goods, and (2) that 63% of consumers want personal products and cosmetics to be made within the U.S. with 52% citing materials used in manufacturing as the reasoning.

Further, a recent survey of 1,000 U.S. respondents aged 18-24 found that the COVID-19 pandemic has had an impact on Gen Z’s perception of manufacturing. More than half of respondents (54%) said they had not considered frontline manufacturing as a potential career before the pandemic; while 24% are now open to it.

Classroom discussion questions:

Why the move to reshoring now?
How do your students feel about jobs in manufacturing and OM?

OM in the News: Made in America–Again

Looking to 2021 and beyond, there is more reason for hope in U.S. manufacturing than at any time since the 1990s, reports The Wall Street Journal (Dec 17, 2020). Three major themes are gaining traction that will carry manufacturing to new prosperity: a quick recovery from the recession; localization of supply chains (onshoring); and technological advancements that level the playing field between the U.S. and low-cost countries.

U.S. manufacturing lost its lead some time ago. Lack of sustained investment, noncompetitive labor rates and degrading infrastructure opened the door for low-cost countries, notably China, to take the lead as manufacturers shifted production overseas. The end result was an industrial sector that leaked jobs and fell behind in technology. So why a turnaround?

N95 face masks being made at a GM plant in Mich. The auto maker started processing face masks in response to the pandemic.

First, the industry is poised to emerge from the Covid-19 recession much more quickly and robustly than it usually does from downturns. Data are overwhelmingly supportive of an industrial economy on the mend. With low interest rates and rising order books, manufacturers are boosting investments in both factories and new products.

Second, pre-pandemic, there was already a rising concern around supply-chain risks. Companies that a decade ago felt comfortable as suppliers consolidated and centralized—often solely in China—began to lose faith in globalization and made plans to onshore. Firms began to see that shipping intermediary products halfway around the world and often back again was no longer productive. These concerns were elevated to near panic as supply chains shut down in the early days of Covid. High-profile shortages, such as the lack of PPE, served as a broader wake-up call for the localization of supply-chains.

Third, automation and other technologies are almost at the point where the U.S. can produce the same quantity of product with half of the employees that would be needed in a similar factory in China. And advancements are accelerating. With progress in data analytics, low cost cloud computing and AI, the American factory is evolving into a new age.

Classroom discussion questions:

Chapter 1 in your Heizer/Render/Munson OM text describes 3 productivity variables. How does each apply in this article?
What other current problems have encouraged the localization of supply chains?

OM in the News: International Supply Chains May Prove Hard to Break

The supposed rush to reshore global supply chains may end up going nowhere. Those expecting large-scale deglobalization and the return of domestic production for many goods might be disappointed, writes The Wall Street Journal (April 23. 2020), with reports suggesting that global sourcing remains in full force.

Bringing some manufacturing home for medical or security purposes might make sense. Amid the U.S.-China trade war, reshoring was already a major issue of discussion before the coronavirus arrived. American imports of Asian-made goods (as a percentage of domestic manufacturing output) dropped in 2019, falling from a record high to the lowest level in 5 years. But that decline was due to a sharp fall in Chinese imports. Imports from the rest of low-income Asia actually rose, and U.S. manufacturing output was roughly flat.

This isn’t exactly deglobalization. Manufacturing shifting from one country to another as countries grow richer and pivot to higher-value manufacturing isn’t new. Just as China took a greater share of manufacturing once done in S. Korea and Japan, Bangladesh and Vietnam are well placed to take a portion of manufacturing that, for now, is done in China. It is inefficient for wealthy countries to attempt to resume much low-value production currently done abroad, as we point out in Ch. 2’s discussion of the theory of comparative advantage (see p.46).

Even in high-value sectors, a lack of knowledge, experience and competitiveness in niche areas are difficult to surmount. For example, Japan last year restricted exports of smartphone screen components to S. Korea. (Despite Korea’s dominant position in electronics, screens are largely produced in Japan). Manufacturers such as Samsung and LG were left hanging. Korea managed to reduce its Japanese components modestly (from 92% of the total to 85%) by massively expanding imported parts from the U.S., Belgium and Germany.

Ideological commitment to globalization didn’t drive the growth of major value chains in the first place, and its decreased popularity is unlikely to unwind them even with the current pandemic.

Classroom discussion questions:

What risks have operations managers come to discover with outsourcing?
What steps has the U.S. just taken to increase its supply of medical goods which are predominately manufactured in China?

OM in the News: Adidas Sneaker Factory Does Reshoring in Reverse

Adidas plans to close its only sneaker factories in the U.S. and Germany, shifting cutting-edge automated footwear production to Asia and reversing an effort to make products closer to shoppers in the West. The German company, the world’s second-largest athletic gear maker by revenue after Nike announced it would move technology developed at its so-called “Speedfactories” to two suppliers in Vietnam and China. The closure of the facilities in Germany and Atlanta—both opened within the past 3 years—raises questions about the feasibility of bringing manufacturing jobs back to developed markets.

Adidas said the move would result in the “better utilization of existing production capacity and more flexibility in product design,” writes Supply Chain Dive (Nov. 12, 2019). The company’s facilities in Germany and Atlanta were home to robotic production and 3D printing enabled by motion capture technology. Adidas is not totally discounting the 3D printing technology it has lauded as a superior way to produce shoes, but it is demonstrating that location for this tech still matters to the bottom line.

With the production move, Adidas suggests the business case is still better in Asia, even with advanced technology and despite the distance from target consumers. Supply chain disruptions have weighed heavily on Adidas this year, which may be contributing to the company’s decreased inclination to pay for facilities and labor in expensive markets like Germany and the U.S. Recovery from the shortfalls is bound to be expensive. The company has already increased use of air freight to catch up, warning the cost for the next two quarters would be “substantial.”

Classroom discussion questions:

What was the uniqueness of the “Speedfactories”? (See our post just 2 years ago)
Why move this manufacturing to Asia?

OM in the News: Reshoring Black & Decker Wrenches

Stanley Black & Decker plans to move production of its Craftsman brand wrenches from China back to the U.S., the latest manufacturer looking to use automation to increase domestic output as tariffs raise the cost of imports from overseas. Stanley is investing $90 million to open a plant in Texas that will employ 500 people to make 10 million Craftsman wrenches and 50 million sockets annually. Robots and fast-forging presses will help boost output about 25% above the older forging machinery now used to make these wrenches in China, helping keep production costs at the new plant in line with those in China.

The company’s strategy mirrors moves by other manufacturers in recent years to bring some foreign production back to more automated factories in the U.S., reports The Wall Street Journal (May 16, 2019). Whirlpool is making some KitchenAid appliances in the U.S. again after they were made in China for years. Caterpillar has moved the assembly of excavators and small bulldozers from Japan to new plants in the U.S.

“We’re pushing very hard to manufacture where we sell it,” Stanley’s CEO said. The company moved production of Craftsman products to China years ago to reduce costs after decades of manufacturing in the U.S. (Some Craftsman tools are already assembled at 8 Stanley plants in the U.S.) Craftsman wants 50% of its tools to be made in the U.S. a few years from now, up from 30% today. The firm remains reliant on foreign-made components for motors for its power tools. After the administration recently raised U.S. duties on components imported from China to 25% from 10%, Stanley said its tariff costs on components from China this year will increase more than 60% over 2018 to about $250 million.

Classroom discussion questions:

Discuss the implications of the tariff increases.
Why is the U.S. now able to compete with China?

OM in the News: Is Fanuc the Most Important Manufacturing Company in the World?

Businessweek thinks there is one clear winner in the manufacturing world: the $50 Japanese billion company that controls most of the world’s market for factory automation and industrial robotics. “In fact,” writes Businessweek (Oct. 23, 2017), “Fanuc might just be the single most important manufacturing company in the world right now, because everything Fanuc does is designed to make it part of what every other manufacturing company is doing”.

At Fanuc’s Mt. Fuji plant, hundreds of bright yellow Fanuc robots are working around the clock to build other Fanuc robots. Some robots will be shipped elsewhere in Japan, where strict immigration policies and a declining birthrate have left manufacturers of all sizes more dependent on factory automation. But most are bound for China.

Automation has been rising in China over the past decade, partly because, as wages and living standards have risen, workers have proved less willing to perform dangerous, monotonous tasks, and partly because Chinese manufacturers are seeking the same efficiencies as their overseas counterparts. More and more, it’s Fanuc’s industrial robots that assemble and paint automobiles in China, construct complex motors, and make injection-molded parts and electrical components.

And as China goes, so goes the rest of the industrial world. Multinationals that are reshoring operations from Asia to N. America and Europe are doing so in part because automation promises sophisticated production methods and labor savings; they are spending more than ever on industrial robots– 32% more than a year earlier, with many of them are ending up in Midwestern steel and auto manufacturing centers. Orders from the U.S., though, are dwarfed by those from China—some 90,000 units, 1/3 of the world’s total industrial robot orders last year. (Researchers estimate that each new industrial robot displaces 5 human workers).

The key to Fanuc’s success may lie in AI. In the past, the selection of a single part from a bin full of similar parts required skilled programmers to “teach” the robots how to perform the task. Now, Fanuc’s robots are teaching themselves. “After 1,000 attempts, the robot has a success rate of 60%,” the company said. “After 5,000 attempts it can already pick up 90% of all parts—without a single line of program code having to be written.”

Classroom discussion questions:

What is the role of artificial intelligence in robotics?
What will be the impact of robotics on U.S. manufacturing?

OM in the News: Can the U.S. Bring Back 1/2 the Manufacturing Jobs that Moved Overseas?

Which jobs make sense to reshore from China?

For decades, U.S. companies have been chasing cheap labor offshore and then importing products to sell in the U.S. market. Now, according to Market Watch (March 9, 2017), “Trumponomics, a broader focus on Total Cost of Ownership (TCO) and advanced manufacturing have the potential to end the manufacturing stagnation of the past 30 years and create millions of manufacturing jobs in the U.S.”

Over the past 20 years, the boom in offshoring drove the U.S. goods trade deficit up by $640 billion a year, costing the U.S. 3-4 million manufacturing jobs. But one study revealed that 60% of offshoring decisions used only rudimentary cost calculations, typically just price or labor costs and ignored other costs such as freight, duty, carrying cost of inventory, delivery and impact on innovation.

Advanced manufacturing now helps level the global playing field. First, the number of labor hours per unit of output is reduced. Second, the gap in the labor cost per hour shrinks. For example, a highly skilled robot engineer in China makes 1/3 to 1/2 of American pay, and not the small fraction (5% or 10%) of the low-skilled Chinese workers. In addition, acquiring capital equipment is more expensive in China because of China’s value-added tax of 13% or 17% on imports. Fortunately, the U.S. can have automation and more jobs as it reshores.

The availability of a skilled workforce is essential for bringing jobs back, ranking second among the reasons given by U.S. and foreign companies moving jobs back or creating new manufacturing jobs here. When companies reshored and failed to find the needed workforce, the transition was painful. The good news is that the bleeding of manufacturing jobs to offshore has stopped. Reshoring balanced offshoring in both 2014 and 2015. In comparison, in 2000-2003 the U.S. lost a net 200,000 manufacturing jobs a year to offshoring.

Classroom discussion questions:

Explain the TCO concept.
Why is reshoring more feasible now than a decade ago?

OM in the News: Can Sneaker Makers Come Home?

“A new Trump administration has industry players who import almost all their sneakers from low-cost locales in Asia talking about their efforts to switch more production to the U.S.,” writes Businessweek (Feb. 6-12, 2017). They already know that manufacturing closer to home would lower the time it takes to get products to market. Now, sneaker makers’ efforts to manufacture here could also help deflect attention from the fact that they overwhelmingly are in the business of designing and marketing made-in-Asia footwear for American consumers.

Nike’s products are made by 1.1 million workers in 645 factories located across 42 countries. About 400,000 of the workers are in Vietnam, with 202,000 in China. Only 7,000 are in the U.S. Footwear companies are hoping for incentives for manufacturing onshore to speed up their made-in-America ambitions. But as they look to bring production back to the U.S., shoemakers are embracing a new kind of worker: robots. Sneakers, with lots of pieces stitched or glued together, are labor-intensive. That’s one reason so many plants are located in low-wage nations. So automating is key for any shift.

Still, getting U.S. production to account for more than a tiny fraction of their global totals will be tough. Nike employs 1,300 at factories in Oregon and Missouri, and says it plans to invest in advanced manufacturing to bring production to the U.S. Even if many shoe factories were to get built in the U.S., most of the jobs they’d bring would likely go to industrial robots or 3D printers, not people. Adidas, for example, says its upcoming “speed factory” in the Atlanta area will initially employ only about 160 people. And Under Armour uses just a dozen workers to make its 3D-printed shoes in New Hampshire.

Classroom discussion questions:

Why does the U.S. want shoe jobs back?
Will Nike ever leave its plants in China and Vietnam?