The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site where Bob Ferrari is a featured guest contributor.
Today’s Financial Times features both page one and supporting page 3 articles (paid subscription or free metered view may be required) outlining the conclusions of a newly released research report from the Boston Consulting Group indicating that a renewed trend of “re-shoring” among certain manufacturers in the U.S. may lead to the creation of an additional three million new U.S. jobs. These FT articles provide summarization of the BSG report along with some specific examples from U.S. manufacturers, such as candle manufacturer Chesapeake Bay Candle, the security division at Fortune Brands, and high end professional hairdressing equipment provider, Farouk Systems.
We scanned the BSG report and it looks to be quite comprehensive in its analysis. While we have not had the time to read the report in detail, a couple of important observations and takeaways are worth mentioning in this commentary. We plan to provide a more detailed commentary in our upcoming Supply Chain Matters Q3 Newsletter which is distributed to our registered subscribers.
The report notes that: “a combination of economic forces is fast eroding China’s cost advantage as an export platform for the North American market. Meanwhile, the U.S., with an increasingly flexible workforce and a resilient corporate sector, is becoming more attractive as a place to manufacture many goods consumed on this continent.” One of the conclusions drawn is that by 2015, the economics of manufacturing and supply chain costs will favor goods in certain industries that are destined for North American consumers to be near-shored. “Wage and benefit increases of 15 to 20 percent per year at the average Chinese factory will slash China’s labor cost advantage over low-cost states in the U.S., from 55 percent today to 39 percent in 2015, when adjusted for the higher productivity of U.S. workers. Because labor accounts for a small portion of a product’s manufacturing costs, the savings gained from outsourcing in China will drop to single digits for many products.”
That alone is compelling, and has been a topic of discussion among product sourcing professionals. In its implications section, BSG opines that: “China should no longer be treated as the default option. Companies should undertake a fresh, rigorous, product-by-product analysis of their global supply networks that takes into account the total cost of production.”
These are important conclusions coming from a highly respected corporate business strategy firm, the same firm that advised manufacturers to source in low-cost countries many years ago. The report itself can be downloaded at the following link.
This author has been following and reporting on low-cost manufacturing events in China since 2005, while an analyst at research advisory firm IDC. Back then, we advised clients to clearly differentiate sourcing strategies among the needs for securing low-cost production vs. access to specific high-growth emerging markets such as China. The other important aspects were the weighing of risks, which included inventory and transportation tradeoffs, but specifically the number one rated risk among manufacturers even in 2005 was protection of intellectual product and process property (IP).
Since that time, manufacturers and supply chain sourcing professionals are becoming much more educated in differentiating and weighing the tradeoffs involved in these strategies. Tools for analysis of information and optimization of landed costs have also provided more insight. However, this new BSG report should be utilized to facilitate re-visits to product and supply chain sourcing requirements.
While the BSG report may be trumpeted in headlines as the return of manufacturing jobs to the U.S., caution is advised. Unstated is that sourcing decisions are based on the weighting of product demand from various geographic regions. China remains a booming consumer market, in spite of efforts from China’s leaders to ratchet-down economic forces of inflation. Future product demand from China and other vibrant emerging markets will remain enormous, and may well outweigh volumes of North America, where consistent high unemployment continues to fuel tepid demand.
The other important consideration is the state of U.S. supply chains for certain industries. While the economics for near-sourcing may turn more optimistic, will the supporting network of value-chain suppliers be just as optimistic? Supply Chain Matters feels that in certain areas, the U.S. may have lost some competitive value-chain capabilities. As an example, with a large percentage of electronics originating in Asia, is there a viable supplier network in North America? Similar can be stated for electronic appliances. Thus is the need for more pronounced industry and governmental collaboration to identify deficiencies. In some cases, it may be too late. Supply Chain Matters has been imploring the U.S. Presidential Committee on Jobs and Competitiveness to accelerate its efforts and deepen its area of recommendations beyond that of the lobby interests of its members. It must include a analysis and state of U.S. supply chain capabilities for growth industries.
We encourage more commentary regarding the conclusions of this latest BSG report. Now is the time for analysis and action, not only for individual companies and product management, but industry groups as well.