My last column was a brief introduction to the Reshoring Initiative’s resources and some best practices regarding what companies can do to accelerate reshoring to gain business. Now we would like to discuss in more detail how your company or your customers can use the free online Total Cost of Ownership (TCO) Estimator® to more accurately determine the real P&L impact of reshoring or offshoring. Doing so will probably prove that some work should come back.
Revealing the Hidden Costs
The main trends that are driving the shift from offshoring to reshoring are the rising costs of offshore production, the impact of distance on innovation, flexibility and resilience, especially in the age of COVID-19 and the increased use of TCO to quantify these hidden costs and risks. Companies are increasingly deciding to bring production and sourcing closer to home.
The shrinking cost advantage of low offshore wages and FOB prices is increasingly offset by dozens of hidden costs. Essentially, the Reshoring Initiative provides the tools for companies to decide whether their overhead comes down more than their manufacturing cost goes up when sourcing locally. Using TCO will help your company more accurately assess the total microeconomic impact of the firm’s offshoring or reshoring decisions.
Our TCO Estimator user data shows that if companies use TCO instead of price to make their decisions, under current conditions, they can reshore an average of about 25% of what they have offshored and improve their profitability. TCO typically closes a 15-20% FOB price gap, but some companies do the analysis up to a 50% gap. Before tariffs and COVID-19, about 8% of imports from China were more profitably sourced here, based on FOB price. That 8% rises to 32% if the decision is based on TCO. With a 15% China tariff also added, the U.S. share rises to 46%. As conditions from the pandemic improve and Chinese deliveries normalize, U.S. companies would be wise to prepare for future disruptions now and reshore a largeportion of what they have offshored.
Buyers can use TCO to assist them in their evaluation of sourcing options. Domestic suppliers also use TCO as an objective sales tool to help their customers quantify the advantages of domestic sourcing. For example, we recently helped an Illinois printed-circuit-board contract manufacturer save a $60 million order versus a Chinese competitor by showing the customer that the Illinois supplier provided the lower TCO even though it had the higher price.
Welding equipment manufacturer Rinco Ultrasonics Inc. recently expanded its U.S. manufacturing headquarters, bringing in new machinery and hiring additional employees. The Swiss-based, U.S.-owned company brought its tooling in-house to assume complete control of key functions for its customers.
Help the Country and Your Company!
Accelerated reshoring can help your company gain business and promote national economic stability by adding more jobs, increasing individual and corporate taxes paid, and decreasing the need for unemployment compensation and other government expenditures.
The Reshoring Initiative’s resources can be found at www.ReshoreNow.org. Twenty related free webinars can be found at https://reshorenow.org/videos/. For help, contact me at 847-867-1144 or email firstname.lastname@example.org.