We’ve been hearing for a decade that Northeast Ohio has to compete with China. Now, China and the rest of the world are eyeing us.
Manufacturers in Ohio and nationwide are moving some of their production back from overseas, a trend known as “reshoring,” after discovering that offshoring can include unexpected costs. Mary Kaye Denning, president of the Cleveland-based Manufacturing Mart, says she knows of six Northeast Ohio companies that have reshored some of their operations for various reasons: better engineering know-how in Ohio, rising shipping costs, shorter delivery times and the hassle of managing operations thousands of miles away.
“I think there’s a patriotic motivation in play,” she adds: “OK, we’ve been there, done that; let’s go in a new direction.”
A March report from Accenture found that 61 percent of global manufacturing executives surveyed say they need to consider major changes to their plant and supply network. Although labor cost remains the most important factor in selecting manufacturing and supply locations, proximity to customers is a close second. More than a third say they need to better align their network with their customers’ locations.
This March, the Fund for Our Economic Future awarded a $25,000 grant to Polymer Ohio to study reshoring. Wayne Earley, Polymer Ohio’s CEO, says his organization applied for the grant after hearing from companies that wanted help relocating back to the state.
Still, some local companies that are reshoring may not be willing to talk about it publicly for fear of giving away a competitive advantage, trade secrets or intellectual property.
U.S. Sen. Sherrod Brown organized a conference call in April to discuss reshoring. “Fuel costs are part of it,” Brown says. “The cost of raw materials is evening out.” Tougher enforcement of trade rules may also discourage offshoring by reducing unfair trade advantages in certain industries, Brown argues.
Susan Helper, chair of the economics department at Case Western Reserve University’s Weatherhead School of Management, says economists don’t have enough solid data to measure the growth of reshoring. But she hears about it as she’s conducting a study of the automotive supply chain for the U.S. Department of Labor.
“There’s still offshoring going on, still companies finding opportunities abroad,” Helper says. “But some companies are finding that the idea that we can’t possibly manufacture here competitively is wrong.”
IB: Why are some manufacturers bringing production back home?
SH: There was all this movement to China, a rush to China, after it joined the World Trade Organization in 2001. It’s a huge market with cheap labor, so people saw it as a panacea. Given most of the accounting systems manufacturers have, it looked great, but the only thing that they can track well is direct labor. ... I think some of them found that there are a lot of hidden costs in doing business in China.
IB: What are some of those costs?
SH: Top managers are spending a lot of time creating a supply chain rather than developing new products or solving the problem in the U.S. You can miss the market window. The debugging and ramp-up has taken longer, doing it thousands of miles away and with a language barrier. Sometimes it only takes one bad outcome to have a problem. If the shipment is late, it upsets Walmart or General Motors or whoever your customer is.
IB: So it’s harder to do business in China than manufacturers think?
SH: Yes. Labor costs go down, but travel costs and product development costs go up. The lost revenue is harder to track. Second, some costs just aren’t monetized, like how CEOs spend their time. Some of it is lost intellectual property: You give your suppliers a design, and then the supplier figures out how to make it themselves and sell it themselves, sometimes modified, sometimes not. The third reason is variability and risk. The supply chain is long. It’s hard to recover if you have problems.
IB: Are companies discovering it’s easier to manufacture in the U.S.?
SH: If they do training and an integrated series of changes, they can move to ... agile production, where you deliver quickly to a variety of markets. It’s not just training of workers, it’s also IT investment in a website that works, [where customers can order] products or parts. That leads directly to the scheduling of the factory and workers who can operate multiple machines. But any one of the investments isn’t enough. Improving the factory schedule doesn’t work unless the workers are trained.