Why Manufacturers Operating Offshore Must Consider Total Cost of Ownership – Part One

MetalMiner came across the Reshoring Initiative at a recent IMEC supply chain conference here in Chicago, and has separately touched on reshoring in recent articles. We got in touch with the initiative’s founder, Harry Moser, to clarify just what his firm does, why total cost of ownership (TCO) matters and why it’s important for US metals companies to consider reshoring.

Moser is the retired ex-president of GF AgieCharmilles, a leading producer of EDM and HSM (High Speed Milling) machine tools; serves on the board of the National Institute of Metalworking Skills (NIMS); and started the Reshoring Initiative in 2009.

(The following interview was condensed and edited.)

MetalMiner: Please give our readers a brief background on the recent reshoring trends.

Harry Moser: It’s what the typical US manufacturer wants to hear. The challenge is to get to the companies that offshore to their supply chain managers — and convince them to reevaluate their offshoring decisions. What they do now is make decisions on price. Instead, they should be looking at the total cost of ownership (TCO). We provide a free estimate to companies with our Total Cost of Ownership (TCO) Estimator. We provide to job shops, the metal suppliers, etc. to help them sell the advantage of local sourcing.

Companies that offshore do it at their own factories abroad called in-house offshoring and others are buying products offshore, called outsource offshoring. It’s not a function of volume. A company might buy one mold offshore, but Apple buys essentially all Foxconn, with a quarter million people in China making product for Apple. That’s bigger than any single company in the US so volume is not a pure indicator of what’s outsourced. We see everything from molds and dies to Apple buying millions of parts and products. The [offshoring] tendency has been toward high-volume, labor-intensive sectors.

MM: What is the exact difference between reshoring and nearshoring?

HM: Onshoring means making it here; offshoring means that what you used to make here goes outside the US; reshoring (or backshoring) means bringing it back to the US; and nearshoring means bringing it closer, to Canada or Mexico. The TCO Estimator allows a user to calculate the TCO of any source it wants to for which it has the data. It will compare the US to China, India, wherever but it can compare Mexico to China as well. The program automatically populates the freight rates for the country.

MM: What are some of the “real costs you mention that companies may not be thinking of when they decide to offshore?

HM: Most companies make their decisions based on price. Some would make their decision based on landed costs (price plus duty plus packaging). In addition, I’d also include hard costs carrying costs of the inventory, 18-22 percent per year handling costs, obsolescence costs, etc. The travel costs to go check on the supplier are time-consuming and expensive when it’s 12,000 miles away.

Another one that doesn’t appear in the PNL is the opportunity cost when the customer comes in and orders something and you can’t supply it, you lose that profit. When there’s a spike in demand or when someone wants a variation on a particular product, you have a chance of doing that more quickly from your local supplier — but not from China.

(The interview continues in Part Two.)

For more on how to access the Reshoring Initiative’s Free TCO Estimator, go to their Web site or send an email to harry(dot)moser(at)comcast(dot)net

–Taras Berezowsky