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

by on

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 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.

(This edited and condensed interview continues from Part One — check it out here.)

MetalMiner: An article in the Times tries to make a trend story from the fact that some companies are now investing more in automated equipment than employees. How heavily do labor costs actually factor in here?

Harry Moser: There’s a mistaken belief that labor is only 5 or 8 percent of the total cost of making things, and that’s absolutely wrong. If it were only that much, companies wouldn’t go to China. If it’s ever that low, its direct labor only (meaning the worker who actually touches the work piece). In a low-labor environment, that’s 5 or 10 percent. If you compare US sourcing to Chinese sourcing, you have to factor in direct and indirect workers (forklift operators, foremen, managers, secretaries, service people, etc.). Then the 5 or 10 percent is only in-house labor content at the supplier, it’s not the labor content which is embedded in the components they buy.

Take GM — they make the sheet metal, engines, etc., but almost all other components they buy from somewhere else. That’s material cost. But at the company that made them, a significant percentage of that component is labor. If you’re in China, the components cost less. If you add all that labor up, there’s a factor of 40 or 50 percent of labor costs. That’s what drives people to look to reshoring. The steel, aluminum and oil all cost the same the difference is in the labor. The cost gap is closing.

MM: Your site mentions that one benefit of reshoring is getting operations closer to R&D, which would drive innovation can you talk a little bit about that?

HM: Innovation is enhanced by keeping the engineering close to research and marketing. Pisano and Shih at Harvard Business School have written that if you separate the two of them, you degrade both. Everybody says we should be an innovation economy. If you look at Apple as a model, you have 25,000 employees here in US and 250,000 in China actually making those products Apple, in that sense, is a poor model, and certain imbalances exist.

(The interview concludes in Part Three.)

–Taras Berezowsky

Leave a Comment

Your email address will not be published. Required fields are marked *