When Offshoring, Solely Price-Based Decisions Are a Thing of the Past

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Harry Moser is still at it.

The founder of the Reshoring Initiative, whom MetalMiner has interviewed before, recently preached the valuable message of considering total cost of ownership (TCO) when making all kinds of ‘shoring’ decisions (off-, re-, near-) during a recent webinar sponsored by MFG.com.

While much of the webinar felt more times than not like sales pitch (even though Moser’s Total Cost Estimator, an application that can help companies calculate their total cost of offshoring/reshoring, is free) rather than super-meaty intelligence, there were a few takeaways, including cases and examples.

  • Flawed economic models. Moser sees flawed economic models used by a lot of the companies that could or already do use his help. In his estimation, 60 percent of manufacturers apply rudimentary total cost models and ignore 20 percent of the total cost of offshored products. “Faulty data leads to faulty decisions, he said during the webinar.
  • Pay attention to the “new usual suspects. That phrase may sound contradictory, but you all know what they are: Fragility (natural and political disasters), China (wages rising, currency rising), US dollar declining, oil soaring¦It seems harder now than ever to overlook carrying costs, travel costs, risks (natural disasters, political instability, intellectual property, etc.) when you take sourcing into account. (The most chuckle-inducing risk by far? Pirates.) Essentially, non-price-based costs are factoring in more heavily for companies with every successive quarter.
  • Shipping is a big suck. Many wasteful segments of offshoring, including waiting, half-full boats, over-processing, safety stock issues and inspections, center on the logistics of shipping halfway around the world.
  • The GE example. GE brought water-heater production back to a unionized facility in Kentucky from China. Some reasons for this were tax incentives, and ease of design collaboration with workers and a 2-tier contract. On price alone, China was still 30 percent cheaper, but ultimately, adding all the relevant costs made the China cost 6 percent greater than the local reshored cost.

  • Reshoring could solve US debt and unemployment problems. As Moser sees it, successful, broad reshoring efforts could eliminate the trade deficit to the tune of $600 billion a year, add 3 million manufacturing jobs, and 8 million total jobs, effectively cutting the unemployment rate to 4 percent. Quite a forecast and perhaps a bit too optimistic — yet undeniably, reshoring ostensibly means more people put to work domestically.

So why hasn’t TCO factored in as heavily for firms before, as opposed to price-based decisions? Simply put, because it’s easy, Moser said. “Price is readily available,” Moser told me after the webinar. “TCO is not available from any ERP/accounting softwares that I have found.” Also, “supply chain managers and other executives are often bonused on price savings. A recent survey said 43 percent [of them] are bonused on price,” he said. Not to mention that price is “real,” whereas risks generally are less tangible.

More can be found at The Reshoring Initiative, including the TCO Estimator.

–Taras Berezowsky

Comment (1)

  1. Thanks for attending the webinar! We put up a supporting post on the MFG.com Sourcing Blog. I hope you enjoy that as well. I would love to have you weigh in on the conversation.

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