One of the most interesting – and, at times, eyebrow-raising – sessions (from this writer’s point of view, at least) at Commodity/PROcurement EDGE, MetalMiner and Spend Matters’ jointly held conference last week, was Harry Moser’s presentation, To Offshore or Reshore: How to Objectively Decide.
Harry Moser, as MetalMiner readers may or may not know, is the president of the Reshoring Initiative, and preaches the gospel of total cost of ownership analysis in deciding whether reshoring or nearshoring is the right way to go for a US manufacturer – and generally, Harry’s view is that TCO analysis will show that bringing jobs back to the US is a beneficial value proposition.
But the question that became clear during the session seemed to be, “What if price alone still outweighs any other TCO considerations, such as freight, intellectual property risks, etc., when working with overseas suppliers?”
We’ll try to tackle that in a bit. First, let’s break down what really wakes Harry Moser up every morning.
Chinese Labor Costs
This is definitely a central impetus for manufacturing organizations to consider reshoring, from Moser’s point of view.
It’s hard to take justify reshoring to Canada because of higher labor costs than those in the United States, so 80% of the time, companies nearshore to Mexico; although, according to Moser, many people are simply scared of going there due to the violence. (That threat is present, of course, but read about some other challenges to Mexico sourcing you may not have expected.)
Here’s the meat of it: When looking at the labor cost per unit of output, not just raw labor cost, the US has stayed same with regards to unit cost since about 2000, whereas China has had 15-18 percent wage increases, expressed in dollars, while the productivity increase has been 6 percent per year, according to Moser’s presentation. Basically, China’s unit labor cost is 3.2 times what it was 13 years ago.
Will this continue? Moser thinks yes: Chinese wages will keep going up because of rapid economic growth and their one-child policy. For example, China’s employable population last year fell by 3.5 million.
How to Quantify Value of Lower Non-Price Costs?
The types of inputs that go into the Reshoring Initiative’s total cost of ownership estimator tool, Moser outlined, are the China vs. US unit price, the number of units per year, product life in years, packaging, product liability risk, intellectual property (IP) risk, innovation, and annual wage inflation, just to name a few.
However, one audience member asserted that all of the above notwithstanding, they couldn’t see those elements of value overriding low part prices, for instance. Another audience question poked even more at the Jenga tower Moser had built:
“What about costs that aren’t realized right away (IP, etc.), i.e. which don’t come through in the financials?” an attendee asked. “Our sourcing department was saying we don’t want to do it. So how can we restructure the incentives for the company to go out and reshore?”
Moser replied that you have to get entire company involved, not just purchasing. He acknowledged that some savings will be realized 5-10 years in the future, but that’s how you hedge against Black Swan event risk.
Still, many aspects of reshoring all or even part of a manufacturers’ supply chain are a hard sell.
But that’s why Moser eats, sleeps and breathes this stuff.