The U.S. has become a more attractive destination for manufacturing over the last few years. That’s a fact. And several U.S. companies are indeed bringing back their manufacturing operations. Several others are asking the question: “Should we reshore our activities as well?” That’s unfortunately the wrong question. What companies should realize is that the factors that make reshoring interesting today — for example, low energy costs, shrinking labor differential with China, etc. — are inherently cyclical. Consequently, even if manufacturing is coming back to the U.S. in a big way (which it’s currently not, by the way), those operations definitely are not going to be here forever. So the better questions to ask are: “How long will manufacturing in the U.S. be attractive, and is that long enough to make it worth the capital and effort for my company?”
Looking at macroeconomic factors only doesn’t present the full picture. Companies in industries that you’d never expect (for example, apparel) have come to the U.S. recently, while industries you’d think have a strong case for reshoring have not yet made the move. So, the question is more complicated than “Should we reshore?” To help you avoid any nasty surprises once you get to the nuts and bolts of reshoring, here are a few questions to help you make the decision.
Is my reshoring decision future-proof?
When considering whether reshoring is right for your company, the answer isn’t just a simple yes or no, but rather a more qualified answer such as, “Yes, but only under conditions X and Y.” Understanding these conditions requires thinking through potential scenarios. The tried and tested methods of strategic scenario planning can help test alternative scenarios such as energy, labor cost differential, and supplier network developments to ensure that your reshoring decision has the right balance of steady state efficiency and future-proof robustness.
In a typical scenario planning exercise, the first step is determining the time required to make sure the cost and capital related to reshoring have an acceptable return. Next, the set of macroeconomic and industry trends that could impact your re-shoring decision are established. That list depends on where and how your company competes, but it usually adds up to 10 to 15 business drivers. In a somewhat simplified but much more practical scenario planning approach, we only look at the top two drivers and articulate the polarized outcomes for these drivers. For example, if energy cost is one of the top two variables that will drive your reshoring decision, the two polarized outcomes could be “Energy Costs Stay Low” within the timeline that you need to pay back your investment or ”Energy Costs Go Back to Pre-Shale Gas Levels.” Once the two ends of the spectrum are articulated for each of the top drivers, a 2 x 2 grid of plausible and relevant scenarios can be created. Finally, the expected probability for each scenario is determined, and the affect of each one on the reshoring business case is ascertained. We’ve found this to be a necessary stress test to avoid making the wrong decision.
Is my company ready to reshore?
While scenario planning can provide directional confirmation that you should consider reshoring, several factors will have to be further investigated. Availability of capacity is one important factor. It can provide economies of scale while accelerating the operation’s transition and learning curve and can also reduce the need for capital. Our research of companies that have reshored revealed that 74 percent reshored to existing locations. If you don’t have available capacity, you need to make a key decision—whether to own or outsource the reshored operation. This “build or buy” decision should obviously fit into the broader business strategy.
Skills availability, in particular, is an area of concern. Across industries, 75 percent of manufacturers reported skill gaps. Furthermore, skilled tradesmen are older than the average worker and many are nearing retirement. To make this a perfect storm, young Americans have shunned manufacturing and STEM-type classes, due to the lack of opportunity. Not being able to find skilled resources that can be ”plugged in” may not be that big of a deal if solid training programs are available. Unfortunately, as companies went through tough times during the recession, training was often cut back. Well documented standard operating procedures can help, but they’re likely not up to snuff for operations that were sent overseas. Apprenticeship models to orient new hires or having new employees shadow others on the job are ways to deal with the skill shortage, but they all come at a cost that needs to be factored into the reshoring business case.
So, evaluating your reshoring readiness will help identify some of the potential pain points your company may face during implementation, as well as provide an understanding of where the reshoring business case stands.
What is the best reshoring location?
If you don’t return to an existing facility, a thorough location selection exercise must be conducted. Our research shows that the majority of companies that moved to new locations picked those locations based on, primarily, advantaged skilled labor, supply chain ecosystem synergies, and proximity to customers (combined with the proper incentives, of course).
Skilled labor and customer proximity are obvious, but the synergies that existing ecosystems provide are often harder to measure. As it turns out, a rich and diverse business ecosystem can provide a shortcut to building capabilities while lowering startup and ongoing costs. They can help address the shortage of labor by providing a critical mass of workers for a variety of key needs. Nearby universities can also provide high-potential, local labor that comes without relocation fees. A best practice in determining the right location is to understand what the governments of host locations take into account as they determine how to ”sweeten the pie” during negotiations. The answers to questions such as “Is this a strategic sector for our state?” and “Can they leverage the infrastructure investments and the workforce training programs we’ve set up in our state?” are important, politically and economically. If these criteria are fulfilled, the incentives are typically larger. Understanding where your company ranks versus a state’s attractiveness index and being transparent about what your key location decision drivers are is crucial in finding the sweet spot for both parties. Finally, looking at the potential locations through the lens of each of the earlier mentioned scenarios is a good practice to ensure that the reshoring location decision holds in the future.
With all that in mind, determining whether reshoring is right for you is probably more complicated than most companies had envisioned. Multiple pitfalls and headwinds can negatively affect the timing, effort required, and even the business case that supports your reshoring project. To do reshoring the right way, companies must understand the underlying conditions that drive the attractiveness of reshoring for the company, but that’s only half the task. Testing your readiness and deciding who should own the operation and where the best re-shoring location should be are equally important. Only by going through a rigorous analysis and process will companies know if reshoring is the right decision for them, both now and in the future.
About the authors
Patrick Van den Bossche is a partner with A.T. Kearney, a global management consulting firm. He leads the Americas Operations Practice and is based in Washington, D.C. He can be reached at Patrick.van.den.Bossche@atkearney.com. Pramod Gupta is a principal with A.T. Kearney and is based in New York. He can be reached at Pramod.email@example.com. Hector Gutierrez and Aakash Gupta are consultants with A.T. Kearney and are based in San Francisco.