U.S. Manufacturing is Expanding
Significant U.S. “outsourcing” of manufacturing to overseas companies has been with us for decades. Upper management of U.S. companies owes a duty to the owners of those companies to deliver the best quality offerings at the lowest costs so as to maximize profits. Accordingly, the manufacturing function was often assigned to foreign companies so as to remain competitive.
Currently, a consensus has arisen among many economists and executives that significant factors have emerged in this arena which may have contributed to an expansion of U.S. manufacturing. So, many top U.S. executives are revisiting the issue in order to be prepared for adaptation to that resurgence if it should materialize.
One consideration is that oil has reached exceptionally high prices around the world. In recent years new, viable natural gas sites have been found in the United Sates. These sites should contribute to lower energy costs. Accordingly, manufacturers will be able reduce the high cost of transportation related to domestic manufacturing.
Another factor is that in the last few years, labor costs in China have increased year-over-year by nearly 20% and, at the same time, labor costs in Mexico have increased year-over-year by 5%. In contrast, labor costs in the United States have risen year-over-year by only 3%.
Further, since 2003 improvements in applicable technology have enabled productivity increases and require fewer, but more skilled, workers. Inexpensive sensors, fast computing, robotics and other new technologies have led to new user-friendly factory automation.
As might be expected, the economic advantages of outsourcing must be weighed against inherent risks such as the practicality of geographic, intellectual property, political turmoil and currency risks. These risks have shown to outweigh many of the assumptions made a decade ago. The geographically diversity in supply chains of major manufacturers have created a multitude of increased risk for each link in the supply chain.
In the current environment, those who engage in outsourcing should revisit their operations and business strategies related to outsourcing and pay very close attention key assumptions related to expenses and risks. The risk and expense profile may well have proven to be accurate for much of the last decade. Now is the time to re-examine these assumptions and reconsider where (and by whom) your products should be manufactured. Most importantly, operations executives should realize that outsourcing and offshoring are cycles — not trends.
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