Daily Archives: February 6, 2012

The Case for Onshoring … Is A Damn Good One!

Upon a closer look, offshoring is not always the right answer for all products, especially those sold in America. For one thing, labor costs in general are shrinking as a share of the total cost for many items. Moreover, average factory wages in many developing countries are rising, as is the demand for America’s sophisticated just-in-time, cost-saving, logistical systems. When common shipping problems are added into the mix — natural disasters, security threats, political instability, theft and other risks — more manufacturers are concluding that the savings offshoring had promised are just not there.
  Guy Morgan, BBK Managing Director
  from The Case for Onshoring

You’d almost think he was trying to get in the doctor‘s good book! Truer words could not be spoken and I could not have said it better myself.

And these words are true whether you are talking manufacturing, software development, back-office functions, or call-centre outsourcing. We’ll review some high points of the article and then discuss these other points.

I think the author is right when he quotes Harry Moser, retired chairman emeritus of GF AgieCharmiles, who argued that many companies began moving production to low-cost countries mainly because they thought everyone else was. The worried that a competitor might gain a cost advantage; and, in the process, they put a limit on their thinking by fixating on a component’s sticker price rather than considering its total cost. But this leads to problems, especially since as per a 2009 analysis by Archstone Consulting and Duke University, most manufacturers use “rudimentary total cost models” that ignore 20% of the offshoring’s cost. And when you add to this the fact that the prices for Asian manufactured products have risen 15% to 20% in the past 4 years, there aren’t that many cost advantages.

And then, as the author astutely points out, you need to factor in excess inventory to replace poor-quality products and insure against late shipments, stolen intellectual property, rising fuel costs, environmental impact and more … which all adds up to more cost!

Add it all up, and it’s often cheaper to produce your product in North America. And this is sometimes the case even if you have to produce it in or near a major city that you would normally consider to be a high-cost locale!

It is time for the home-shoring renaissance that the doctor has been predicting since 2007 (which is well before the Boston Consulting Group figured it out, as mentioned in the article, but we’ll forgive them because they’re still ahead of the curve). What everyone is forgetting is that, despite higher labour costs, good ol’ (North) American ingenuity and innovation always leads to much higher rates of productivity and lower component costs in the end that always more than cancel out the labour costs. The proclamation that some U.S. states will become among the most cost-effective locations for manufacturing in the developed world is a correct one and it will happen. The only question is will your organization be one of the few who will lead the way and reap the greatest rewards?

And if you want to get an idea of how big those cost savings associated with onshoring could be and you’re in manufacturing, checkout the FREE TCO Estimator associated with the Reshoring Initiative over on ReshoreNow.org. It’s not perfect, but with 29 cost factors, it’s a good start.

As for the other industries I mentioned, you’ll save money bringing those back as well.

If your software development is outsourced to India, there are big savings to be had. Labour costs are still rising and the average skilled worker now costs (at least) 40% as much as his American counterpart. You might say that he’s still cheaper even after communication, remote management, and reduced productivity costs are factored in, but, if it’s innovative development, he’s not — especially if you reshore to Canada. Up here, we have the Scientific Research & Educational Development tax credit which can refund you up to 75% of approved research and development costs. And if you need money up front, it can always be stacked with the National Research Council’s Industrial Research Assistance Program. And since, up here, a software development resource costs at most twice as much as a resource in India, after these programs are applied, our world-class developers, who speak your language in your time zone and understand your business, cost half as much.

With respect to back-office functions and call-centres, there are a large number of small, rural, towns with low costs of living that would thrive off your operation and staff it at very affordable rates. And while the North American minimum wage might be three or four times as much as a prevailing wage for an English speaking call center or back office resource in Asia, when you consider that many calls will be resolved significantly faster as both parties will understand, and be comfortable, with each other from the first “hello” (as many North Americans aren’t comfortable with Asian call-centre support and have problems understanding their accent), the higher labour cost is negated with higher productivity. Plus, and this is key, no long-distance costs, no remote infrastructure costs, and significantly lower training costs (with much lower turnover). Win, win, win.

Bring the work back home. Unless you’re a Fortune 500 (like Apple) with demand for your product so big that it has to be made in a city (like Foxconn), and in the top 0.01%, it will be more cost effective to do so. And the higher quality and lower risk will make it all worth while.