By Michael Langley, Chair of the International Economic Development Council
Many companies with overseas facilities would prefer to have those operations in the United States – as long as the numbers work. But for many firms, the concept of reshoring, or returning manufacturing and services operations to the United States from overseas, is a daunting one.
Yet it doesn’t have to be. At the national, regional, and local levels, there are tools to help with this process, as well as organizations that would like nothing more than to help site selectors and companies work through some of the issues that come with “domesticating” their supply chains.
The International Economic Development Council (IEDC) – the world’s largest membership association serving the economic development profession – has been conducting research on the reshoring trend for three years. In that time, we have interviewed dozens of companies that have returned operations to the United States (or turned to domestic suppliers), and learned a tremendous amount about why companies are reshoring and the challenges and opportunities they face.
But first, a little about the big picture. In 2016, for the first time in decades, more manufacturing jobs returned to the United States than went offshore, according to data from the Reshoring Initiative. A total of 77,000 jobs were added in the United States in 2016 from reshoring and foreign direct investment combined, a 10 percent increase over 2015, and figures from early 2017 show even greater growth.
So what’s behind these trends? IEDC’s research has found six primary issues that are leading companies to bring production back to the United States:
- Rising labor costs abroad
- Quality issues
- Long lead times
- Intellectual property violations
- Language barriers
- Desire to shorten supply chains
In speaking with many firms that have reshored, IEDC found that the desire to address supply chain issues was perhaps the most frequently cited reason for the decision. (This is likely bolstered by the fact that the cost savings of manufacturing offshore have narrowed significantly in the last few years.) Take, for example, the experiences of these firms:
- Made in America Seating’s CEO Darius Mir found that long lead times from China, sometimes as much as three or four months, meant the company had to keep extra inventory. This kept capital tied up in additional management and real estate costs. By manufacturing closer to its clients, Made in America Seating has saved both time and money.
- California-based Celebriducks manufactures rubber ducks in the image of famous film, music, athletic, and historic figures. Company president Craig Wolfe says that by making its products in the United States, the company is able to avoid some of the logistical and labor hurdles common to manufacturing overseas. Furthermore, Celebriducks is now better positioned to respond to consumer demands, and can quickly produce ducks that mimic celebrities currently in vogue. “We can meet deadlines that nobody can make because I do not have to get shipment from overseas,” Wolfe said. “I am able to have a turnaround time that is unlike anyone else’s, so we have options.” (Another benefit to closer proximity to suppliers, Wolfe noted, is the company’s ability to reduce its carbon “duck” print.)
- Constructive Eating, a utensil manufacturer based in Michigan, experienced difficulties with lead times while manufacturing in China. As a growing company, there were times when sales exceeded forecasts, and the company did not have inventory readily available. The company had to decide whether to wait for the next shipment to arrive, add storage capacity, or, several times, fly in stock by air freight, which is far more expensive than shipping by boat.
- As a young company, electronics manufacturer ZeeVee in Massachusetts struggled to meet upfront capital needs for its foreign orders. Its Chinese supplier required a 50 percent payment of the value of the product before orders could be processed. The time from processing an order to getting the product built, packaged, and prepared for shipment took approximately three to four months. Before the product could enter the distribution channel, the company had to pay another 50 percent to the distributors, which further delayed shipment. From the time the first payment was made until the product was received by retailers, six months or more could pass.
Help Available for Smaller Companies
While a number of large corporations have announced large reshoring projects, smaller companies have less capacity to deeply analyze their supply chains, run the numbers, and finance a shift to American manufacturing. This is where economic development organizations and manufacturing associations can lend a hand.
Since 2014, the Northeast Pennsylvania Industrial Resource Center (NEPIRC), a Manufacturing Extension Partnership affiliate, has been helping small and mid-size manufacturers reshore to the Keystone State. NEPIRC, along with Pennsylvania’s six other Industrial Resource Centers, leveraged state funding and an Economic Development Administration (EDA) ‘Make it in America Challenge’ grant to help companies with offshore components locate U.S. suppliers who can get the job done stateside.
NEPIRC held 140 meetings with small to mid-size manufacturers across northeast Pennsylvania. In most cases, NEPIRC found it was easier for companies to switch to domestic suppliers than it was to bring equipment back from overseas. By mapping their supply chains and using the Access Costs Anywhere and Total Cost of Ownership tools (more on these later), NEPIRC helped smaller manufacturers realize the advantages to working with domestic contract manufacturers.
Since 2014, NEPIRC helped bring 16 different components that had been manufactured abroad back to be produced by U.S. companies. The IRCs facilitated these matches with the Reshore2PA website, a sort of online billboard for companies to request orders from domestic suppliers, and for suppliers to advertise their capabilities to OEMs.
Several reshored firms mentioned that one of their biggest challenges was finding a capable domestic supplier within their region or state. Many Chinese contract manufacturers will only take large orders, and many of the companies IEDC interviewed decided to reshore once they located a domestic supplier that could fulfill smaller, customized orders. Economic development organizations can play a vital role in matching manufacturers’ needs with qualified suppliers. Several communities have created websites with searchable supplier databases, including the City of El Paso, Texas’s Supplier Database and the Pennsylvania Southeast Partnership for Regional Economic Performance’s Manufacturing Industry Maps Tool. The Indiana Economic Development Corporation sponsors a business-to-business website, the Indiana Supplier Insight Procurement Portal, where manufacturers can connect with suppliers and logistics firms in the state and learn about supplier events, see procurement ads, and access training opportunities. Networking events, such as supplier fairs, are other useful tools for making these connections.
Several of the reshored firms IEDC interviewed were small businesses that had not had contact with an economic development organization. The firms’ own research on suppliers often drove their location decisions. Several of the reshored firms noted they would have welcomed assistance in identifying domestic suppliers.
Potential Roadblocks: Good to Know
Despite many advantages to making in America, reshoring production is not without risk. Businesses like stability, so it’s important to understand the challenges that can come with supply chain changes.
Many companies have long-term contracts with offshore suppliers, which cannot be easily or inexpensively cancelled. Some buy multiple components from the same supplier, so even if it’s smarter to purchase one component domestically, they run the risk of losing other contracts. Companies may have to ask themselves, “Are we reshoring a component, or reshoring from a country?”
If a company is willing to cancel a contract, it runs the risk of never seeing its equipment again. That can mean the need to identify domestic suppliers who are not only able to fulfill specific orders, but to also make new molds and tooling.
Even if a new domestic supplier is found, it can take time to get the specs right on the new order; extended gaps between the end of one contract and the beginning of a new one can cost a company time and money. In the case of Pennsylvania, most of the successes the IRCs helped with were the result of phasing in the new supplier as the previous contract wound down.
Discretion also is key. Some companies don’t want it known that they’re looking for a new supplier, as they could they could face serious repercussions with upcoming orders if their existing supplier gets wind of it. That’s why the IRCs’ internal network was so valuable in the process. Information-sharing – sometimes just a simple call or email – between IRCs enabled them to quietly identify a qualified supplier in another network if a local one couldn’t be found.
Resources for Companies and Site Selectors
Many companies don’t consider logistical costs when purchasing from foreign suppliers. The Total Cost of Ownership Estimator (TCO) tool is useful in exploring and uncovering these costs. The TCO is available free and online from the Reshoring Initiative to “help companies account for all relevant factors – overhead, balance sheet, risks, corporate strategy and other external and internal business considerations – to determine the true total cost of ownership.” Companies can put their unique data into the calculator and receive a total cost of ownership analysis that includes useful calculations, charts, and graphs.
Many federal agencies are eager to lend a helping hand. The Assess Costs Everywhere (ACE) Tool, from the U.S. Department of Commerce, helps business assess total costs more accurately to enable informed decision-making. The tool provides companies with an analytic framework, links to public and private resources, and case studies that can illuminate reason to source in the United States. The EDA is at the ready with grants to finance infrastructure needs for companies that require new access roads or utility extensions. ENVE Composites’ investment in Utah’s Ogden Business Center is one such beneficiary of EDA’s reshoring support. Where to locate your facility is another question the EDA can help answer, thanks to the National Excess Manufacturing Capacity Catalog (NEXCAP) and U.S. Cluster Mapping. NEXCAP is an online inventory of underutilized industrial sites, and the Cluster Mapping tool can identify areas with a strong supplier presence for an array of industries.
Companies with products that could be sold to Walmart should be aware of the company’s U.S. manufacturing initiative. Walmart hosts a Jobs in U.S. Manufacturing (JUMP) Portal, a dedicated site for suppliers and other companies interested in U.S. manufacturing or reshoring their operations. The site offers a knowledge base of documents, videos and how-to information.
Your Local and Regional Economic Development Organizations are Here to Help
Once a company has run the numbers and decided to reshore, it may still face numerous challenges when returning to the U.S., including recruiting a skilled workforce, finding new suppliers, and securing necessary permits. This is where local, regional, and state-level economic development organizations (EDOs), though too often underutilized, can play a significant role in assisting companies to reshore.
For instance, these EDOs often have relationships with local high schools, community colleges, and other post-secondary educational institutions that can be leveraged for workforce training purposes. If a manufacturing company that is reshoring requires workers with a specific set of skills, economic development organizations can often help ensure these workforce needs are met.
EDOs are also able to assist companies with supply-chain mapping and connecting businesses that want to reshore with local and regional suppliers. Economic development organizations should have an inventory of suppliers in the region and will be able to make necessary introductions.
When reshoring a manufacturing operation requires significant upgrades to the proposed site, EDOs are able to assist with procuring permits. When these upgrades include infrastructure enhancements, EDOs can coordinate with local utilities and secure grant funds to effectively address the reshoring company’s needs.
Lastly, EDOs may be able to arrange financial incentives, such as tax credits, for companies that reshore. Companies that agree to meet certain hiring or investment benchmarks may be eligible for local and state-level financial incentives. State EDOs can help companies make connections with local level organizations.
In working with local, regional, and state EDOs, you’ll find partners who want to help you succeed in the United States. Take advantage of them!
Bio: Michael Langley is CEO of the Greater Minneapolis-St. Paul Regional Economic Development Partnership (GREATER MSP) and Chair of the International Economic Development Council (IEDC).