The Wall Street Journal has an interesting article about the Caterpillar, which is considering relocating some heavy-equipment overseas production to a new U.S. plant. (“Caterpillar Joins ‘Onshoring’ Trend“)
The article describes the discussion at Caterpillar as an example of a growing trend among manufacturers to move their operations back home.
After a decade of rapid globalization, economists say companies are seeing disadvantages of offshore production, including shipping costs, complicated logistics, and quality issues. Political unrest and theft of intellectual property pose additional risks. “If you want to keep your supply chain tight it’s hard to do that with a 16-hour plane ride from Shanghai to Ohio,” said Cliff Waldman, an economist with the Manufacturers Alliance/MAPI, a public policy and economics research group in Arlington, Va.
So is the world not flat anymore?
When we started looking at the costs and complexities of the inventory and lead times, there really wasn’t any savings,” said Block Windows’ president, Roger Murphy. The company added 10 workers, increasing employment to 120, and can keep inventory levels lower because shipping times have been cut.
In the Operations Strategy class (which I will be teaching in exactly two week and five days – but who counts) we discuss the metric of Total Landed Cost as one that allows firms to account for exactly all of these costs. Using such a uniform metric that tracks all the end-to-end costs including those traditionally associated with COGS, but also the additional logistics and overhead expenses allows for more rational offshoring decisions. It’s true that it may be difficult to account for issues related to intellectual property and unexpected complexities – but it’s a step in the right direction.
I think it is fairly clear that the days of “blind offshoring” are long gone. The price differences between production in the US and production in, say, China, are diminishing, and while the same can be said about the complexity of managing the relationship – it does not happen at the same rate. The additional overhead and the required capital (for example due to the need to carry more inventory to account for the longer lead times) increase the attractiveness of the onshoring option. The only surprising thing here is that firms are surprised by the disadvantages of offshoring. Using the same logic, in a few years they will also be surprised by the disadvantage of onshoring.