August 2021 Volume 3

AUTOMATION

What’s Your ROI on Reshoring? By Jon Cocco

I do my best thinking when I have Microsoft Excel open. I can come up with a justification for anything by putting together a spreadsheet that convinces me of a financial return. Ten years ago, I was responsible for a global business unit with 1,500 employees and 7 global manufacturing plants. I was always quick to point out that labor cost was a company’s largest expense. Thus, higher profits came by figuring out the best labor arbitrage situation. In almost every Excel spreadsheet I created, it pointed to moving our U.S. manufacturing to China because of the sub $5 per hour wage

rate (See Figure 1). This was an easy decision for someone who was paid based on the company profits (and someone that did not live through World War II – I will explain the relevance of this later). Therefore, I made many decisions to offshore U.S. jobs to lower wage rate countries. However, today is different for executives confronted with the decision to move production. There is more to the story. Many companies are actually moving jobs back to the U.S., a phenomenon known as the reshoring movement.

Figure 1: Average hourly cost of manufacturing workers

History of Off-Shoring The United States has a history of both onshoring and off-shoring manufacturing. Our roots as an English colony in an international trading network laid the foundation to become one of the world’s largest manufacturing hubs. By the 1940’s, and the onset of World War II, the U.S. had generated a positive momentum, making it possible to switch from manufacturing millions of automobiles to manufacturing bombers and wartime industrial output (The Arsenal of Democracy by A.J Baime). This movement gave the confidence to U.S. companies to compete in a global market. The WorldWar II generation rarely thought about resourcing because of the patriotism created from the wartime manufacturing.

Then in the 1970’s the pendulum swung the other direction. Companies in a multitude of industries found themselves struggling withwhether to offshoremanufacturing. Off-shoring came at a great expense and tremendous risk, but the benefits over time appeared to justify the move. The result of this movement hit hard at home when China gained access to the World Trade Organization in 2001. As a result, the U.S. lost nearly 2.5 million manufacturing jobs to China between 2000 and 2010 (1). Fast forward to 2021, when many of those same companies are now making calculations in the opposite direction as they consider reshoring manufacturing back to the U.S. How are they justifying the risky and costly decision to move back home?

FIA MAGAZINE | AUGUST 2021 36