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This article was originally published on INC.com and can be viewed here.
Companies around the country are increasingly cashing in on ‘reshoring’ opportunities.
Just two years after Tim Zimmerman learned American manufacturing was fleeing overseas, he tried to bring it back.
In 1990, Zimmerman, then the new salesperson at contract manufacturer Mitchell Metal Products, persuaded a maker of kids’ furniture to repatriate its production of hinges from China to his employer’s Merrill, Wisconsin, plant. “What boosted our effort was Tiananmen Square,” says Zimmerman, now co-owner and president of the $12 million company. Mitchell couldn’t match Asian prices, but the uncertainty the political protests caused made his prospective client nervous.
Zimmerman encouraged the furniture maker to conduct a risk analysis and calculate the financial exposure of missing a quarterly shipment. The numbers won the day. Working with Mitchell, the company began receiving parts shipments every three or four weeks, compared with quarterly shipments from the Chinese supplier. That stoked the customer’s growth, and it shifted more production to Mitchell.
But Mitchell benefited less from that early reshoring effort than did its client. Over more than two decades, the company successfully lured just a handful of small accounts from China. “There was a corporate mandate: We take cost out,” says Zimmerman. “It was an automatic attitude. ‘Sorry, Mitchell Metal Products. You can’t even compete.'”
In 2012, that started to change. Today, 8 percent to 10 percent of Mitchell’s volume comprises jobs captured from Asian manufacturers, a number Zimmerman expects will rise to 25 percent in five years. The increase is part of a tide of production flowing back to U.S. shores. In 2014, the number of American manufacturing jobs heading overseas and the number coming back reached rough parity, according to the Reshoring Initiative, a nonprofit based in Kildeer, Illinois. In 2016, the United States added a net positive 30,000 manufacturing jobs as a result of reshoring, that organization reports.
Some percentage of those jobs return in-house, as corporations like Ford and Boeing boost production at their domestic plants or open new ones. But small and midsize companies frequently offload at least some production to others. A study of close to 900 reshoring companies found that roughly 60 percent bestow their repatriated business on U.S. contract manufacturers or other third-party vendors. For companies like Mitchell Metal Products, the trend dangles juicy opportunities.
“I think U.S. manufacturers have learned a lot since the 2008 recession,” says Zimmerman. “Before, they had a lot of cash tied up in processes that were not fully efficient.” Widespread improvements in things like inventory management, Zimmerman says, “have set the stage for companies to effectively reshore.”
Getting more competitive
The most common explanation for an increase in reshoring is rising costs in China, where wages for manufacturing jobs tripled between 2005 and 2016, according to Euromonitor. But disenchantment with offshoring is broader than that.
Savings, for example, are often less spectacular than anticipated. Companies that focused on a per-piece rate may have missed a slew of additional costs, from shipping to auditing to travel. (The Reshoring Initiative offers a free online tool that helps companies calculate their total cost of offshoring. Many contract manufacturers use it in their pitches.)
In addition, “there is a recognition of risks that people did not recognize when they first offshored,” says John Gray, an associate professor of operations at Ohio State University’s Fisher College of Business. In a study conducted by Gray and two other researchers, small to midsize companies cited a litany of reasons they had chosen to bring home production. Among them: Asian factories’ use of unapproved suppliers or components, finished products that differed from samples, poor quality, intellectual property theft, and lack of responsiveness to problems.
“It’s not just that they offshored something that maybe they shouldn’t have because they did not think about hidden costs,” says Gray. “But they also did not think about how it would affect their ability to be responsive, deal with problems, and develop new products together.”
Customer expectations have also changed since 2001, when China’s entry into the World Trade Organization ratcheted production east. “The customers want it now,” says Harry Moser, president of the Reshoring Initiative. “Amazon can deliver it today or tomorrow, which means Amazon has to be able to receive inventory very quickly if there’s a surge in demand. If you are getting the product from somebody here, then that supply chain is feasible.”
Kathleen Sarniak, the CEO and owner of Jeannette Specialty Glass, has won back some customers’ offshored business by building organizational muscle where her Asian competitors are weak. The 65-employee company, which is based in Jeannette, Pennsylvania, makes glass for use in commercial and industrial light fixtures. In 2003, 30 percent of that business waltzed off to China.
Sarniak made up some of the loss by creating a branded line of glass sinks, a new category not easily replicated overseas. When the housing market crashed in 2008, she aggressively wooed the few lighting customers that still kept some small-volume work at Jeannette to bring back larger jobs they’d offshored.
Like Zimmerman at Mitchell Metal, Sarniak drilled down on cost of inventory, buying a 60,000-foot warehouse in 2010 where the company stocks large customer orders and then ships as needed. She also significantly beefed up its R&D and quality assurance functions, areas in which Chinese manufacturers often lag. Team members visit customer locations–something overseas producers can’t do–to help improve efficiency on their assembly lines. They also handle troubleshooting.
As a result of her efforts, five customers have reshored substantial orders to Jeanette, and Sarniak recently landed two new ones bringing back production from China. One of those accounts may amp her company’s growth by 30 percent. “It was costly, but we’ve made a lot of changes that allowed us to compete,” says Sarniak. “If you find out what is not being offered by the Asian vendor, then you can offer it and move ahead.”
Offshore companies do maintain one significant edge over their U.S. counterparts: They are more likely to produce complete products, soup to nuts. “When they went to China, a lot of U.S. companies did not want to do their own assembly because of all the language and legal and other complications,” says Moser. “So it was advantageous for manufacturers there to develop a complete capability to take over a whole project.”
Moser says that Chinese companies are starting to buy U.S. injection molders, tool and dye makers, and other contract manufacturers in order to replicate those capabilities here. The appetite for such inclusive services and the potentially large-scale employment they promise is evident in the ardent pursuit of Taiwanese behemoth Foxconn by the states of Wisconsin and Michigan. Moser would like more U.S. manufacturers to develop skillsets to handle complete assemblies. He sees opportunities to build more companies like Jabil, an $18 billion global manufacturer started in 1966 by a couple of guys in Florida.
Zentech, a Baltimore-based contract manufacturer, is one company that handles projects from design through testing. It has successfully taken on two complete-assembly reshored projects since 2010: a wireless printer for coupons and a wearable device for volleyball players. But the company, with 200 employees and north of $50 million in revenue, has parted ways with four or five other reshoring customers over price.
One of those customers went back to China. The others cut bait for very low-priced manufacturers in the United States.
“The reason they were in Asia to begin with was that they were in price-sensitive markets,” says Zentech’s president Matt Turpin. “Products that are low complexity or have a low-reliability requirement have a low barrier to entry for people making them.” U.S. manufacturers in inexpensive regions with smaller, moderately skilled work forces are well positioned to pick up that work, says Turpin. For companies like Zentech, which specializes in complex military and medical products that affect lives, such jobs “became a race to the bottom.”
Although most reshoring isn’t right for Zentech, Turpin believes it will help the economy overall. “I would not pretend you are going to set up a manufacturing business focused on reshoring and be the darling of Wall Street,” he says. “But from a societal standpoint, reshoring is going to create jobs and generate economic activity. For the U.S., this is a growth area.”
Energy Department Launches New Manufacturing USA Institute Focused on Recycling and Reusing Materials
THE SUSTAINABLE MANUFACTURING INNOVATION ALLIANCE WILL LEAD $140 MILLION INSTITUTE IN ROCHESTER, NEW YORK TO IMPROVE COMPETITIVENESS OF U.S. MANUFACTURING
WASHINGTON — As part of the Manufacturing USA initiative, today the Energy Department announced its new Reducing Embodied-energy and Decreasing Emissions (REMADE) Institute, which will be headquartered in Rochester, New York and led by the Sustainable Manufacturing Innovation Alliance. REMADE will leverage up to $70 million in federal funding, subject to appropriations, and will be matched by $70 million in private cost-share commitments from over 100 partners.
The REMADE Institute will focus on driving down the cost of technologies needed to reuse, recycle and remanufacture materials such as metals, fibers, polymers and electronic waste and aims to achieve a 50 percent improvement in overall energy efficiency by 2027. These efficiency measures could save billions in energy costs and improve U.S. economic competitiveness through innovative new manufacturing techniques, small business opportunities, and offer new training and jobs for American workers.
“The REMADE Institute is a key example of how public-private partnerships like Manufacturing USA are critical to advancing America’s low-carbon economy and strengthening manufacturing industries across the country,” said Energy Secretary Ernest Moniz. “This Institute will be an important catalyst to leverage innovation and energy efficient technologies that will reduce harmful emissions while creating jobs and building America’s 21st century economy.”
U.S. manufacturing accounts for nearly 25 percent of the nation’s total annual energy use. The physical products that are created as a result of manufacturing embody most of that energy. The research and deployment of cost-effective technologies that could reduce the energy used in materials production could offer energy savings of up to 1.6 quadrillion BTU annually in the U.S.– more than the electricity, oil and other energy consumed by New Hampshire, Hawaii, Delaware, Rhode Island, Washington, D.C. and Vermont combined.
Extracting raw materials like steel and aluminum for manufacturing is energy intensive as is the manufacturing process used to make products with these materials. By enabling recycling and remanufacturing (the rebuilding of original products using a combination of reused or recycled parts) technologies, the Institute will dramatically reduce life-cycle energy consumption for products and improve overall manufacturing efficiencies. The focus also includes new ways for information collecting; gathering, identification and sorting of end-of-life and waste materials; separating mixed materials; removal of trace contaminants and robust and cost-effective reprocessing and disposal methods.
REMADE is the fifth Energy Department-led institute in the multiagency network known as Manufacturing USA, also known as the National Network for Manufacturing Innovation. Since it was established four years ago, Manufacturing USA has grown from a single institute to a network of 13 institutes. Led by manufacturing experts renowned in their field, the Manufacturing USA Institutes have attracted over 1,300 companies, universities and nonprofits as members – starting with 65 members and now at more than 1,000.
The institutes continue to attract new business investment to their regions, develop cutting-edge technology and train American workers to apply new skills to our growing manufacturing sector. To date, the federal government’s commitment of more than $920 million has been matched by more than $1.87 billion in non-federal investment. For more information about the REMADE Institute and participating organizations, visit Energy.gov.