Even before COVID, companies shifting manufacturing back to the US
Updated: May 18, 2021
By Samantha Mooney
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The Philosophy Changed Even Before COVID
Recent surveys have shown that many companies are shifting more complex contract manufacturing back to the US. Many realized a lot of the models used in the 1990s and 2000s just aren’t as accurate as previously believed, outside of basic widgets.
“In the ensuing months and years, amid ongoing shortages of raw materials and lifesaving pharmaceuticals, the U.S. will likely undergo significant shifts, not just in its policy, but in its fundamental business philosophy,” according to Forbes.
Valence IndustrialTM (Valence) started feeling a shift with demand from auto, pharmaceutical and medical device manufacturers along with construction equipment manufacturers by October 2019.
Valence's customer base wants to go local for their contract manufactured equipment. That ranges from customized fabricated materials in their factories ranging from fabricated formed parts and material handling to mezzanines and safety guards for the machinery.
Our customers often want custom specifications to create a competitive advantage. Companies are moving their products and process to a proprietary model. This model allows more of a competitive advantage in which they can supply their customers with functions and features that are hard to duplicate. It allows for higher margins and longer product cycles. When your competition cannot duplicate your offering, it makes you standout in the crowd.
In the late 1940s, manufacturing accounted for one in three non-farm jobs in America, according to the Economist.
Since the 1970s, with the influences of the internet and better communications, there was a shift to “creating efficiency” for shareholders. This came in the form of offshoring to countries with lower requirements around environmental and worker protections.
In 1991, 234m people in developing countries worked in manufacturing. That number inched up to 304m people in developing countries by 2014, with just 63m manufacturing jobs in the rich world, according to The UN Industrial Development Organisation (UNIDO)
Today, manufacturing accounts for one in 11 non-farm jobs in America, according to the Economist.
None of this information is shocking. We all heard that manufacturing jobs were drying up in the 1990s and 2000s. However, people are finding that the case for offshoring may have had holes in it.
Is your manufacturing an innovation service or a widget product?
In a recent survey, nearly 87% of the companies surveyed were sourcing from multiple global suppliers. More than half had a global sales office, global contract manufacturers, and shared global manufacturing sites.
Companies operating in multiple global locations decreased by 10%
From 2017 to 2018, the number of companies operating in multiple global locations decreased by 10%, according to the same survey of North American companies with 100+ employees in automotive, consulting, consumer products, finance, industrial products, logistics 3PL, manufacturing and technology.
The most common areas with offshoring include:
Speed of innovation. Just-in-time capabilities, optimizing speed for broader projects to be scoped.
Less safety stock paired with lead time (& orders tied in transit). Customers often prefer to have only what they need when they need it. Offshore orders are typically in the tens of thousands of pieces, which leads to a significant amount of capital tied up in inventory that may not be available for weeks. Common shipping problems are added into the mix with natural disasters, security threats, political instability, theft and other risks.
It’s iterative work on the factory floor. Engineers don’t often share the ins and outs of design, but when you are mid-design, they realize the little things like the enclosure door is off or the forklift should move the steel pallets in both directions, not just one.
Waste. Is the procurement department going to ask the vendor to ‘junk’ it when it isn’t to specifications or doesn’t fit correctly?
Is it really cheaper? The models may be off
IndustryWeek put it best to summarize some of the challenges that large companies had when they jumped on the offshoring bandwagon for increased shared-holder value.
"According to the findings of a 2009 analysis by Archstone Consulting and Duke University, most manufacturers use rudimentary total cost models that ignore 20% of the offshoring's cost. Other studies indicate that the prices for Asian manufactured products have risen 15% to 20% in the last four years; and, at that rate, it won't take long for the cost advantages of many offshored products to vanish."
Wages around the world have risen fivefold since 2005, according to the Deloitte 2016 Global Manufacturing Competitiveness Index. If that was in 2016, the assumption that the trend hasn't changed drastically but has continued.
“5x wage increase globally”
Millennials are now changing the workforce in China. Previously, first generational workers were coming from smaller villages to major cities and were sending their paychecks back home to their families.
Millennials born after the 1990s stayed in their first job for 19 months on average. In comparison, the number for those born in the 1980s is 43 months, and 51 months for those born in the 1970s, according to a report published by professional networking platform LinkedIn.
According to one recent statistic, the aging population in China is expected to cause the workforce to dwindle by 100 million every 15 years starting in 2020. These are all compounding factors in the rising focus of on-shoring.
On-shoring is Going Big in 2021
14 traditional Asian low-cost trading partners reduced their exports to the US as a direct result of aggressive US government trade policies, according to the seventh annual Kearney US Reshoring Index.
The other reasons that we’re seeing on-shoring is a much larger pool of available labor with more workers open to manufacturing jobs in the Midwest among other areas, according to the Brookings analysis.
Additionally, there are lower real estate costs in the Midwest among other areas, according to smartassetTM.
Lastly, state incentives (like those in Kentucky & Ohio) have attracted investments. In fact, Valence is in the process of applying for a grant from Sidney, Ohio to expand our factory.
Contract Manufacturing, Supporting Workers of the Future
While no one believes widgets are coming back to the US, you can see in the graph that R&D and engineering are key areas of growth. This trend has been happening for the past decade.
Full on-shoring would require heavy resources to coordinate logistics if done all in one swoop. However, fine-tuning is a whole other thing. Advanced manufacturing provides jobs of the future, not the past.
A great example of this type of work is in contract manufacturing. Valence has people who have worked as welders or machinists before being cross trained on Computer Aided Manufacturing (CAM) & Computer Aided Design (CAD) programming. Workers of the future will need skill and adaptability. This is the first step into training workers in artificial intelligence and managing multiple robotic cells – which will be coming soon to factories near you.
Custom manufacturing vendors need to invest in both, the software and people to design and fabricate the parts. CAD focuses on the design of a product or part - how it looks and how it functions. CAM focuses on how to make it. You can design the most elegant part in your CAD environment, but if you can’t efficiently make it with a CAM system then you’re better off kicking rocks, according to AutoDesk.
While Ohio & Kentucky have some of the highest rates of machinists according to the US Bureau of Labor Statistics, it is still a challenge to find machinists with CAM experience.