Earlier this March, Caterpillar (CAT) announced a possible plant consolidation that would unite production from an overseas plant in Akashi, Japan and a domestic plant in Aurora, Illinois into a new plant at a to-be-determined location inside the United States. The Alliance for American Manufacturing hailed the move as a positive step in the movement for more “onshoring.”
Generally, “onshoring” refers to repatriation to the United States of jobs that have been sent to low-cost locations overseas. The movement has picked up momentum recently, due partly to a weakening dollar and in response to the political environment generated by the recent recession and lingering unemployment. President Obama has emphasized rebuilding the United States’ domestic manufacturing base and is likely to propose restructuring tax incentives to encourage business to use the domestic labor force.
There are reasons, however, to suspect that the “onshoring” trend is based on fundamental forces beyond temporary currency fluctuations and the ebb and flow of labor politics. A series of articles by McKinsey researchers have explored the supply-chain dynamics of onshore versus offshore production for goods aimed at the U.S. market. In 2004, seeking to explain why Toyota (TM) still manufactures cars in the expensive Silicon Valley, McKinsey analysts Ronald Ritter and Robert Sternfels wrote, “Toyota remembers [what] many others have apparently forgotten: sending goods 500 feet in 24 hours is better than shipping them 5,000 miles across logistical and political boundaries in 25 days.”
Toyota famously pioneered manufacturing supply chain efficiencies, sometimes called “Lean” manufacturing or “Toyotism;” this philosophy focused, among other things, on “Just-in-Time” production, aimed at minimizing inventory build and related carrying costs. Many large manufacturing businesses, including tool and machinery maker The Stanley Works (SWK), have adopted Toyota’s methods. Central to implementing a “Just-in-Time” production strategy is efficient supply chain management, which means that parts are manufactured and moved from plant to plant in predictable and well-timed sequences.
But another McKinsey report, a 2006 survey of executives about supply chain management issues, showed that supply chain risks were on the rise from the greater complexity of products and services, higher energy prices, and increasing financial volatility. Added to these are political risks, the dangers of intellectual property theft, and quality control issues. In short, as oil prices rose in the 2000s, the per-unit cost savings of offshore production began to be consumed by shipping costs. At the same time, the slow speed of trans-ocean shipping made efficient inventory management more difficult. Finally, political and economic uncertainty increased the risks to supply chain continuity to unacceptable levels.
A closer look at Caterpillar’s proposed plant changes reveals that supply chain management may have been the driving force behind the move. Caterpillar plans to move production for the U.S. market away from its Akashi plant in Japan, but is not planning on closing the Japanese plant. Instead the idea is to redirect the output of the Japanese plant to meet demand in the Asia-Pacific region. The new U.S. plant would aim to fulfill domestic demand. Shorter supply chains thus seem to have been uppermost in the mind of Caterpillar managers. Window maker U.S. Block Windows, a division of privately held Hy-Lite Products, expressed a similar rationale for moving some China-based production to Pensacola, Florida.
Interestingly, buzz about “onshoring” is not limited to heavy manufacturing. It is well known that U.S. companies have outsourced an enormous number of Information Technology (IT) centers and Business Processes (known as Business Process Outsourcing-BPO) to China and India. But recently American firms Rural America Onshore Sourcing Inc., Xpanxion and Systems in Motion have been trying to compete with overseas IT and BPO providers. The Obama Administration’s stimulus bill allocated $7 billion for rural broadband installation, which advocates of American IT and BPO onshoring argue will bring millions of low-cost rural Americans in touch with the Internet and make them available to the virtual labor marketplace. Rural onshoring is far cheaper than hiring IT or BPO professionals in urban locations, but still somewhat more expensive than moving the entire operation to India or China. But the rural U.S. offers some advantages as well, including better data security, the same time zone as the potential customers, and better language skills.
Ultimately, domestic labor in both the manufacturing, and IT and BPO sectors still must work to be competitive on a man-hour basis. But it seems that the supply-chain benefits of “onshoring” mean that the movement is likely to last beyond the present weakness of the dollar and political promises of tax incentives for job creation.