In the first post in this series, I called attention to a surprising piece in Wired (surprising in that it talks about just how mainstream manufacturing re-shoring has become) about the story of one organization that had successfully moved spend from China to a US supplier and increased its profitability in the process. The remaining part of the article succinctly captures a number of themes that we echo on these pages everyday. Consider, for example, how just as China labor costs have risen — by as much as 50% on a total cost basis in some regions in recent years — so too have US manufacturing prices declined thanks to productivity improvements and a continued drive to automation. Yet the real drivers of re-shoring and the reduction of China as a critical link in the production supply chain might be different.
Here Wire cites a study from KPMG that “recently asked 196 senior executives to list their top concerns for 2011 and 2012” in which “labor costs ranked below product quality and fluctuations in shipping rates and currency values.” US companies are responding to these concerns and voting not only with their global and regional supply choices, but also with product designs in mind as well. As one CFO quoted in the article suggests, “We’ve redesigned products five or six times, trying to reduce the number of connectors, the number of screws, anything that would require additional labor … with some of the products we’re introducing this year, we’ve decreased the labor content 40 percent.”
Even though it is rare from a global sourcing standpoint that we ask for cost breakdown worksheets from suppliers or build total cost models that encompass specific production elements and steps — rather than simply aggregate information such as raw material costs and labor components — it now makes more sense than ever to understand the actual drivers of production costs rather than simply the Cliff Notes summary. Organizations that realize a single product design decision may not only reduce the potential global supply base for an item, but also create additional labor requirements and potentially constraints are likely to be in the best position to make education decisions on re-shoring. Moreover, as the cost of capital for larger, credit-worthy companies has remained low, investments in capital equipment may make more sense if it’s possible to reduce supplier or internal labor costs.