Harry Moser, founder of the Reshoring Initiative, is involved in providing  manuacturing companies with the tools to determine whether or not moving back to the U.S. and North America is in their best financial and business interests.

Tecma Group of Companies:

Hello and welcome to another edition of Tecma Talk Podcasts. Today joining us is someone who is pretty well known these days in manufacturing circles in the U.S. He’s somewhat of an expert on the topic that we’re going to address today. His name is Harry Moser. Harry is the founder of the Reshoring Institute, rather than give any more information about you, Harry, I’ll let you give the folks an overview of you and your Reshoring Initiative. We’ll take a few questions, and discuss the topic after that.

Harry Moser:

So Steve, as you corrected, it’s the Reshoring Initiative, not the Institute. We’re honored to be part of this recording and eventual communication out to your listeners. I founded the Reshoring Initiative about four years ago and the mission is to bring back manufacturing mainly to the U.S. but also to North America because there are a lot of ties between the U.S., Canada, and Mexico and more broadly to any country.

We emphasize that companies should measure the economic advantages of producing near the consumer and when they do that, most countries find that some of what has been offshored comes back to be produced in that home country. The logic that we provide is relevant to most countries.

Tecma Group of Companies:

So basically what you want to do, and you’re working on producing, is the bottom line argument in terms of the economic rational that supports producing closer to consumers. Is that it?

Harry Moser:

Yes. So what we do is encourage companies to not purchase or produce based on the purchase price of the object or product, but instead to look at a more complete measure of the cost of that product—what we call total cost of ownership.

Instead of looking just at purchase price, they look at price, duty, freight, packaging, carrying, cost of inventory, travel costs, impact on innovation of separating engineering from manufacturing, intellectual property risks, etc. and adding in all those other costs typically adds 20-25% to the purchase price and, in many case, we think maybe 25% of the cases makes the difference between whether an emerging market like China or India is the most cost effective source, or whether U.S., Canada, and maybe Mexico is the most cost effective cost for supplying the North American Market.

Tecma Group of Companies:

Well when you think about this: the history of companies manufacturing and having global locations to conduct their activities, there were certain obvious factors that provide the impetus for companies that offshore certain operations to do so. There’s a significant amount of this that has occurred over the years . In considering that, what would you ascribe the trend or that movement to? How did that happen?

Harry Moser:

Offshoring was primarily driven by the low wage rates and willingness and diligence of emerging country workers. The fact is that 20 years ago you could get a hard working Chinese manufacturing worker for 30 cents or 50 cents an hour, and in the U.S. it was $20 an hour. That was an overwhelming advantage. The major factor driving offshoring and defining offshoring as producing in that low wage country to ship to be consumed in the U.S. or North America, then the major driving factor was cost, labors costs.

Secondarily, some companies set up facilities in those other countries to penetrate those markets, to sell in China, India, and other countries. That’s not offshoring that’s just sales, that’s just marketing, that’s just common sense. That’s entirely consistent with our philosophy that you should produce most things where they’re going to be consumed. So what drove it was largely the wage rates and in terms of real offshoring, and what’s producing a trend towards reshoring has to do with the wage rates, as well. Now that Chinese wages have been growing at, let’s say 15-18% per year expressed in dollars, and they’ve been doing that for about 15 years. Therefore that unit labor cost, which is wages and dollars adjusted for productivity, have gone up by a factor of about 3 in China in the last 13-14 years. Whereas in the U.S., they’re stable and in Mexico they’re about flat, maybe down a little bit. All of a sudden production in North America has become a significantly more attractive to which to consider reshoring manufacturing activities.

Tecma Group of Companies:

And of course one thing that you point out quite correctly is that people for a long time focused, almost exclusively, on wage rates. When you talk about China and that 30 cents well obviously you have the significant increase in cost of labor maybe over the last 5 years or so, but in addition to that there’s volatility in costs of fuel, therefore shipping can be more expensive. At one time the ability to actually get containers to get out of China and make your shipments on time from sources that I speak with was an issue. Finally, all of that stuff that’s floating across the ocean is inventory, and it costs money to carry inventory.

Harry Moser:

I was speaking mainly about what has changed. The Chinese wages have changed, oil prices have gone up, and I’d say the other thing that’s changed is that, increasingly, companies based on their own experience, and based on what they’ve read about other companies, are saying it’s not enough to just look at the price or just at the wage, but I’ve got to consider the carrying cost of the inventory, which you were talking about. The travel costs of my employees to go audit and help the supplier. The intellectual property risk, the corruption risk and cost, the whole variety of cost, many of which are only worth a half of a percent or a percent, but collectively when you add them up are 15 or 20 percent, and should not have been ignored in the first place.

Tecma Group of Companies:

Right, well given all of the things you just mentioned, people are a lot more savvy in how they look at the economics of this, and things have obviously. You work in your Reshoring Initiative to primarily bring manufacturing back to the U.S., but North America as you said as a destination, the three countries have a very strong supply chain linkages between the three countries that are positive in the aggregate for all of them. Can you point to anything in particular to quantify the kind of movement that we hear about in a way that’s tactile for us?

Harry Moser:

I think the simplest way is to take the ten year overview. Back around the middle of the last decade, let’s say 2003-2005, offshoring was growing at maybe 150,000 manufacturing jobs a year and reshoring was unheard of.

Maybe it was 2,000 jobs a year, but it wasn’t recorded, it wasn’t discussed. Now in contrast in 2013, the offshoring is down from 150,000 to maybe 40,000 and the reshoring is up from 2,000 to maybe 40,000, so the net offshoring is down from about 150,000 manufacturing jobs a year to 0. You might say we’ve stopped the bleeding. If you think of it as an ocean liner, before you can turn it around you first have to stop it. We’ve stopped it. From the U.S. viewpoint, there’s still three or four million manufacturing jobs offshore which we’re focused on bringing reshoring, and most of those we believe will come to the U.S., some will come to Canada, a lot of them will choose to move manufacturing to Mexico.

Tecma Group of Companies:

Just within those trends and those numbers that you just quoted for us, from your examination of those numbers, are there any industries or any products or characteristics of products that are more prone to make that return trip than others?

Harry Moser:

Sure, there are two easy categories, there’s the products that never got offshored and that therefore, are not candidates for reshoring. Food and lumber, and things like that, they’ve always been made here they never went away and, as a consequene, they cannot be reshored.

The opposite end of that are the category or maybe the middle is the category of things that were offshored especially in the last few years and should not have been—machinery, and heavy equipment, and some automotive components and appliances—things where the weight and the size are such that relative to the labor rates, labor costs, that you probably couldn’t justify it 5 years ago, and you certainly cannot today. The marginal things that probably shouldn’t have gone have been the first to come back—again like bulky appliances, machinery, things like that. Especially if they have a fairly frequent design changes, and if there’s a need for quick delivery or modification and customization for the customer. Let’s say at the far end of this there’s apparel and footwear and painted Christmas tree ornaments. We’ve seen some apparel we’ve seen some footwear, but that’s a tougher fight for the big, heavy stuff that never should have gone.

Tecma Group of Companies:

Now you talked a little bit about it, but maybe you can elaborate on it. How does nearshoring fit in the trend that you examine on a daily basis?

Harry Moser:

My first priority is to bring manufacturing back to the U.S., but my second priority is to bring it back to North America. What we see is that there is some work that you cannot bring back to the U.S., because it’s so labor-intensive.

If the only two alternatives are let’s say China or the U.S., and it’s just so labor-intensive and you can’t automate it and you look at all of the other costs and cannot justify it, it’s got to stay in China. WIf you say that’s as far as I’m willing to look then that’s too bad but if you open up a little bit and you say wow, it could go to Mexico. Well then, to me, that’s an okay solution—that’s a better solution than staying in China. Why would the company think that’s good? Well they get labor rates that’s now about the same as China, they avoid the intellectual property risk, and they have much, but not all of the logistical considerations are eliminated because Mexico is right next to the United States. That’s from a company perspective, from a U.S. societal perspective, if the only choice is bringing a portion of a product to Mexico or leave it all in China, for the U.S. company and for the United States as a country it’s better for the U.S. to be part of the winning team than all of the losing team. It’s better to have portions of the product made here in the U.S and portions in Mexico than to have all of the product made in China.

Tecma Group of Companies:

You touch on an an important issue—you know having worked in the area that you’re talking about for about 20 years—is what people sometimes don’t take into account is that 90% of the components that end up in products that are assembled in Mexico come from the United States. Rather than have a product made in China, where in that particular situation, most of those components that go into the final assembly are not going to be sourced on this side of the world, they’re going to be sourced in southeast Asia. Or, having something assembled in Mexico and having 90% of the component parts coming from places like Harrisburg, Elk Grove or some other town in the U.S., obviously that’s much more preferable. It’s interesting, I read not that long ago that for every 1 US dollar of Mexican exports, the U.S. actually makes 30 cents, because of that U.S. has content incorporated into most of the products that are manufactured in Mexico.

Harry Moser:

It tends to go even further than the components that go into the product—if there’s a stamping plant or an ejection molder in Mexico, they probably got the stamping dye or the ejection mold in the U.S

Tecma Group of Companies:

So what you’re saying is that it’s not just manufactured goods but it’s services as well?

Harry Moser:

A mold is a manufactured good, but I’d say it goes beyond the components down to the tools and the fixtures. They might bring consultants in from the U.S. They might bring all kinds of materials, so that’s an excellent point. Then also let’s say a company is assembling in the U.S. and you have two choices, you could get most of the components from China, or you could get most of them from Mexico and some from the U.S. That assembly plant in the U.S. is more sustainably located in the U.S. with a supply chain that has short lengths into the U.S. and Mexico than it would be if all the components were coming in from Asia. Therefore, the assembling factories and engineering are more likely to stay in the U.S. with that North American supply chain.

There’s a lot to be said for cooperating amongst the three countries and optimizing for North America, where as a U.S. citizen I can say my first choice is to bring things back to the U.S.

Tecma Group of Companies:

And as it should be in activities that you take part in. As a summary statement, or a summary set of bits of advice you might give, what would you recommend that companies do to make better sourcing decisions?

Harry Moser:

They should know in detail how their supply chain and purchasing people are making decisions especially between domestic and foreign sources. Are they really using something like total cost of ownership, which for us has about 29 cost factors, or are they primarily using just purchase price or landed costs? These are very simplistic, and very incomplete measures.

If they’re using those simplistic measures, then change to use total cost of ownership. Listeners can get access to our free software to do that calculation at
www.reshorenow.org.

I would advise that manufacturers convert to using total costs. I would also recommend that listeners reward your employees, your purchasing people and supply chain people based on total cost, not on purchasing price, because they’re going to do what they’re rewarded to do. If companies do that then they will find that in maybe 25% of the cases what they’ve offshored would make sense to bring back to the U.S. Some additional percentage would probably make sense to bring back to Mexico and then in addition for the maybe 15-20%, if they apply lean principles, automation, employee engagement, training, they’ll find there’s some additional percentages that they can bring back by improving their competitiveness either in the U.S. or in Mexico.

Tecma Group of Companies:

Harry, I’ve looked at your total cost of ownership estimator on your reshorenow.org website, and it isthe really impressive the number of variables that you’ve taken into account to steer people in the direction of being able to determine what the true cost of what it is that they’re sourcing is. If, for instance, somebody that’s listening to this, if they make the effort to look at the website, perhaps sign into it and play around with the numbers, a lot of folks when they listen to our podcasts have follow up questions for the person that was our guest, would you be willing to take questions from people that are examining this?

Harry Moser:

Sure, our whole purpose to exist is to help companies that are interested. Harry.moser@reshorenow.org they can email me and I’ll get back to them as soon as I can. If they’re having problems getting through the software, I’ll help them, and all I ask for them is to give it a fair chance and especially when they succeed and they decide to re-shore something, that they tell us about it, because the more companies that we can announce that have re-shored or near-shored into the U.S., Canada, Mexico from more distant points, the more that other companies will re-evaluate their offshoring and decide if they can do this.

Tecma Group of Companies:

Okay, Harry, I’m sure that some of the listeners will take advantage of that offer. It has been two years since we spoke last, and it’s good to see that you’re still out there working toward making things happen. We wish you the best of luck and hope you continue to do so.

Harry Moser:

Thank you Steve, I look forward to next time.

Photo Credit: Nick Harris