Should US Manufacturers Relocate Factories and Production Back to the USA?

In June of this year, William A. Levinson published a book entitled Reshore Production Now: How to Rebuild Manufacturing and Restore High Wages, High Profits, and National Prosperity in the USA. The author contends that a manufacturing resurgence in the United States will not only increase the standard of living enormously but generate taxable economic activity that will help pay down rather than increase the Federal debt. Higher productivity also delivers a greater supply of goods to accompany higher wages and thus works against inflation. This can prevent looming recessions and disruptions.

I had a chance to speak with William this month, and during our conversation, I had the chance to ask him two crucial questions. I'm posting them here with William's answers following the questions:

What aspects of reshoring do manufacturers not fully understand? 

Accounting metrics often ignore the total cost of purchase or ownership of a product or service, and focus instead on only the immediate price. Harrington Emerson's Twelve Principles of Efficiency depicted the latter as near common sense, or focus on only the immediate bottom line, in contrast to supernal common sense which seeks to account for all costs. These include but are not limited to the carriage of inventory—one of the Toyota production system's Seven Wastes—in transit, the incompatibility of container ship-sized quantities with just-in-time production systems, the additional lead time associated with transportation, the fact that inventory gives defects a place to hide and additional exposure to force majeure supply chain interruptions. An earthquake that idles a vital offshore supplier factory, a ship that gets stuck in the Suez Canal, or a strike by longshore workers can all paralyze a supply chain. While domestic supply chains also are vulnerable to force majeure, they are also a lot shorter so there is much less exposure.

Many manufacturers and also retailers are also dependent on products from the People's Republic of China (PRC), whose recent activities have proven it to be a dangerous, untrustworthy, and unreliable supply chain partner. The PRC has a long track record of selling us counterfeit semiconductor devices, substandard active pharmaceutical intermediates (APIs), contaminated heparin, melamine-tainted foods, and most recently counterfeit N95 respirators that may have exposed their users to Covid-19. Cheap becomes expensive for domestic sellers who find themselves at the wrong ends of product liability lawsuits because their offshore suppliers, who are often beyond the reach of our judicial systems, cut corners. The PRC also threatened to cut off supplies of vital products, including medications needed to treat Covid-19, and it is now openly threatening nearby countries like Japan, Taiwan (a major exporter of semiconductors), and Australia with military force. The United States was able to respond quickly to wartime losses of access to, for example, natural rubber during the Second World War and we ought to be up to the job of making ourselves independent of the PRC today. 

Why are many company leaders reticent to rebuild manufacturing in the US?

The dysfunctional focus on labor costs drove the exportation of valuable American manufacturing jobs even though American industrial pioneers like Frederick Winslow Taylor, Harrington Emerson, and Henry Ford proved with real-world results that wages become largely irrelevant if management makes the job sufficiently productive. Emerson's Twelve Principles of Efficiency suggests that the idea of a contest of efficiency against inefficiency originated in Prussia where Helmuth von Moltke had to "do more with less" against France in 1870, as France had more soldiers, better rifles, and a superior economy. Japan adopted these principles and used them to win wars against China and Russia, both of whose populations outnumbered them. Japan applied the same organizational principles to its industries, and to the effect that American industrialists were alarmed at the prospect of having to compete against them. Americans such as Taylor, Ford, and Frank Bunker Gilbreth—who cited explicitly the application of military motion efficiency principles to civilian occupations—responded with what we now call lean manufacturing as later adopted by Toyota.

The dysfunctional focus on labor costs drove the exportation of valuable American manufacturing jobs even though American industrial pioneers like Frederick Winslow Taylor, Harrington Emerson, and Henry Ford proved with real-world results that wages become largely irrelevant if management makes the job sufficiently productive. Emerson's Twelve Principles of Efficiency suggests that the idea of a contest of efficiency against inefficiency originated in Prussia where Helmuth von Moltke had to "do more with less" against France in 1870, as France had more soldiers and a superior economy. The Japanese adopted these principles and used them to win wars against China and Russia, both of whose populations outnumbered them. Japan applied the same organizational principles to its industries, and to the effect that American industrialists were alarmed at the prospect of having to compete against them. Americans such as Taylor, Ford, and Frank Bunker Gilbreth—who cited explicitly the application of military motion efficiency principles to civilian occupations—responded with what we now call lean manufacturing as later adopted by Toyota.

Emerson, Taylor, Ford, and others also pointed out the short-sightedness of choosing cheap labor over efficiency. Ford's My Life and Work urges executives, "to overcome by management what other people try to overcome by wage reduction." Emerson's Twelve Principles of Efficiency adds, "It is unfortunate that the employer shies at the suggestion of a 10 percent advance and pays scant if any attention to a 50 percent inefficiency, two-thirds of which is his own fault." Taylor's Principles of Scientific Efficiency talked about the need to hire "high-priced men"—we would say high-priced workers today—who would follow instructions such as those typical of what we now call standard work. Taylor and Ford both added that, when workers realize that the benefits of productivity improvements will show up in their pay envelopes, they will look for ways to make their jobs more efficient. When employers pay as little as possible, the workforce will respond accordingly by doing only what it is told, and probably only when a supervisor is watching. Low wages also give management little incentive to, as Ford put it, "put more brains into the business" to make the jobs sufficiently productive to pay high wages. 

What do you think of Willam A. Levinson's perspective on manufacturing in the USA? Do you think manufacturers can be more profitable in the long run by relocating factories and production back to the USA?

Moving Production Back to the USA -- The Better Business Strategy for US Manufacturers?

A new book by Tim Hutzel and Dave Lippert titled Bringing Jobs Back to the USA: Rebuilding America’s Manufacturing through Reshoring was published this month. This book continues the theme of their first book, Keeping Your Business in the U.S.A.: Profit Globally While Operating Locally.

As many US businesses have relocated operations to different parts around the world for supposedly cheaper labor costs and materials, I asked Tim and Dave why should a US company now consider reshoring and reestablishing its manufacturing back in the USA? Here is Tim and Dave’s response:

Some reasons may stem from the original motivation to offshore. Was it strictly cost? If so, what costs were considered? In many cases, the labor cost was the driving force. If that is the case, then looking at the current offshore labor costs, as well as the near term labor cost trend, may paint a very different picture from the original. The rapidly rising middle class in China is eliminating that country’s labor cost advantage.

Another cost is transportation. Energy costs have increased markedly from the days when many companies began their offshoring operations. This is another development that may make domestic manufacture appealing.

Travel costs and time spent coordinating with offshored production are trackable and must be included. While travel costs are calculable, the opportunity costs are probably ignored. That is, could executives traveling to offshored locations be using that travel time in much more productive ways? Also, could the staff time spent dealing with offshore production issues, including complicated logistics, be more productively spent on other matters?

There are also hidden costs that burden the offshoring company in ways it fails to recognize. Scrap and rework can be immense and also unpredictable costs. Do batches of product arrive and sometimes need rework? When that happens, are those costs tracked accurately and reflected in the actual cost of the imported product? What about outages – are there times when product is en route, and stock outages occur prior to arrival? What is the cost of an unhappy customer? Are customers driven to competitors’ products? That can be an unacceptable cost. It can also be difficult or even impossible to measure.

Is the cost of stocking large inventories completely and accurately covered? To avoid outages, extra stock may be kept and stored. Is stock sometimes damaged, or even lost, and are those costs captured? Is a heavily stocked product susceptible to obsolescence through design changes?

Perhaps the most difficult costs to identify are those that result from the distance between production and design/engineering. Are product improvement opportunities lost due to the disconnect between these two entities? Are there quality problems that result in substandard product, which can lead to lost market share? How can such subjective or camouflaged costs be measured, even though they are very real? Sadly, we are convinced that costs like these have been left out of the offshoring equation for many companies. 

What do you think of Tim and Dave's points? Do you think that the era of US companies locating their operations offshore because of supposed cheaper costs are drawing to a close?

"Made in the USA" -- Can it Happen Again?

During the past 20 years, US manufacturers have moved their production operations, at a massive rate, to foreign countries that offer cheaper labor costs.The migration of US manufacturing jobs to such locations as China have resulted in cheaper products, but the overall effect on the US economy has been hotly debated. Will manufacturing in the United States ever see a resurgence?

Tim Hutzel and Paul Piechota recently published a very interesting and timely book titled Keeping Your Business in the U.S.A.: Profit Globally While Operating Locally, and they feel that the current adage -- "The US can't compete with offshore labor costs" -- is a mere myth. Both have spent the past three years researching companies that have flourished while manufacturing their products in the US and their book documents just how these organizations achieved this goal.

I recently asked both authors why they believe the US can recover from the out flow of manufacturing, and here is their response:

A burning issue that is certainly in need of a remedy is the mass departure of manufacturing from the US to foreign countries. The results of this exodus are felt every day. As much as you would like to buy US-made products, this has become an impossible task. It is heartbreaking and disturbing that so many products, such as bicycles, clocks, garments, shoes, and computers are not produced domestically anymore.

Manufacturing can return to the US because many companies have been hurt by the rush to outsource. We have heard the tales of many business leaders regretting their outsourcing decisions -– the unplanned costs, poor quality, uncontrolled processes, long delivery times, graft, monstrous order quantities, inventory nightmares, lost and damaged products, oversight trips overseas, confrontations, half-truths, excessive order-to-remittance times, and added debt. In addition, there are social and national implications of outsourcing -– unemployment, increased government jobs, loss of skills, weakened national defense, loss of tax base, and unbridled national debt.

In our book, we clearly illustrate three manufacturing companies that have been able to resist the outsourcing trend and achieve overwhelming success while keeping jobs in the US. We have examined the successes, failures, lessons learned, and methods used by each company to achieve and sustain profitability.

What do you think the future holds for US manufacturing? Will labor costs in China only eventually rise? Will shipping and inventory costs associated with production in foreign countries eventually be important factors in cost?