TCO: Why Reshoring May Be The Smart Move For Your Supply Chain

Discussions about bringing manufacturing back to the United States are heating up as reshoring and U.S.-based manufacturing have become more lucrative. Many CEOs and CFOs are realizing that their businesses would have a lower total cost of ownership (TCO) with U.S.-based operations when potential steep tariff hikes and reshoring tax benefit programs come into play. Tech giants like Apple, Foxconn, and Offsite Networks are now looking to manufacture more affordably, locally, and, most importantly, with more integrity.

Why Reshoring May Be The Smart MoveIn the early 2000s, many companies like Offsite Networks made the decision to move contract manufacturing to places such as China, Malaysia, and Tokyo, where suppliers provided reduced labor and production costs and established facilities capable of performing complex manufacturing functions. Financially, the decision to offshore made sense. However, in 2011, Offsite Networks decided to reshore and source their contract manufacturing in the United States, establishing a relationship with Baltimore-based Zentech Manufacturing.

But why the move back? The answer is multifaceted but ultimately comes down to TCO. To start, labor rates are steadily increasing as the continual demand for economical, quality labor causes shifts in cost. China, for instance, has seen labor rate increases of 500% over the past 12 years. Also, poor-quality materials have increased warranty-related costs and have hurt overall brand perception, causing irreparable damage to customer loyalty. Reshoring allows for goods to be produced closer to the consumer, thereby increasing control and visibility, reducing shipping costs and lead times, promoting positive branding, and stimulating the economy — all of which ultimately boost sales.

Speculation has swirled around the production of a U.S.-based iPhone and Foxconn’s serious contemplation of a U.S.-based manufacturing facility, further fueling interest in reshoring. Because of the complex supply chain associated with iPhone production, as well as how established current manufacturing processes are overseas, the endeavor does not appear cost effective in the short term. However, Apple has previously undertaken reshoring initiatives for other product lines. In 2013, Flextronics, the contract manufacturer used for Mac Pro desktop production, moved a production line to Austin, Texas. In the short term, production costs for a U.S.-based iPhone would be higher than current costs, but to stay competitive, downstream manufacturing suppliers would also begin shifting to the United States, causing the market to realign.

Automotive manufacturers’ reshoring initiatives are already causing supply chains to shift production. Japanese machinery manufacturer Nissei Plastic Industrial Co., Ltd. noted that U.S. reshoring in the manufacturing sector has created high demand for local production. The company has already invested in an American manufacturing facility for injection molding presses.

As companies look to reshore, sourcing from contract manufacturers — like Syscom, who has well-established supply chains within the United States — can offer OEMs significant competitive advantages. Sourcing locally makes it easier for OEMs to realize market-competitive pricing, drastically reduce lead and cycle times, and increase control and quality assurance. As more OEMs dig into TCO, the findings will indicate that cheap labor doesn’t necessarily translate to lower costs. The labor cost gap is closing at a rapid pace, and the hidden costs of doing business overseas are quickly becoming more apparent. OEMs are now reviewing true cost, factoring in all possible costs, including ancillaries like overhead and corporate strategy development. Based on recent trends, expect OEMs to continue looking toward reshoring contract manufacturing for long-term, cost-effective solutions. 

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