Consider Reshoring to Shorten and Secure Your Supply Chain

Supply chain managers are continually looking for ways to improve supply chain performance so their company operates more effectively and profits improve. A strategy that should be considered to achieve this goal is reshoring parts produced overseas or near shoring parts that are made domestically outside of Pennsylvania. Developing supply sources close by can help your company achieve major gains in productivity. Surprisingly other areas of the business can be positively impacted by reshoring parts “home”.

Operating more effectively results from having quality parts ready when they are to be consumed in the productive process. The best possible practice would be buying small lots of parts frequently with a supplier agreement that minimizes the administrative cost of purchasing and reduces materials storage and handling activity. Improved profitability can be achieved by increasing throughput when the right parts of proper quality are on hand when needed. This will accelerate production, reduce warehouse overhead activities, and enhance on time delivery.

Reshoring parts from Asia and other foreign countries is a strategy that is getting much consideration currently. In past decades, sending parts overseas proved to be a simple approach to reducing parts cost and improving profit margins. The fundamentals of the 1980’s and 1990’s are long gone. Wages have increased measurably in countries like China. Other costs, not often measured correctly by companies, have also become an important part of the reshoring evaluation. 

Suppliers have become less flexible in how a customer can fill a container and the cost of shipment has continued to rise.  Quality can vary and moving parts production to even lower cost countries does not necessarily enhance supply chain performance. This can be because of political instability and less capable infrastructure for utilities and transportation. 

There are many variables to consider when looking at supply chain strategies. The best way to quantify the benefits of reshoring is by completing a total cost of ownership (TCO) analysis of each part that should be considered for reshoring. A well-structured evaluation of the full cost of parts made overseas can reveal really good reasons to consider bring production much closer to your factory.

The TCO analysis can be broken down into three categories of evaluation including:

The TCO analysis can be broken down into three categories of evaluation including 1) financial basics, 2) indirect costs and 3) risk avoidance.

The finance basics include what it costs to make and receive parts from overseas. This typically includes the part production costs, packaging parts for a long trip, required duties, shipping cost on the water and from domestic port to your factory. These are the more specific charges that a company pays for its parts visible on an invoice from the supplier or transportation company.

The next layer is indirect costs or which there are many. They include:

• Overseas payment terms

• Foreign currency fluctuations

• Cost of capital to finance the purchase of the items,

• Carrying cost of warehouse space and frequent material moves

• Cost of quality, rework, and warranty

• Cost of supplier trips (lost opportunity cost of managers being off site)

• Cost of supplier certification

In the risk avoidance category, consider the following somewhat hard to quantify issues that could become real challenges at any time:

• Intellectual property risk

• Challenges of new product development remote from your facility

• Inability to recover product liability damages

• Foreign country economic and political stability

• Overseas wage inflation risk

• Currency revaluation risk (not just fluctuation)

Some of what may have happened to your business and stories from companies all over the Delaware Valley support the issues listed above as more than theoretical events. Given what you know and what you have heard, contact Bob Cormack at the Bucks County Economic Development Corporation to schedule a free meeting to understand further how reshoring can help your company. Take advantage of free services offered by the Commonwealth of Pennsylvania until the end of June 2016 to have a TCO of your parts prepared and reviewed with you to help you make well defined decisions about reshoring.

Contact Bob Cormack, 215-348-9031 or rfc@bcedc.com.

Article written by Harry Lansburg, Director, Business Process Technology Consulting, DVIRC.