Another Trade Policy Gone Wrong

A prominent big box retailer recently asked the Department of Commerce for a reduction in the duties on imported pet leashes because they claimed that no one makes them here in the US.  I considered that odd since my company, based in Rhode Island, makes them by the thousands every year.  And if I weren’t paying attention, the retailer would have been able to get the duties reduced or eliminated.  This is a real world example of how trade policy made in Washington DC goes wrong and how it has a direct negative impact on US manufacturing.

By now you’re probably wondering what policy would allow this to happen.  The answer is something called a Miscellaneous Tariff Bill (MTB).  Ironically, MTBs were created to help US manufacturers.  Their purpose was to allow manufacturing companies to more cheaply import parts that were not available from US vendors.  Sounds like a good plan, doesn’t it?

So how does a big box retailer end up with the wherewithal to import finished products with reduced or eliminated duties?  Quite simply, there’s no one minding the store.  The MTB process should be reserved for prime US manufacturers (not big box retailers) who are sourcing inputs (not finished products) that are unavailable domestically.  Instead, it appears that any type of company can request the reduction of duties on any type of finished product.  And in the event that the US based manufacturer of that product isn’t combing these MTBs to figure out who is requesting reduced duties on what, we end up with situations like mine.  Of course, that means that I have to pay attention every time an MTB is posted and spend my time carefully perusing it, instead of running my company.

Earlier this month, I was on Capitol Hill spreading the word about how this policy designed to help manufacturers was, in some cases, hurting us.  I’m hoping they listened and will get it right this time.

Why the Primary Arguments Against the Border Adjustment Plan are Wrong

Yesterday, I explained why the border adjustment plan is a good idea, particularly for US manufacturers.  Today, let’s look at the two major arguments against the plan – that it’s too complicated, and that it’s a regressive tax, particularly on lower income people.  Here’s why those arguments are wrong.

First, let’s address the idea that the plan is too complicated.  Now, I’m neither an accountant nor an economist; I just run a manufacturing company.  And since I was an English major in college, my mathematically-minded wife has jokingly referred to me as having a “fluff” degree.  So numbers are not my strongest suit.

But the central idea in the plan – that you would no longer be allowed to take a business deduction for the expense of imported parts – simply isn’t that complicated, even for someone like me.  Conversely, if you export products or parts, the value of the exports would not be considered taxable income.  So the border adjustment plan isn’t actually a tax – it’s a change in the tax code.  For those companies that manufacture in the US, taxes would actually go down.  The CFO of our manufacturing company grasped it in about two minutes (it took me about ten).  The best explanation I’ve seen is from the Wall Street Journal.  Here’s the link:

Multi-national companies that do a lot of importing are, of course, opposed to the plan because it will cut into their profits unless they begin sourcing more in the US.  Fair enough.  But when I read that they’re opposed to the plan because it’s too complicated, I chuckle a little bit.  They can pay millions of dollars to accountants and attorneys to maximize deductions and profits, but they can’t figure this out?  I’m not convinced – and I don’t think most people who take a look at the plan will be convinced either.  It’s just not that complicated.

The second argument against the border adjustment plan is that it’s a regressive tax on consumers, especially low income consumers.  Tough to argue with this one, since – over the short term – prices on imported goods are likely to rise.  So lower income consumers, given that their income remains the same, would be forced to spend a higher percentage of that income on basic necessities.

Let’s first consider the source of this argument.  It’s coming from a group named Americans for Affordable Products, comprised primarily of importing big box retailers like Walmart.  I expect that Walmart’s objections have more to do with how the border adjustment plan will affect their bottom line and disrupt their current overseas supply chains than it is about keeping products affordable for those with lower incomes.  But that argument on their behalf won’t win the day, so I think part of their strategic calculation is to scare the heck out of us, and elicit sympathy for Walmart (of which they don’t get a lot). I’m not saying that the Walmart folks are bad people; only that their job is to protect their company’s bottom line by maintaining the status quo.

But let’s grant the assumption that prices on imported products rise, and we pay a little more until the marketplace adjusts to sourcing more US manufactured goods.  What I’ve not yet heard mentioned by Americans for Affordable Products is the effect of the border adjustment plan on US manufacturing jobs.  It’s important to note at this point that both the labor force participation rate and real median household income in this country remain lower now than in 1999; which is, not coincidentally, the year that Congress granted China permanent normalized trade relations status and the massive wave of offshoring manufacturing jobs began.  The border adjustment plan would make it more profitable for companies to source domestically, which would clearly boost U.S. manufacturing jobs.  Since the job multiplier effect is higher for manufacturing than for most other industries, many lower income people would be trading slightly higher prices on consumer goods for a decent paying job.  Ask around and you’ll find out they’ll take that trade.

Granted we’ve got a lot of work to do as a country to ensure that people are adequately trained to fill those jobs.  And that’s precisely what our education system is for, right?  But that subject, my friends, is for a different blog post.

Why the Republican’s border adjustment plan is a good idea

The Border Adjustment Plan in the House Republican’s tax reform package won’t cause apocalypse.  Really, it won’t.  But that’s not what you’ll hear from the big box retailers and multi-national brands that are unleashing the attack dogs to kill it.  If you listen to those folks, it will cause rampant inflation, the collapse of the world economy, and we’ll all be living in the streets.  Now, I do understand their point of view.  They’ve built their business model on geographically extended supply chains that continuously sniff out the lowest cost overseas producer.  That model won’t be as profitable if the Border Adjustment plan is enacted, so it will adversely affect their businesses – but it won’t cause apocalypse.  In fact, it would be the first meaningful step taken by any presidential administration in decades to help level the playing field for U.S. manufacturers.

Why is the Border Adjustment Plan a good idea?  First, it’s not a tariff, which is basically a tax applied to imported goods.  Tariffs are a red flag for the World Trade Organization (WTO).  If we applied tariffs to goods imported from China, for example, the WTO – which can’t seem to find China at fault for much of anything – would take about ten seconds to decide that the U.S. is violating WTO guidelines.  Some might say we should assess tariffs anyway and ignore the WTO.  That would make me feel good, too, but why take the hard road when there’s an easier way?

The Border Adjustment Plan simply changes the way U.S. companies calculate their income taxes.  It’s not complicated.  Instead of a company taking a business expense deduction for everything they buy, they would no longer be allowed to take a deduction for what they buy overseas.  Will they now pay more taxes to the U.S. government if they import a lot of stuff?  Sure they will, but that’s precisely the point of the plan.  It’s why Walmart, Target, et al are circling the wagons.  But, I’m guessing those companies will find ways to stop doing so much of that and start buying more goods domestically.  They’re smart people; they’ll figure it out.  Also, since the Border Adjustment Plan is similar to the value-added tax that many countries already assess, there is a less of a chance that the WTO will raise a ruckus.

Another great thing about the Border Adjustment Plan?  It is part of a House Republican tax reform package that will reduce the corporate tax rate from 35% to 20%.  Of course, the big box retailers and multi-national brands love that part of it.  If you asked them they’d probably say, “Let’s kill the Border Adjustment Plan and keep the lower tax rate.”  I told you they were smart people, didn’t I?  But they shouldn’t be allowed to have it both ways.

Third great thing about the Border Adjustment Plan?  Because it is part of the proposed House tax reform package, there’s a good chance, if Trump gets behind it, the plan would make it through the House.  There would be tougher sledding in the Senate, but then it would be time for the “Great Negotiator” to do his thing.

Fourth and best reason the plan is a good idea?  It would provide a boost for U.S. manufacturers who have been playing on a wildly skewed field of battle.  I can tell you from personal experience that those of us who have survived the last 35 years are lean, mean and ready to rumble.  Imagine what we could do if we were allowed to fight overseas competition with two hands instead of one?

Trump’s 45% Tariff Proposal, and the History of the “Misguided Trade Policy” Forest

Money Magazine columnist Marc Bain recently wrote an article criticizing President-Elect Trump’s proposal for a 45% tariff on goods imported from China.  His analysis included a mathematics lesson and a bit of bluster about how this would raise the price of Chinese made goods.  Well, we didn’t need a math class to figure that out.  But, by focusing exclusively on Trump’s 45% tariff, Mr. Bain misses the forest for one tree; which is exactly the type of economic orthodoxy that got us into this mess.  So, to provide a bit of context for the President-Elect’s proposal, here’s the history of the “Misguided Trade Policy” forest:

In the 1980’s, Wall Street began placing higher valuations on “asset light” companies, according to a 2013 report from the MIT Taskforce on Innovation and Production. This gave larger U.S. based manufacturers an incentive to move production offshore. But the resulting offshoring was somewhat limited because no single country had the infrastructure and labor force to take advantage of the new environment – other than China.

However, in the ’80s and ’90s, China had not yet been granted “permanent normalized trading relations” (PNTR). Each year, Congress voted on whether China would have the benefit of normalized trading relations (hence, not yet permanent). This uncertainty restrained large U.S. based manufacturers – and buyers – from making investments in Chinese production capability.

When the U.S. granted PNTR to China in 1999, the offshoring ball began to roll downhill. China’s entry into the WTO in 2001 – facilitated by the U.S. – was when that ball rolled off a cliff and we lost over 3 million manufacturing jobs to China. Why did the U.S. push for China WTO entry? Because large multi-national manufacturing companies and big box retailers were lobbying for it. And conventional economic wisdom (and the Clinton administration) believed that China would adhere to its WTO commitments (including guidelines on pollution, labor standards, currency manipulation, etc.). We all know how that has gone.

In spite of this history, economic pundits and politicians still labor under the assumption that trading manufacturing jobs for cheap imports will raise our standard of living. It is important to note that real median household income in the U.S. trended downward over the course of several years after China was granted PNTR in 1999, and still remains below 1999 levels even given last year’s 5% increase (according to figures from the Federal Reserve Bank of St. Louis). Also, when did the labor force participation rate peak in this country? Yup, you guessed it; 1999.

That, my friends, is the history – and the sad result – of the “Misguided Trade Policy” forest.

So my analysis of Trump’s proposal for a 45% tariff on Chinese-manufactured goods is that he is staking out a negotiating position that will be used to address the root cause of the problem – China flaunting WTO rules and forcing U.S. manufacturers to compete on a highly skewed playing field. And, as the CEO of a small manufacturing company, I’m not even asking for a level playing field, just a fighting chance. Perhaps President Trump can give me – and others – that chance.

A Real World Case of a Skewed Playing Field

If you were a sprinter and competing with someone who took drugs that allowed them to run four times faster than you, would you consider it fair?  Most small to medium-sized U.S. manufacturers competing with China are in exactly that position.

Those of you who have read my book know that I’m the CEO of a small manufacturer that competes with China every day.  My company, Trans-Tex, is not in what one would normally call an “advanced” industry.  We manufacture dye sublimated lanyards, which you might receive if, for example, you are an attendee at a trade show.  The lanyard is used to hold the badge that bears your name.  Search online for “images of dye sublimated lanyards” to see examples.

Recently, we bid on a government project for a significant number of lanyards.  We lost the bid to China because they bid 75% less than we did.  The lanyard they make overseas will not be of the same quality that we manufacture.  However, even given the difference in the quality of the parts and printing, the fact that a China manufacturer can make that lanyard at ¼ of our cost illustrates the huge gap in manufacturing costs between a U.S. manufacturer and a China manufacturer.  What accounts for the gap?  Extremely low wages, lax to non-existent enforcement of weak environmental laws, and generally bad working conditions, to name just a few of the reasons.

Although the bid was issued under “Buy American” provisions, the pricing gap was so substantial that the GPO (Government Printing Office) was able to award the bid to China under a loophole that allows for overseas purchases if the government would be forced to pay “unreasonably high costs” by buying domestically.

Despite such handicaps, we’ve become successful at Trans-Tex by following the American Dragon principles of FEWER, FASTER, and FINER.  Because we’re competing with China manufacturers that specialize in low cost and long production runs, we focus on shorter, more customized production runs, speed to market, and good quality safe products.  That focus has allowed us to quadruple in size during some of the worst economic times since the Great Depression.

That being said, the playing field – in spite of increasing costs out of China – obviously remains heavily skewed in China’s favor.  And China’s trade policy is to keep it that way.  Job One for the new Trump administration is to reset U.S. trade policy to protect U.S. manufacturers in the same manner that Beijing protects theirs.  And I’m not even asking for a level playing field – just give me a fighting chance.

Bad Trade Deals and the Flint Water Crisis

You might think that the drinking water crisis in Flint, MI, is unrelated to the decrepit state of roads and bridges in your state.  Well, think again.  Both problems are the result of a lack of available resources to update infrastructure that is decades old.  Why the dearth of resources?  The massive offshoring of manufacturing jobs over the last 25 years has eroded our tax base.  In a nutshell, we’ve traded good-paying manufacturing jobs for access to cheap imports.  It’s a bad trade-off, and it has left us with a tax base that does not provide enough money to rebuild or maintain infrastructure.

How did we get here?  One of the major culprits is bad trade deals.

For decades, politicians have operated under the false assumption that if we import cheaper goods it will raise our standard of living.  So they pursued trade deals that opened up our markets to imports, and created a wildly tilted playing field that placed US manufacturers at a grave disadvantage.  The ultimate result was the offshoring of over five million good-paying manufacturing jobs since 2000, with over two million of those lost to China alone.

Keep in mind that the US granted China Permanent Normalized Trade Relations status in 2000 and facilitated their entry into the World Trade Organization the following year, unleashing a flood of cheap imports to our shores.  How has that worked out for us?  Since 2001, real median household income in our country has gone down, according to data provided by the Federal Reserve Bank of St. Louis.  Household income peaked at $57,843 in 1999 and was only $53,657 in 2014.  Thus, importing cheaper goods at the expense of good manufacturing jobs has actually lowered our standard of living.

But isn’t the latest news on employment gains positive?  After all, job data released by the Bureau of Labor Statistics shows an increase of 150,000 jobs in January 2016 and a drop in the unemployment rate to 4.9%.

Let’s take a closer look at those employment numbers.  What has replaced good-paying manufacturing jobs?  Jobs in service industries.  Of the jobs created in January, over 70% were in retail stores and restaurants.  This is not to denigrate the hard working people who need those jobs, but it’s no great secret that service industries pay less than manufacturers.  The Benefits of Manufacturing Jobs, a May 2012 report released by the Department of Commerce, concluded that total compensation for service jobs is 17% less than in manufacturing.  Lower wage levels means less total taxes paid, and less money to spend on our rapidly deteriorating infrastructure.

Yet, we learn little from our past mistakes.  The Obama administration is pursuing a new trade deal, the Trans-Pacific Partnership, that once again throws manufacturing under the bus.  Shortly after the text of TPP was released, the Wall Street Journal cited an analysis from the Peterson Institute for Economic Analysis estimating that TPP will lead to an additional $10 billion deficit in US heavy manufacturing, and an additional $20 billion deficit in light manufacturing.  Perhaps this explains the Department of Labor’s December 2015 projection that we will lose another 800,000 manufacturing jobs by 2024.

If our manufacturing base continues to erode, we will pay an increasingly higher percentage of household and business income on taxes and fees to rebuild roads and bridges.  And we can expect more tragedies like the drinking water crisis in Flint, MI.

How Trade Agreements Come Back to Bite Us – China’s Market Economy Status

You’ve heard it a thousand times.  The devil is in the details.  Nothing proves that point more than China’s insistence that, in December 2016, WTO countries – including the US – must grant them market economy status (MES).  Why is this detail such a devil?  Because if China is granted MES, it will lead to the massive dumping of excess China manufacturing capacity into the US and other countries, further eroding our manufacturing base.  To understand how we find ourselves in this predicament, we need to go back to 2001.

At the turn of the new millennium, the US facilitated China’s entry into the WTO.  As a direct result, we lost over 2 million manufacturing jobs in this country.  By manipulating their currency, paying manufacturing workers extremely low wages, putting those workers in often substandard or unsafe working conditions, and directly subsidizing state-owned enterprises, China was able to undercut the prices of US manufacturers and flood the US with cheap imports.  The net result is a trade deficit with China that ballooned from $84 billion in 2000 to $366 billion in 2015.

With the Chinese economy now in a skid, Beijing, afraid of labor unrest, is doubling down on this strategy, and subsidizing factories to keep producing even when there is decreasing worldwide demand for their factories’ products.  Because of the subsidies, the excess can then be dumped into the US at below market rates, further undercutting domestic manufacturers.

Under normal circumstances, to prove that a country is dumping, one uses the production costs in the dumping country to prove the case.  That doesn’t work with China because so many of their manufacturers are either state-owned enterprises or subsidized by the government.  As a result, because China was not a market economy when it joined the WTO, a clause was added to the original agreement to protect other countries from China dumping by allowing the plaintiff country to use cost comparisons from third party countries to prove their case.

Now, back to the devil.  When the agreement was drafted, a sub-clause was included in that provision which states that after 15 years the exception allowing a plaintiff to use a third party country for cost comparisons expires.  China is arguing that this sub-clause negates the entire clause.  If that is the case, then China must be granted market economy status under WTO rules.  This would open the floodgates to even more dumping by China, and the US would have little recourse.  Others argue, and I agree, that the sub-clause does not negate the entire clause, and that the use of a third party country for cost comparisons is still valid.  So the future of thousands of factory workers’ jobs throughout the country rests in the semantic interpretation of an arcane clause in a 15-year old trade agreement.

This is where Washington DC should draw a line in the sand.  Anyone with a shred of common sense knows that China is not a market economy.  According to Fortune magazine, the top twelve Chinese companies aren’t even privately held; they’re state-owned enterprises.  There are no circumstances under which this administration – or the next one – should grant China market economy status.

Of course, this is also a precautionary tale about TPP.  Are there any ticking time bombs in that agreement?

Harry Moser and the Total Cost of Ownership Estimator

Harry Moser was frustrated.  He had spent his entire career in domestic manufacturing, including over 4 decades selling machine tools and foundry equipment.  He had anxiously watched the slow, steady stream of offshored U.S. manufacturing jobs become a tsunami as the new millennium dawned and decided he’d seen enough of it.   In the mid 2000’s, as president and then chairman of +GF+ Machining Solutions, Moser lobbied the Association for Manufacturing Technology, the National Tooling and Machining Association and the Precision Metalforming Association to join forces to support reshoring efforts that would ensure the future sales and use of U.S. made machine tools.

Transitioning out of his role with +GF+, he began making presentations and writing articles on how to beat Chinese competition in the U.S. market.  Having read the canon on the hidden costs of importing, he noted that almost every writer mentioned the hidden costs that many procurement departments ignore when comparing the cost of an imported part to a domestically made part, and that they all stressed that buyers should make purchasing decisions based on what is called the “total cost of ownership.”  However, not one writer offered a spreadsheet that would allow a purchasing manager to actually calculate it.   It was surprising to Moser that a profession that so values accurate numbers did not have a simple tool to accurately calculate the true cost of ownership so that a comparison could be made between the cost of buying or making an import vs. the cost of buying or making a domestic part.  He decided to change that.

In 2010, Moser founded the Reshoring Initiative with a mission of bringing good, well-paying manufacturing jobs back to the U.S. by assisting companies to more accurately assess their total cost of offshoring and shift collective thinking from “offshoring is cheaper” to “domestic reduces the total cost of ownership.”  Job One for Moser was to delve back into all the articles he had read and list the myriad costs, risks and strategic impacts that affect total cost of ownership.  He then wrote software that would assign dollar values to each item on the list and had the software critiqued by colleagues from across the country, most notably by his contacts at the Association for Manufacturing Excellence.

That software became the Total Cost of Ownership Estimator, which now resides on the Reshoring Initiative website, and can be used at no charge by any purchasing department interested in calculating the true cost of importing.  Since the site was launched, the Estimator has been used over 1,500 times.

The Total Cost of Ownership Estimator is an excellent tool to help one better understand the difference between the price of something and its total cost.   The price of an item is the amount of money that exchanges hands for the item.  It’s simple.  The price of the widget is $2.00 so I give the cashier $2.00.  The total cost of an item is fully loaded with other factors that determine whether the purchase is actually a good value.

For B2B buyers, this comparison can be particularly critical.  In determining the total cost of ownership, B2B buyers must weigh not only the price of a widget, but also such factors as:

  • The minimum order size (If you are forced to order a higher amount, then negative cash cycle ramifications must be added into the total cost)
  • Length of time until delivery (If it takes a long time before you receive the product, then you need to order higher amounts – which costs more – to prevent an out of stock situation)
  • Ease of communication with the source (If poor communication issues due to either time zone differences or language problems cause your employees to constantly call or e-mail the vendor, the additional cost of the employee’s time must also be considered)
  • Poor quality (If you reject parts and/or replace defective product made from those parts then the cost of this waste must also be added in to arrive at the total cost)
  • Supply chain disruption risk (e.g., political instability in the overseas manufacturer’s country or strikes at shipping ports)

As the pricing gap narrows between imports and domestically made products and parts, calculating the total cost of ownership becomes ever more critical.   Even the Commerce Department has recognized the importance of the total cost of ownership approach to measuring the speed and effectiveness of supply chain partners.  Their March 2015 report titled “Supply Chain Innovation: Strengthening America’s Small Manufacturers” notes that when a manufacturer uses a total cost of ownership approach to sourcing – instead of simply buying from the supplier with the lowest per piece cost – the additional costs of added shipping time, risk of inventory being damaged during transport, and interruptions of the supply chain become more readily apparent.

B2B buyers can play a role in the renaissance of U.S. manufacturing by simply breaking the habit of automatically buying from overseas and redoing the math on whether importing parts – or moving manufacturing overseas – is the cost effective investment decision.  U.S. manufacturers of B2B parts don’t want handouts; they simply want a level playing field.  By taking a close look at the total cost instead of the price per piece, U.S. B2B buyers can level that playing field.

Why Supply Chains Will Compress and Drive Reshoring

The following commentary appeared in the newly published book, “L’Industrie Americaine: Simple Rebond ou Renaissance?” (American Manufacturing: Simple Rebound or Renaissance?)  by Thibaut Bidet-Mayer and Philippe Frocrain and published by Presses de Mines – Transvalor, 2015.

Conventional wisdom holds that the U.S. manufacturing revival is driven largely by factors such as lower energy costs, stagnant labor rates and the influence of the federal stimulus.  And whereas these factors have certainly contributed to the rebound, they don’t tell the full story.

Over the long term, the revival of domestic manufacturing in the U.S. – and in other industrialized nations – will be driven by the trend toward geographic compression of supply chains.  Why are supply chains compressing and how does this affect the revival of domestic manufacturing, whether in the U.S. or in Europe?

There are three primary reasons and all are intertwined.

The first is a trend away from long production runs of commodity-type products and toward shorter production runs and more customized products.  Consumers are increasingly demanding goods and services more tailored to their own needs or desires.  Motorola’s decision to assemble its Moto X in Austin, TX, instead of in China was the result of a product development decision to offer consumers a wider range of customization options.  Because they did not want to sacrifice speedy delivery, shortening the supply chain link between final assembly and the consumer became a necessity.  Many of the phone’s parts are still sourced in Asia, but final assembly is being done in the U.S. so that the more customized version of the phone can be delivered to the customer as quickly as possible.

The second factor leading to the geographic compression of supply chains is the need for manufacturers and retailers to minimize inventory levels.  This is, of course, a financial consideration driven largely by cost-saving measures such as lean manufacturing initiatives at the factory level.  Buying large quantities of goods overseas, paying for them in advance, and waiting 3 or 4 months for them to arrive on a slow boat from China is no longer cost effective, especially given the upward pressure on the price of goods from China.  No doubt one of Tesla’s strategic reasons for partnering with Panasonic to build a lithium ion battery factory in the vicinity of their plant is to minimize supply chain risk by eliminating the long lead times and high minimums of importing the batteries from overseas.

The third, and perhaps most important, reason for the geographic compression of supply chains is the increasing importance of speed to market.  In a manufacturing world dominated by offshoring, executing speed to market conflicts with the goal of minimizing inventory levels.  For example, if a manufacturer is importing intermediate parts, speed to market can only be accomplished if one eliminates the risk of depleted inventories.  Thus, companies buy massive amounts of parts inventory and store those parts on warehouse shelves for assembly as needed.  Only a compressed geographic supply chain – especially one including domestic vendors that provide short production lead times and smaller minimum order sizes – can reconcile the conflict, allowing for lower inventory levels yet still enabling speed to market.  The concept of supplying “fast fashion” to retailers, giving them the ability to respond more quickly to fickle consumer demand while carrying lower inventory levels, is an example of satisfying the need for greater speed to market.

Why are these trends currently more evident in the U.S. than in other industrialized economies?  Because the U.S. remains the largest market in the world, and to be successful here it will be increasingly important to manufacture here.  This explains the amount of direct foreign investment, particularly from China, pouring into the United States.  Raymond Cheng, CEO of a Hong Kong-based consulting firm which coordinates deals for China companies that want to establish a manufacturing presence in the U.S., points out that, “For many of these companies, their biggest customers are in the United States.  It’s a tactical advantage to be next door to your biggest client.”

Of course, we still face an uphill manufacturing battle against imports.  The fact that parts for the Moto X are still being sourced in Asia illustrates one of the two key challenges faced by U.S. manufacturers if the renaissance is to continue. In the furious race to offshore manufacturing over the past 25 years, we decimated entire supply chains that will now need to be rebuilt.

The second challenge is the “skills gap” between available manufacturing jobs and the unemployed.  We need better training programs both for the chronically unemployed and for young students if we are to fill the manufacturing positions open now and in the future.

But these are challenges that can and will be met.

Time is Money: How Offshoring Increases Supply Chain Risk

Any amount of friction that slows down the speed of a supply chain, whether domestic or global, has a cost; and the cost rises exponentially as the degree of friction rises.  The opportunity cost of lost sales, the necessity of financing higher levels of inventory to protect against transportation delays, and the personnel time and effort used to secure alternate sources are only three of the many additional costs associated with supply chain disruptions.  And when you offshore to overseas countries, the number of risk factors that impede timely delivery multiply.

Do you think an uncontested election on the other side of the globe would have any bearing on the cost or availability of a T-shirt?   In January 2014, the Bangladesh National Party (BNP) boycotted national elections that brought Sheikh Hasina to power.  The BNP had hoped that Hasina would step aside before the election and accept neutral oversight of the polling process.  She refused and ran unopposed.  In January 2015, on the one year anniversary of the election, the head of the BNP, Khaleda Zia, was planning to lead demonstrations to protest the election that brought Hasina to power.  To prevent the demonstrations from taking place, the government placed Zia under virtual house arrest in her party’s offices.  In response, Zia called for the BNP faithful to blockade roads, rails and rivers, slowing down or halting apparel shipments from Bangladesh to the U.S. and other countries.  In 2014, Bangladesh exported $4.8 billion of apparel to the U.S., ranking third behind China ($29.8 billion) and Vietnam ($9.3 billion).  The blockade and resulting supply disruptions sent shock waves through the Bangladeshi economy, as apparel manufacturing accounts for approximately 12% of the country’s GDP.

The week after the triple disaster of the Japanese earthquake, tsunami and nuclear meltdown in 2011, the price of certain computer chips used for smartphones, digital cameras and other devices spiked over 30%.  Some Japanese auto plants were forced to halt production due to damage from the natural disaster and the resulting shortage of certain key parts, delaying the delivery of some car models to U.S. dealerships.

And these types of supply chain disruptions don’t happen only in overseas countries.  The International Longshore & Warehouse Union (ILWU) represents labor in 29 west coast ports.  Their 6-year labor contract with the Pacific Maritime Association, which represents the west coast carriers and terminals, was set to expire on July 1, 2014.  Talks dragged on for months beyond the expiration of the contract, leading to work slowdowns in the winter of 2014 that created massive backlogs of imports on container ships off the west coast.  The strike was eventually settled after federal government intervention, but the backlog of goods bound for factories and stores in the U.S. took months to dissipate, leaving importers scrambling for alternate sources.

Given the negative impact that such risk factors have on speed to market, many U.S. firms are taking a hard look at their extended supply chains and opting to source at home.  In 2009, U.S. Block Windows, a manufacturer based in Pensacola, Fl, decided to reshore production of acrylic blocks.  Formerly, the company would ship acrylic resin to China where it would be molded into blocks for various sizes of residential doors and windows, then shipped back to Pensacola.  “With the manufacturing in China, you had to forecast out lead time that with transportation could mean 12 to 14 weeks to delivery,” said Roger Murphy, the company’s president. “So you were always carrying more inventory than you needed and you also were at risk for being out of something if demand spiked.”[1]  Six successful years later in 2015, Murphy admitted that he made the decision to reshore less out of patriotism than to protect his bottom line.  Given that he reshored at a time when low cost China imports were flooding the U.S., how did reshoring help his bottom line?  By increasing his speed to market, he was able to fulfill orders in four production days.  The shopworn cliché is truer today than ever before – time is money.

HanesBrands announced in January 2015 that it was expanding its hosiery plant in Clarksville, Arkansas, adding 120 jobs.  The plant is one of the largest factories of its kind in the world.  Hanes plans to reshore the finishing and packaging of some of its hosiery products.  In a press release, Hanes Senior Vice President of Global Operations, Javier Chacon explained, “It is not easy for a U.S. plant to compete with offshore competitors, but the capabilities of our plant workforce and management team in Clarksville to continuously adapt, automate and improve efficiency is a testament to the resiliency of this facility since it opened in 1988.”  The company also noted that some of the key competitive reasons for expanding in Clarksville include the plant’s size, the high quality of the hosiery produced there, lower energy costs, and proximity to the U.S. market.  In other words, why slow yourself down by manufacturing socks in Arkansas, shipping them overseas for finishing and packaging, then shipping them back to the U.S.?  It takes far too much time; and that’s before supply chain risk is factored in.

The Reshoring Initiative’s “Total Cost of Ownership Estimator,” mentioned in our previous chapter as a tool for recognizing the benefits of the FEWER principle, also shines a light on the hidden costs of slower, extended supply chains.   Even the Commerce Department has recognized the importance of the total cost of ownership approach to measuring the speed and effectiveness of supply chain partners.  Their March 2015 report titled “Supply Chain Innovation: Strengthening America’s Small Manufacturers” notes that when a manufacturer uses a total cost of ownership approach to sourcing – instead of simply buying from the supplier with the lowest per piece cost – the additional costs of added shipping time, risk of inventory being damaged during transport, and interruptions of the supply chain become more readily apparent.

After decades of offshoring as a default sourcing position, more U.S. manufacturers are recognizing that a sourcing strategy that may have worked ten years ago is simply too slow today.  In the fall of 2014, L.E.K. Consulting interviewed a number of senior U.S. sourcing executives in a variety of manufacturing industries and one of the key themes they heard time and again is that strong demand from the end buyer, be it a consumer or a B2B purchasing manager, is driving companies to manufacture in closer proximity to their ultimate customer.  Key benefits included “greater responsiveness, better positioning in the markets being served and more accurate demand forecasts,” as well as more rapid innovation and end-market customization.[2]  Note the link between the compression of supply chains and the ability to go FASTER and make FEWER.  Supply chain proximity to the ultimate customer enables greater responsiveness and more rapid innovation (FASTER), as well as end-market customization (FEWER).

[1] Johnson, Ron, “Reshoring brings jobs back to U.S., including Pensacola,” Pensacola News Journal, January 17, 2015.

[2] Connerty, Michael and Wingard, Carol, “American Manufacturing: Not a New Dawn But a Welcome Advance,” Industry Week, December 17, 2014.