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Treasury Management

Onshoring Keeps Robust Pace

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August 02, 2017

Onshoring jumps on Trump’s watch as firms consider total offshoring costs; treasury should be aware.

Money compassPresident Trump has yet to initiate the threatened tariffs and other dramatic trade policies he promised during his campaign, but the number of companies proclaiming bringing production back to the US or initiating production here has jumped since his election. That number had entered positive territory long before the election, as companies have increasingly looked at the total cost of their supplies and not just the price.

The Reshoring Initiative tracks the number of manufacturing jobs US-based companies announce bringing back to the US, often referred to as onshoring or reshoring, as well as foreign direct investment, when non-US companies open manufacturing facilities on US soil. In first quarter 2017 that number reached nearly 45,000, up from just over 30,000 in the fourth quarter, and third quarter 2017 saw around 22,000, up from just over 10,000 in each of the first two quarters. The Reshoring Initiative tracks announcements in the public domain, including TV, radio and print.

Harry Moser, who heads up The Reshoring Initiative, said that in part the increase stemmed from companies pushing forward announcements of reshoring they planned to do anyway.

“To a significant extent, however, it’s companies saying it looks like [President Trump] is going to make this a better place to manufacture, by lowering taxes, easing regulation and other factors, and he’s going to make it worse to offshore production,” Mr. Moser said, adding that continuation of the upward trend will depend on whether Republicans succeed in their legislative and regulatory quests.

Moser said 60% of companies make offshoring decisions based on rudimentary metrics, a number consistent with The Reshoring Initiative’s observations but specifically was generated by Archstone Consulting, now a part of the Hackett Group. Those metrics may include the supplier’s price, duty and freight, but typically leave out a slew of other costs that companies are becoming increasingly aware of.

The Reshoring Initiative has sought to capture those less obvious costs in its Total Cost of Ownership (TCO) Estimator software. Those less obvious costs, which treasury should be aware as part of the financial analysis whether to outsource production outside the country or not, include inventory carrying costs, warranty, intellectual property loss, impact on product innovation from having manufacturing distant from engineering, and the losses from stock-outs due to long delivery times. The TCO also seeks to quantify factors associated with the risk of supply chain shocks and disruptions cause by natural disasters and political unrest, and to forecast the impact of future wage and currency changes.

Mr. Moser said TCO often reveals that the price understates actual offshoring costs by 15% to 30%.

Tony Woodall, VP of sales at Woodridge, IL-based The Morey Corp., a provider of electronic manufacturing services for a variety of markets, said that the TCO was “instrumental in developing a local sourcing strategy argument,” which ultimately helped it win a $60 million order over a lower priced Asian competitor. He added that onshoring is becoming something of a global trend, and for potential customers that are considering it the TCO has been a helpful tool in making that argument.

“When you’re looking at going to leaders of companies and to say they should consider building in the US instead of China, it’s important to have the major costs defined, both hard costs and soft costs,” Mr. Woodall said

Mr. Woodall added that intellectual property risk, rework and quality risk as well as other risk factors and the opportunity costs a customer may face if its long-distance supply delivers the product too late, were particularly relevant in that win. “What Harry’s tool really does is bring out other things you may not think of in a pointed conversation about costs.”

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