Moving Factories Back Home

Thirteen years ago, when Puneet Nanda started a company to make toothpaste, mouthwash and toothbrushes, he looked in the logical place for a factory: China.

Nanda’s company, Dr. Fresh, Inc., opened a factory to make its own brands as well as private-label products for Disney, Binaca and Pepsodent and other customers.

But recently, Nanda’s low-cost China connection became pricier. The manager who oversees Nanda’s plant and his relationships with contract factories demanded that her salary be doubled. One of his biggest contract factories hiked prices after giving workers a 15 percent raise. Expenses rose again this year when factories started providing employees with health insurance, part of a Chinese government mandate to insure 90 percent of its citizens.

The additional costs took Dr. Fresh's overseas manufacturing equation from a healthy profit to breakeven.

The experience also soured Nanda's enthusiasm for manufacturing abroad so much that he recently filed plans to add a $1.5 million factory to his Buena Park, California, headquarters, which already has one factory and more than 100 workers. The new facility will triple the company’s domestic production capacity. "Within another 12 months, I believe there will be zero advantage to manufacturing in China," he says.

Manufacturing experts agree. A host of issues are making U.S. manufacturing attractive right now, including the weak dollar, rising wages overseas, high fuel costs for shipping, widespread foreign counterfeiting, unstable governments and growth of piracy on the high seas.

Many of these trends are expected to accelerate in future. Harry Moser, founder of the three-year-old Reshoring Institute in Killdeer, Illinois, projects that within a couple years repatriation of manufacturing to the United States could be more affordable than overseas production. "Currency appreciation is closing the gap," Moser says.

Changing Products, Growing Retailer Demands
Several domestic trends also favor local manufacturing, Moser says. One is the increasingly sophisticated technology found in American consumer products. Such products require a more highly skilled workforce, a factor that last year led General Electric's appliances and lighting division to choose a factory in Louisville, Kentucky to build a new line of energy-efficient washers and dryers.

Major retail chains’ just-in-time delivery requirements are adding to the trend. Increasingly, retailers don't want to hold big inventories and expect manufacturers to make many, small deliveries rather than few large ones.

Dr. Fresh’s Nanda knows about that firsthand. He says retailers such as Wal-Mart and Walgreens are unforgiving with vendors who fail to keep store shelves full. “My delivery dates are fixed, and if I miss, they will fine me for every day I'm out of stock,” he says.

With local production, Dr. Fresh can make 50,000 units of an item for quick delivery, where some China factories might have a 200,000-unit minimum order and require a three-month lead time. That could put him in a bind, leaving him with less cash on hand and higher inventory-storage costs.

U.S. legislators see the trend as an opportunity to bring jobs back home. At the federal level, the Bring Jobs Back to America Act introduced last summer by Rep. Frank Wolfe (R-Va.) proposes creating repatriation task forces that would identify opportunities to move manufacturing back home. The Reshoring Institute offers a checklist that helps companies identify profitable opportunities. According to Moser, six states have created their own reshoring initiatives: Arizona, Connecticut, Illinois, Maryland, Ohio and South Carolina.

The True Cost of Manufacturing Overseas
For decades, conventional wisdom held that it’s cheaper to manufacture in China and other developing countries than in North America. Moser says that belief is part myth and is based on false assumptions that obscure the true cost of making goods abroad.

He says most companies' accounting systems don't figure in all the costs of overseas manufacturing. Often, costs for travel, storing inventory, interest on financing and warehouse labor are classified as general operating expenses instead of as costs specific to offshore manufacturing. Intangibles such as longer delays in fixing defects or lost business due to slower response times aren't considered at all. "All the costs don't stick to the product," he says.

A 2010 Grant Thornton survey of major manufacturers found only 49 percent got better return on investment abroad, down from 54 percent reporting positive ROI in 2009.

The Reshoring Institute teaches manufacturing finance managers to calculate "total cost of ownership" for each product by including all costs. Once companies figure total ownership cost, many rethink their strategy, Moser says. At a National Tooling and Machining Association purchasing fair held in 2010, for instance, more than 50 manufacturers met with 137 American vendors, and 60 percent left with plans to switch some of their production or vendor sourcing back to the United States, he says.

To decide if offshore manufacturing is worthwhile, assess whether the cost would be more than 20 percent below the cost of manufacturing in the United States, says Robert Torrani, director of the manufacturing and supply chain initiative at the Connecticut Center for Advanced Technology in East Hartford. Torrani estimates that U.S. manufacturing will be more cost-effective than overseas production within 18 months. "The real savings is often more like 15 percent," he says. If companies want to cut 15 percent of their cost he suggests using lean manufacturing systems. “At that point, it becomes a wash.”

For many mid-sized companies, installing low-cost, advanced manufacturing or design software programs such as MasterCam or Solidworks can help realize those savings, he says.

Squeezing Out the Fat at U.S. Factories
Can American factories, with their highly paid workers, compete with countries like China or Vietnam? Although many U.S. companies went through lean-manufacturing initiatives or Six Sigma programs years back, there's still plenty of fat to be cut, says Glen Miller of Performance Essentials Inc., a Philadephia consultant known as the "Lean Ranger." "There's at least 50 percent waste," he says. "If you can cut even 1 or 2 percent of that out, it's a huge savings."

To trim costs, Miller urges companies to focus on reducing defects, wait times, and poor layouts that require too much movement, as well as making better use of workers’ skills. Two other common American manufacturing problems that Miller targets are overproduction – making big runs simply because the raw materials are available – and adding features customers don't really want. The latter adds cost without adding value.

One company the Reshoring Institute worked with to squeeze costs out of its manufacturing is Morey Corp., a 750-employee maker of electronic devices for heavy equipment based in Woodridge, Illinois. Morey’s marketing vice president, Tony Woodall, says over the past four years the company’s money-saving efforts have included switching from making all they could in big batches to making only what has been ordered.

Other innovations include keeping certain critical raw materials on the factory floor at all times, reducing wait times for material deliveries by 55 percent. Better-organized production lines cut labor costs on one line 30 percent by making 200 items per shift instead of 150. "We organized lines better by product type, and empowered people doing the work to stop the line and fix problems," he says.

Some reshoring experts argue that the final frontier in lean manufacturing isn't the factory floor, but the human-resources department. Manufacturers are notorious for red tape and wasted administrative time, says Dwane Lay, who blogs about lean HR and serves as global HR manager for major manufacturer Ingersoll Rand Co.

Much as offshore manufacturing costs often get lost in the accounting shuffle, many manufacturing HR managers have no clear grasp of the cost of making a new hire or running a benefits program. Since Ingersoll acquired competitor Trane in 2008, every cost has been reconsidered, from T-shirts handed out at college job fairs to the company’s benefits package. "We saved over $50 million to the bottom line," Lay says, "all in HR."