MIT Study Documents 'Re-Shoring' Trend as U.S. Manufacturers Bring Jobs Back

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--An increasing number of manufacturers are moving some of their operations back to the U.S., a trend called "re-shoring" that could significantly boost employment in domestic factories, according to a supply-chain management study from the Massachusetts Institute of Technology (MIT) (Cambridge, Massachusetts).

David Simchi-Levi, an engineering professor at MIT, cited numerous examples of manufacturers that have, for one reason or another, moved jobs to the U.S. from overseas. For example:

• Caterpillar Incorporated (NYSE:CAT) (Peoria, Illinois) invested $120 million in a Victoria, Texas, plant that makes excavator machinery. That work used to be performed in Japan, Simchi-Levi added.
• Google Incorporated (NASDAQ:GOOG) (Mountain View, California) recently announced it would manufacture its new wireless home media player in the U.S. Simchi-Levi called this "most surprising."
• General Electric (NYSE:GE) (Fairfield, Connecticut) has invested in 15 U.S. manufacturing sites--both expansions of existing plants and grasssroot facilities--that make everything from appliances and lighting to locomotives and aircraft engine parts. This is the "most impressive" re-shoring effort the MIT professor has seen.

Speaking at a conference at MIT last month, Simchi-Levi said re-shoring was "the beginning of a trend, and there's no way to know where it's going." The industries with the most significant interest in re-shoring are Food & Beverage makers, electrical equipment makers, and motor vehicle production and parts manufacturing, he added. The last two industries are part of Industrial Info's Industrial Manufacturing Industry.

The professor said these were preliminary results from an Internet-based survey that would remain open for another few weeks. To date, the study has collected information from 304 companies, of which 176 were manufacturers. Most of the manufacturers responding to the survey--about 137 companies--were headquartered in the U.S., he said. The study, "2012 U.S. Re-Soring Survey," was conducted in conjunction with SC Digest, a supply-chain industry journal.

U.S. manufacturers have reduced their domestic workforce by more than 6 million workers, about 34% of their domestic workforce, since 1997, Simchi-Levi noted. Over that time, factories have reduced their number of domestic facilities by 17%. The U.S. economic recovery, while anemic, has been led by manufacturing jobs, according to the U.S. Department of Labor, which said U.S. manufacturers added about 500,000 jobs between January 2010 and June 2012.

Simchi-Levi also cautioned that this survey asked companies whether they were considering re-shoring jobs, or whether they had or definitely planned to bring jobs back to the U.S. One-third of the manufacturers surveyed said they were considering re-shoring, and 13% said they either have done it or were definitely planning to do it. These results were broadly consistent with a survey of manufacturers released earlier this year by Boston Consulting Group, he said, adding: "Of course, there is a big difference between 'considering' and actually moving jobs back to the U.S. Even so, an increase of 13% is enormous--it changes the footprint of manufacturing in the U.S."

The survey showed significant differences between small manufacturers (defined as less than $1 billion in annual revenue), medium-sized manufacturers (revenue greater than $1 billion, but less than $10 billion) and large manufacturers (revenue greater than $10 billion). For example:

• 34% of small manufacturers were considering re-shoring, and 12% had definite plans to re-shore.
• 33% of mid-size manufacturers were thinking about bringing jobs back to the U.S., and 20% has definite plans to do so.
• 27% of large manufacturers were discussing re-shoring, but only 8% had made specific plans to do so.

Smaller manufacturers had a higher percentage of their facilities in the U.S., and derived more revenue from the domestic market compared to medium and large manufacturers, he said. Small manufacturers had 58% of their manufacturing activities in the U.S. and the domestic market accounted for 70% of revenue for those firms. By contrast, large manufacturers derived about 44% of revenue from the U.S., and about 38% of their manufacturing facilities were located in this country.

Re-shoring is a "very sensitive issue," Simchi-Levi said, adding that 33% of the firms participating in the survey refused to discuss whether they were even considering re-shoring. He discussed how strategic trends have changed over the last decade or two, to the point where manufacturers have been forced to rethink their supply-chain strategies.

"When offshoring began, it was all about lowering labor costs and unit costs," he said at the late-July conference. "Later on, it was to capture financial incentives offered by local governments. But as companies began operating global supply chains, they realized there were other costs they did not take into account when they made their off-shoring decisions."

Simchi-Levi said the top reasons why manufacturers were considering repatriating jobs were:

• Time to market
• Product quality
• Cost reduction
• Hidden costs of supply chain management
• Greater control over input costs and the manufacturing process

The most important supply-chain challenges facing manufacturers today include:

• Long lead times
• Changes in customer demand and expectations
• Significant increases in labor costs in developing countries
• Significant increases in logistics costs
• Greater risks coming from operating in more countries

Wages for workers in Brazil increased by an average of 21% per year between 2003 and 2008, while China's workers have seen an average annual wage increase of 19% over that time, according to the study. U.S. factory workers, by contrast, saw their wages increase by an average of 3% per year over that six-year period. Granted, workers in China and Brazil started at far lower wages than their U.S. counterparts, but a wage increase over 100% over six years erodes a lot of the financial benefits of running overseas factories. "Manufacturers that made production sourcing decisions five, seven or eight years ago based on local wages need to revisit some or all of those decisions," the MIT professor commented.

The logistics costs of operating a global supply chain also have risen sharply in recent years, he noted. Transportation costs, largely driven by rising oil prices, increased 47% during 2003-08, while inventory costs increased 62% over that period. "Higher energy costs affect all aspects of your manufacturing business, not just transportation costs," he said. Higher energy prices incented manufacturers to pursue economies of scale and transport larger amounts of their goods. But those goods piled up in warehouses and distribution centers, pushing up inventory costs, he noted.

"Expansion to a global supply chain creates significant increases in risks as well," Simchi-Levi continued. Companies that operate on a wider geographic basis are exposed to greater set of risks, including natural disasters. Last year, natural disasters cost manufacturers an estimated $300 billion, only $80 billion of which were covered by insurance, he said. The two biggest natural disasters were the earthquake and tsunami in Japan and flooding in Thailand. Manufacturers hurt by one of both of those events included Intel Corporation (NASDAQ:INTC) (Santa Clara, California), Toyota Motor Corporation (NYSE:TM) (Toyota City, Japan), Honda Motor Company (NYSE:HMC) (Tokyo, Japan), Canon Incorporated (NYSE:CAJ) (Tokyo), Sony Corporation (NYSE:SNE) (Tokyo), General Motors Company (NYSE:GM) (Detroit, Michigan) and Goodyear Tire & Rubber Company (NYSE:GT) (Akron, Ohio), he said.

The "new normal" is that manufacturers are competing in an environment that is complex, uncertain, dynamic, and chaotic," Simchi-Levi said. "For a lot of reasons, manufacturers are starting to pursue a regional manufacturing strategy in which operations in China will serve Asian markets, plants in Eastern Europe will service the European Union market, and plants in Latin America and the U.S. will target demand in the Americas."

Tax policy, including tax credits, tax reduction, and research and development incentives, are among the most important factors shaping manufacturers' re-shoring decision-making, Simchi-Levi said, adding: "Small changes in tax policy can have an enormous impact" on a company's decision to bring manufacturing jobs back to the U.S.

David Pickering, Industrial Info's vice president of research for Industrial Manufacturing, said he has seen evidence of the MIT study in his work. "It may cost a little more to make something in the U.S., but those cost saving can be offset by instability in an overseas market or the cost of shipping the product to the U.S. We are seeing increased re-shoring among smaller and mid-sized manufacturers."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.