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Rebuilding and Reshoring: Reestablishing Supply Chains by Increasing Competitiveness

Harry Moser

The U.S. has gone from being the world’s manufacturing colossus for all products just after WWII to being unable to expedite production of Personal Protection Equipment (PPE) to deal with the COVID-19 crisis.

In the mid- to late-1940s, the nation produced half of the world’s manufacturing output, much higher than the 28% that the world’s factory, China, produces today. Currently, at least half of what we consume in the U.S. is imported, with major supply chain gaps such as PPE and rare earth minerals. 

This is the first of a series of articles that cover:

  • How did this trend occur?
  • What success has the U.S. had since 2010 in reversing the decline?
  • What needs to be done to restore self-sufficiency and reestablish U.S. supply chains?
  • How can companies engage and benefit?

After WWII, U.S. dominance was based on a huge build-up for the war and on other industrial countries having their production capabilities destroyed in the war. The nation’s trade surplus declined to zero by 1979. 

The U.S. sacrificed its manufacturing economy initially to help the rest of the world recover from the war and then to help low-income nations achieve democracy and middle-class status by exporting to the U.S. on preferred terms. Unlike competitor countries, we failed to establish an industrial policy. 

In fact, we have effectively had a deindustrialization policy consistently taking actions that undermined U.S. manufacturing. As a result, we have experienced increasing goods trade deficits since 1979, recently averaging about $800 billion per year.

The U.S. manufacturing cost is a driving force behind the trade deficits; thus, the Free Carrier Agreement (FCA) or Free On Board (FOB) price has been 20% higher than in other developed countries and 40% higher than in developing countries. We have not been competitive, so companies sourced offshore to meet consumer and industrial demand for low-priced goods.

Fortunately, a positive localization trend since 2010 indicates an increasing rate of reshoring by U.S. companies and Foreign Direct Investment (FDI) by foreign companies, peaking at 190,000 jobs per year in 2017.

This positive trend has been driven by: 

  • Rising Chinese wages.
  • U.S. automation and lean efforts.
  • Companies rethinking their sourcing metrics. 

Companies can rethink sourcing metrics by using Total Cost of Ownership (TCO) instead of FOB or FCA price or landed cost. A landed cost is the total charge associated with getting a shipment to its destination.

The TCO Estimator is a free online tool that helps companies account for all relevant factors—overhead, balance sheet, risks, corporate strategy, and other external and internal business considerations—to determine the true total cost of ownership. 

Using this information, companies can better evaluate sourcing, identify alternatives and even make a case when selling against offshore competitors.

Universal use of TCO, alone, would gradually reshore 20% to 30% of what is now imported. This positive trend has been strong enough to offset continued offshoring and thus stop the trade deficit’s growth but not reduce it. 

If the U.S. manufacturing industry eliminated the trade deficit, it would result in a 40% increase in manufacturing, engaging five million more manufacturing employees.

The U.S. needs to double the rate of reshoring and FDI to achieve the goal in 20 to 30 years. The biggest obstacle is to increase the skilled and unskilled manufacturing workforce. However, some experts are predicting shortfalls of two million or more due to weak recruiting, relative to high rates of retirement. Achieving the goal will take decades.  CS

This column was originally published on IMTS.com on August 3. 

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