Companies have discussed reshoring since the days of COVID and we are now starting to see it in mass. A combination of changing global economic environment, consumer preferences, and larger market trends are pushing more companies to reshore.
Many companies are finding reshoring difficult and not for the reasons that they expected. A recent MTG engagement shows the challenges that are present in the market and what companies can do to help mitigate these challenges.
The Situation
An MTG client decided that they wanted to move operations out of China to the United States. The client produced a high-end product with low volumes and a high mix. It struggled with it Chinese supplier for years and was tariffed of rising tariffs. We had worked with this client for yours so were asked to find a new American supplier and help onboard them.
The Challenges
The first challenge was price. The American companies that could produce the client’s product were significantly more expensive, often times triple the price. Why was that? The answer was closely tied to the low volume and high mix nature of the product. More product variety added more complexity which meant more changeovers and more complicated production methods.
High labor costs were an issue as well, yet not in the expected way. A representative of one of the companies told us that when it come to mechanized parts with large orders, the price advantage of working in China disappears. The first past yield (FPY) is improved meaning that there are fewer return products, and the mechanization means that one person can do the work of a dozen. At high enough volumes, the extra labor costs for the US versus a low-cost country are negligible. The difficulty for this client is that one of its processes required a lot of manual labor. The process could be automated but not at the current volumes.
Our client was also a victim of the trend towards reshoring. The potential suppliers have been inundated with requests by other companies with much more volume. These companies are more established and were guaranteed to place orders that dwarfed what our client needed. Most companies will choose greater volume with lower complexity over smaller volumes with high complexity. Demand was too great to accommodate a small player.
Lastly, there were transfer challenges. Our client (wisely) owned its own molds and tooling. That it is free to move to a new supplier. However, that does not mean that a new supplier will accept the existing molds. Many American companies will not accept Chinese molds. The reasons for a varied but the shortest answer is that the American companies do not trust them. Our client would have to pay for new higher quality mold which would be at a new higher price. Additionally, while our team was able to provide work instructions for production and other insights, there would still be a learning curve as a new supplier started to manufacture the product.
What Can My Company Do to Mitigate These Challenges?
There are a number of ways to work through these challenges. The first thing you should do is a comprehensive feasibility study. Understand what the challenges are, what are the advantages, and really understand your costs. Our client was adamant that they did not want to pay tariff prices. Who does? However, in the short term there might not be any other option than to pay tariffs on at least some of the products.
The next is to understand what you want to accomplish with the move. What are your goals? If you want to leave China to protect IP, be more responsive to customers, and/or for marketing advantages, then work that into your calculations for costs. Companies that struggle with long lead times and poor quality may find that paying more for manufacturing to alleviate these conditions is worthwhile.
Use the feasibility study to plan a longer-term strategy to mitigate the risks. For example, MTG worked with the client to create a hybrid approach. That meant that some parts of the production were moved to North American while others remained in China. Over time, the new supply chain system will allow the client to move production to North America as orders increase and the advantages of automation become greater.
What Can My Company Do to Mitigate These Challenges?
Reshoring is difficult and not always advisable. Even large companies like Craftman Tools fail to reshore successfully, while others succeed like Bath and Body Works. The situation is even more challenging for smaller companies that might not be ready to own their own manufacturing. Knowing your costs and what you want to achieve by reshoring is the key to successful planning and implementation of a reshoring strategy.
How can MTG help you navigate tariffs in the trade landscape? Click below to learn more.
