Business practices are prone to fads, and in hindsight, the rush to offshore production 10 or 15 years ago looks a little extreme. The distance across the Pacific Ocean was as wide then as it is now, and the speed of cargo ships was just as slow. A lot of the very good reasons for bringing factories back to the U.S. today were potent arguments against offshoring in the first place.
It was important to innovate, and to protect innovations, 10 or 15 years ago. It was important to have designers, engineers, and assembly-line workers talk to each other then, too. That companies spent the past two decades ignoring those things just shows the power of price, even for people who should be able to take a broader view.
Harry Moser, an MIT-trained engineer, spent decades running a business that made machine tools. After retiring, he started an organization called the Reshoring Initiative in 2010, to help companies assess where to make their products. “The way we see it,” says Moser, “about 60 percent of the companies that offshored manufacturing didn’t really do the math. They looked only at the labor rate—they didn’t look at the hidden costs.” Moser believes that about a quarter of what’s made outside the U.S. could be more profitably made at home.
“There was a herd mentality to the offshoring,” says John Shook, a manufacturing expert and the CEO of the Lean Enterprise Institute, in Cambridge, Massachusetts. “And there was some bullshit. But it was also the inability to see the total costs—the engineers in the U.S. and factory managers in China who can’t talk to each other; the management hours and money flying to Asia to find out why the quality they wanted wasn’t being delivered. The cost of all that is huge.”
But many of those hidden costs come later. In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation. And it’s easy to assume that globally distributed production will hum along more smoothly than it often does in practice: however strong the planning, some of those shipping containers will be opened to reveal damaged or substandard goods, and some of them won’t have the number or variety of goods a company needs at that very moment. “All you need is to have to hire one or two 747s a couple times to get product here in a hurry,” says Shook, “and you lose those savings.”
Thomas Mayor, a senior adviser with Booz & Company who specializes in manufacturing strategy, says that in industry after industry, he is seeing the same kind of reassessment GE has made. When asked about the value of the original rush offshore, Mayor laughs.
“Twelve years ago, I saw a lot of boards of directors and senior executives saying, ‘Three years from now, I’m going to be sourcing $4 billion in product from China. Go figure out how to make it happen.’ ” Part of the rationale, from the start, was merely to gain a foothold in the Chinese market. And for many companies, that made sense, at least to some extent. “But if you press them on their savings by sourcing from China for North America, I get stories like ‘Oh, I asked about that six months ago. I had five finance guys working on it, and they couldn’t come up with any savings.’ At the end of the day, they say, ‘If we were doing this for the U.S. market, we should never have gone to China in the first place.’ ”