The Economic Impact of Reshoring
Introduction
Reshoring, the process of bringing manufacturing and services back to the domestic market—has garnered significant interest as companies reassess the sustainability and efficiency of global supply chains. This strategic move is driven by numerous financial and soft benefits that extend beyond merely cutting costs. Today’s lesson focuses on the many advantages of reshoring, specifically focusing on the impacts on companies and the broader community, while providing a detailed look at each benefit. Also, we add the additional twist of the HermitCrab business model, by leveraging the already-waiting empty shells of previously abandoned factories.
Financial Benefits to the Reshoring Company
1. Inventory Reduction from Faster Replenishment: One of the most immediate financial benefits of reshoring lies in reduced lead times for inventory replenishment. Instead of waiting for up to four months for products to arrive from offshore suppliers, companies can receive goods in as little as two weeks. This reduction leads to a substantial minimization of Work in Process (WIP) inventory, cutting down on holding significant amounts of stock and freeing up capital for other investments.
2. Carrying Cost Savings: As the amount of inventory on hand decreases, so do the associated carrying costs. These costs, often referred to as the "cost of money," encompass the expenses related to storing and managing inventory. By reducing the overall inventory levels, companies can lower these carrying costs significantly, improving cash flow and financial efficiency.
3. Demand Responsiveness: Shorter lead times bring improved demand responsiveness. With quicker replenishment cycles, companies can operate with smaller lot sizes and more precise forecasting. This heightened accuracy leads to further inventory reductions, minimizing the risk of overproduction and underproduction, and allowing for just-in-time delivery models.
4. Reduced Obsolescence: Reshoring helps to mitigate the risks of product obsolescence. Faster inventory turnover means that products are less likely to become outdated or unsellable before they reach the market. This benefit saves companies from costly obsolescence write-offs and keeps their offerings up to date with current market demands.
5. Large Reduction of Damage During Shipment: Manufacturing closer to the market decreases the likelihood of goods being damaged during long transits. With shorter and less complex supply chains, products face fewer handling points and environmental stressors, thereby arriving in better condition. This reduction in damage helps to maintain product quality and reduces the costs associated with returns and replacements.
6. Elimination of Inventory Write-Downs: With more accurate demand forecasting and shorter lead times, companies can nearly eliminate inventory write-downs caused by ordering the wrong products well in advance. This precision ensures that the right products are produced and delivered according to actual market needs, reducing the financial impact of excess or obsolete inventory.
7. Near Elimination of Emergency Air Freight: Emergency air freight, a costly necessity for circumventing delays in global shipping, becomes nearly obsolete with reshoring. Domestic production schedules can be more reliably controlled, reducing the need for expedited shipping and the exorbitant costs associated with it.
8. Tax Incentives and Grants: Reshoring often comes with financial incentives from local, state, and federal agencies designed to encourage domestic manufacturing. These may include tax breaks, grants, and other financial incentives that offset the costs of transitioning operations back home, making reshoring financially appealing.
9. ESG Credits for Carbon Footprint Reduction: Reshoring helps companies to reduce their carbon footprint by cutting down on the extensive logistics required for offshore manufacturing. This move can earn companies Environmental, Social, and Governance (ESG) credits, enhancing their sustainability profiles and appealing to environmentally conscious investors and customers.
10. Elimination of Supervisory Overlap: Having domestic facilities eliminates the need for regular supervisory visits to offshore sites. This reduction in travel not only cuts costs but also increases managerial efficiency, allowing leadership to focus more closely on optimizing local operations and driving business growth.
Soft Benefits to the Reshoring Company
1. Improved Brand Image: Products bearing the "Made in USA" label often enjoy a boost in brand image and customer loyalty. Consumers perceive these products as higher quality and are often willing to pay a premium, enhancing market positioning and sales.
2. Support from Local Expertise: Reshoring attracts mindshare and support from local universities, Manufacturing Extension Programs, and entrepreneurs, especially in regions rich in manufacturing history, like the Southeast. This local expertise provides valuable resources for innovation and process improvements.
3. Worker Training: Reshoring necessitates a significant investment in worker training to equip employees with new manufacturing techniques and technologies. This upskilling enhances the workforce's competency, driving productivity and operational excellence.
4. Reduced Intellectual Property Risks: Bringing production back home significantly reduces the risks associated with intellectual property (IP) theft prevalent in some offshore countries. Protecting IP is crucial for maintaining competitive advantage and safeguarding innovative products.
5. Faster and More Agile Innovation: Proximity between manufacturing and R&D teams fosters a more collaborative environment, allowing for quicker iterations and rapid prototyping. This agility enables companies to bring new products to market faster and stay ahead of competitors.
Benefits to the Greater Community
1. Community Revitalization: Reshoring offers a pathway to revitalizing communities by reoccupying abandoned facilities in economically depressed areas. This move can restore employment levels and stimulate local economies, reversing the adverse effects of previous industrial downturns.
2. Increased Tax Base: Bringing jobs and manufacturing back to the local community boosts the tax base through increased corporate taxes and employee income taxes. This influx of revenue can fund public services and further community development.
3. Revitalization of Blighted Locations: Establishing new manufacturing operations in previously blighted areas transforms these locations from eyesores into productive assets. This transformation can increase property values and improve the overall aesthetic and economic landscape of the community.
4. Employment Opportunities for Other US Customers: Reshoring not only creates jobs within the company but also supports employment across the supply chain for other US customers in related product categories. This ripple effect extends the benefits of reshoring across various sectors of the economy.
5. Revenue to Local Suppliers: A reshored factory will need to relocate its entire supply network, creating a domino effect of new jobs and revenue opportunities for local suppliers throughout the Southeast and beyond. This growth boosts the local economy and fosters a more resilient regional industrial base. HermitCrab will look for ways to incorporate suppliers into the revitalized factory and/or produce the sub-products as part of a vertical integration strategy.
Conclusion
Reshoring presents a strategic opportunity with multifaceted benefits that extend well beyond mere cost savings. Financial gains such as inventory reduction, carrying cost savings, and improved demand responsiveness, alongside soft benefits like enhanced brand image and community support, make reshoring an attractive option. The positive impacts on local and state communities, through employment and revitalization, underscore the broader economic and social value of this move. While reshoring requires significant investment and effort, the long-term advantages solidify its position as a crucial initiative for sustainable and competitive business practices.
CASE STUDY: Chobani in New York State
Chobani is a great “Half-Hermit” Case study. While Chobani did not reshore a product to New York State, they did move into the empty shell of an abandoned factory and brought it back to life.
The Beginning: Kraft Foods operated a cheese factory in Chenango County starting in 1920. It later switched over to making yogurt at the facility. Kraft closed the Chenango County factory in 2005, putting 55 people out of work. Turkish immigrant Hamdi Ulukaya opened a mailer and decided to buy the plant. He began making Greek yogurt in 2007 under the brand name Chobani, which means shepherd in Greek. Chobani is now the best-selling Greek yogurt in the United States.
The Economic Impact: Chobani is now the best-selling Greek yogurt in the United States. Hamdi Ulukaya is the subject of a Harvard Business Review article and a TED speaker. The economic impact of his vision is startling for a man who started from nothing.
Economic Impact Data
Multiple Site improvements at original factory, plus additional factories in New York and Idaho.
2000+ jobs at the Chenango County Plant and the newer Unadilla River plant
Workers receive twice the minimum wage and have equity in the company
Nearly $2 million in grants to 50 organizations in New York
Donated 11 million products to schools and charities across 30 states
Massive impact to local suppliers – Chobani buys two billion pounds of milk from local suppliers in New York and Idaho
Chobani annual revenues exceeded $5 billion in 2024
Hamdi Ulukaya is now a billionaire (~$2.5 billion net worth), not bad for a descendent of Turkish goat herders!
Click Here to Read the HBR Interview with Hamdi Ulukaya
Thank you for Reading!
The economic impact of reshoring is obvious and strong, but the stickiness of lowest landed cost as a decision-driver makes the case more difficult, but Chobani proved it can be done. We hope this was an informative read. Tomorrow’s topic, Job Creation, will dig into the jobs needed for reshoring and the value of a skilled workforce.
Thanks for reading,
The HermitCrab Team
