Reshoring Strategies
It’s The (Paradigm) Shift, Stupid
Full Reshoring is harder than offshoring, because history shows that Japan and China didn’t want or need help from hapless American manufacturing companies when they forced offshoring solutions upon us. They maintained a paradigm of “burning the ships” to accomplish their goals of economic success at the expense of US dominance, but used different methods to achieve those goals. Regardless of how they did it, they used a little inspiration and a ton of perspiration to make it happen.
Figure 1: Quote from Edison
Japan’s approach was simple, and focused. They just took over the markets for advanced manufactured products, such as cameras, copiers, watches, electronics (VCRs, DVDs, Stereos), and automobiles. They played to win, and took no prisoners, and offered no partnerships or joint ventures (see Day 3 examples of Kodak and Swiss Watch Industry). 99% perspiration, 100% devastation.
China used a different tactic, but just as effective, and a little more cynical – they made offshoring extremely easy by providing a turn-key replication of a commodity production process where a side-by-side comparison of a finished product revealed a 100% identical outcome, at 20% of the total landed cost, thanks to huge labor cost savings. Human nature kicked in, and America-be-damned, and entire industries were ravaged. China went from “cheerful eager helper” to “dominating adversarial goliath” in less than 20 years. 99% perspiration, 100% devastation.
Both countries achieved their dominance out of a paradigm of despair. Japan was totally wrecked in World War 2, and spent the following 30 post-war years with a maniacal focus on a different form of world domination through manufacturing excellence. China saw manufacturing dominance as a way to exit its century-long slog of economic isolation and state-run poverty for all.
The United States feels neither of those pressures – we remain fat, dumb, and happy, and mostly oblivious to our decline as a nation. We sit in a hot-tub paradigm of profit-seeking and taking the easy way out, something our great-grandparents would never have imagined for this nation. It is time for us to shift our paradigm back to doing the hard work of reshoring, but we need to start with a little inspiration. Let’s talk about the Strategy of Reshoring. The perspiration will come in a later class.
The Big Steps in Reshoring
Early on in the reshoring lifecycle, it is likely that an exact product or product group has not yet been determined as a candidate for reshoring. Everything starts with the decision that reshoring should be at least considered, and a strategy needs to be put in place. After the strategic assessment has been conducted, the actual detailed planning and execution of a facility build-out will be conducted. Finally, once the manufacturing facility is operational, there will always be long-term optimization activities to constantly enable either one growth, or two cost reductions. That high level lifecycle is presented below.
Figure 2: Primary Steps of Reshoring
Create the Reshoring Strategy
The purpose of today's class is to focus on the strategic portion of reshoring. This section will discuss the strategized portion of the three primary steps of reshoring split into two stages that each end with a management checkpoint. The first Stage focuses on securing leadership decision to proceed with the identification of a product to restore, followed by a Stage that emphasizes the operational details required to create the business case to initiate the Build Step of reshoring. The figure below shows the key steps in the process of creating the reshoring strategy for a particular product. Each of the key steps be explained in some detail, along with the top two or three activities within each step as well as the outcomes or deliverables that should be expected.
Figure 3: The Strategize Portion of Reshoring
Stage 1: Product Selection
This is where the decision to consider reshoring occurs, and leadership understanding and acceptance of the need for reshoring is first secured, then a directive is provided to determine the best product for reshoring. Without leadership at the Board or C-Level, getting a company to consider moving their manufacturing back to the US is unlikely.
Step 1: Shift the Paradigm
Description
Shifting the paradigm is working to build the corporate awareness of reshoring as a viable business decision. It’s been so long since manufacturing of offshored goods has occurred, it is likely that beliefs exist that this sort of thing is not even possible. The mindset, or paradigm, regarding reshoring needs to be changed.
Key Activities
Deliver company-wide reshoring workshops.
Provide examples of reshoring successes.
Include reshoring outside experts from industry, academia, or think tanks.
Meet individually with stakeholders to explain the reshoring process.
Conduct reshoring survey to gauge stakeholder willingness to process
Deliverables
Tailored reshoring workshop(s)
Key examples of reshoring success
Survey confirmation of willingness to proceed
Step 2: Convince Board and/or C-Level Leadership
Description
A company-wide decision to execute a reshoring program must require full understanding and endorsement of the CFO, and probably the CEO. If the company is publicly traded, or maintains a board of directors, then a board level approval should be sought to ensure organizational agreement.
Key Activities
Understand the process for obtaining leadership meetings and approvals.
Deliver “order-of-magnitude” cost and benefit projections.
Obtain leadership and/or board approval to complete Subsegment #1
Deliverables
Executive leadership presentations
Reshoring Mission Statement
Detailed next steps to determine initial products.
Step 3: Build the Rationale
Description
The primary goal of the Build the Case Step is to provide directional confirmation that reshoring a product set or specific SKU is worth investigating further. The vast majority of companies with significant offshore manufacturing plants have not done a fresh review of the rationale for reshoring since their original decision to send manufacturing offshore. Obviously, the landscape has changed dramatically, and applying a modern perspective to the benefits of reshoring will certainly generate interest in digging deeper into the benefits.
Key Activities
Conduct broad scan of current offshored products and associated supply chain steps and costs.
Create top 10 products with the best potential for reshoring.
Determine specific costs associated with the top 10 products (landed costs)
Leverage numerous industry analytics tools to generate high-level costs to manufacture the same product inside the US, including best raw material supplier costs.
Apply common existing incentive packages to each product.
Develop general startup costs for factory opening and refurbishment.
Conduct reshoring survey to gauge stakeholder willingness to process
Deliverables
High level cost benefit calculations for top products considered for reshoring.
TCO Estimator results, confirmed by Reshore Initiative™ (2)
Final Report on business case by product.
Step 4: Pick the Product
Description
By this step, there should be a good idea of the top 5 – 10 products that could be investigated at a detailed level for building a reshoring case.
Key Activities
Understand the process for obtaining leadership meetings and approvals.
Deliver “order-of-magnitude” cost and benefit projections based on limited data.
Develop ranking of products for reshoring, focus on top 2 or 3 products.
Develop final recommendation report.
Deliverables
Cost benefit analysis of key reshore product candidates.
Top 3-5 candidates for reshoring.
Final Recommendation Report.
Checkpoint #1 – Approve Reshore Product for Deep Dive
Description
Stage 1 is complete, and now a leadership review of the recommendations for developing a business case needs to be conducted and approved to proceed.
Key Activities
Deliver final Stage 1 report and initial product recommendations.
Agree on target product (and at least one “backup” product) for Business Case development.
Deliverables
Recommended top reshoring product (and backup) for Stage 2 – Business Case.
Stage 2 – Business Case
The development of the business case is crucial to the successful reshoring of manufacturing back to the US. The goal is to meet the current landed cost target from procurement, then fund the initial proof of concept factory build from the projected savings from inventory reductions due to reshoring. The opening expectation here is that any final landed cost that is within +/- 10% of the current offshored landed cost should be considered a “green light” to proceed, otherwise there’s little reason to bother with the exercise.
Step 1: Lock in Partners
Description
There is a significant difference between partners and suppliers. In the case of a HermitCrab Reshoring pursuit, “partners” consist of State Economic Development Agencies, manufacturing oriented universities (Clemson, North Carolina State, Georgia Tech), industry forums and advisory groups, state-by-state Manufacturing Extension Partnerships (MEPs) and various regional and county-specific economic development groups. There will be dozens of experts available within each state to help confirm the strategy, complete the design, and execute the buildout of a reshored manufacturing facility.
Key Activities
Develop short-list for applicable partners based on product type.
Conduct partner workshops to share HermitCrab strategy and seek inputs.
Seek order of magnitude cost estimates for partner support when approvals are obtained to proceed with reshoring proof of concept.
Deliverables
Primary and secondary partners by state.
Enhancements to Cost-Benefit Analysis thanks to Partner input.
Step 2: Lock in Suppliers
Description
Since HermitCrab has a strategy that emphasizes leveraging easy-to-find raw materials from the southeast US, such as wood, paper, ceramics, and cotton, the ideal raw material suppliers will exist within the three-state HermitCrab territory, or within a bordering state. Once the suppliers are identified, and the target quantities have been negotiated, long-term pricing strategies can be implemented and applied to the business case.
Raw materials are only a portion of the suppliers needed for success. Additional diligence will be needed to identify equipment suppliers, technology support, and business services providers. All of these costs must be accounted for and locked in to the final business case.
Key Activities
Determine the top 80% of raw materials needed by commodity class.
Determine best suppliers within HermitCrab region or nearby states.
Identify essential equipment suppliers depending on reshored product.
Select appropriate technology support across Enterprise Resource Planning (ERP), Supply Chain Planning (SCM), Industry 4.0, and Back-office functions.
Deliverables
Full cost makeup for all suppliers, plus contingency for unforeseen costs
Letters of intent from suppliers to match agreed-to pricing plans for reshored product opening and ramp-up
Step 3: Confirm Incentives
Description
All three states inside the HermitCrab territory offer tax breaks and incentives to locate facilities within specific distressed counties within each state. While corporate taxes are not an incentive, North Carolina’s lowest corporate tax rate could be a driver to locate a facility there. Many other factors exist that will affect the site location decision.
Key Activities
Develop catalog of to locate plant in rural area to maximize incentives.
Deliverables
Incentives catalog of options available
Recommendation report based on incentives available
Step 4: Tip Scales with ESG
Description
20 years ago, no one considered the environmental, sustainability, and governance (ESG) aspects of offshoring, and conversely, reshoring manufactured products. If the regular cost benefit analysis is even close to break even, ESG benefits should tip the scales for all environmentally conscious retailers, buying groups, distributors, and importers.
Key Activities
Determine the total carbon footprint of the current offshored product.
Apply the same metrics to the site location inside the HermitCrab territory.
Create ESG Benefit report for reshoring.
Articulate the real and perceived benefits from reducing the carbon footprint for the current offshored product.
Deliverables
ESG Benefit report for reshoring.
Inclusion into Final Recommendation Report.
Step 5: Finalize the Case
Description
All the pieces are in place to make the final recommendation. The site locations are determined, the supply chain costs are settled, the total cost of labor is understood, and incentives are included.
Key Activities
Organize final Cost-Benefit Analysis of reshored product, leveraging TCO Estimator™ and best available incentives to create best possible case.
Develop Final Recommendation Report.
Deliverables
Final Cost-Benefit Analysis of Reshored Product.
Final Recommendation Report, including:
Manufacturing Process Overview
Confirmed Existing Costs
Target estimates for future costs
Plant buildout costs
Total benefits projections
Reshoring timeline.
Checkpoint #2 – Approve Reshoring Business Case
Description
Stage 2 is complete, and now the business case is approved and the decision to proceed with a reshoring program is at hand. This is not a decision to be taken lightly, because now the inspiration stops, and the perspiration begins! The financial aspect will also be significant, since millions of dollars will be required, and the payback is going to be at least 12 to 18 months away.
Key Activities
Approve Business Case, including budgetary numbers to launch prototype factory to commence production.
Deliverables
Gameplan for Reshored Manufacturing Facility.
Corporate-wide paradigm shifts to the new way of work.
Conclusion: This has been the longest class so far in the 30 Days of HermitCrab, but for good reason. Getting the strategy right takes time, consensus-building, and lots of data. Even when the plan is completed and the case is evident, there will still be a leap of faith required by the customer to take the difficult road of reshoring one of their product sets back to an American Manufacturing facility. The good news is that everyone involved will be better off for it.
Thank you for Reading! Come back tomorrow for Day 18: The Specific Types of Reshoring: Not Every Reshoring Plan is Equally Good for America. We will focus on and define the various types of reshoring that is happening today, and rank them by the economic benefit to America.
Thanks for reading,
The HermitCrab Team
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