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Reshoring

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Reshoring and its’ effect on America
Hideo Mera
Webster University

Abstract
The paper is going to discuss the trend of reshoring and it effect on America. Reshoring is the action of a company to bring jobs back to the United States (US) that were once being done overseas. The trend has been happening a little bit over the years but has gained some steam over the past few years. Some of the reasons for this shift is that the low cost labor advantages that some countries had in the past is eroding due to inflation and other factors. Another factor is costs associated with the logistics of getting parts from overseas location to your market in the US. There are other factors to consider when it comes to reshoring such as innovation, diminished customization, and concerns of quality. All of these factors are reasons that reshoring is occuring and gaining steam.

Reshoring
Reshoring is when jobs that were once being performed overseas is being brought back to the US. This trend has been happening over last few years but in the last couple of years this trend has gained some steam because the cost saving that were once so prevelant overseas is no longer being realized now. The cheap labor force that existed isn’t as cheap as it once was. The areas of the world that supplied the cheap labor have risen the wages of their workers and the skill set that is required is no longer available. Another factor that there is to consider is the logistics of moving parts from overseas to its’ marketplace in the US. Then there is the other factors to consider when a company is thinking about reshoring and in this grouping there are such as innovation, diminished customization or innovation capability, and concerns of quality
History
Prior to the rise of offshoring US manufacturers had plants in the US and had total control of the entire process. Companies started to look for a way to maximize profits and that came from getting cheaper labor overseas. As stated by an unknown author
Governed by the belief that free markets provided the answer to the economic difficulties experienced in the 1970s, Prime Minister Thatcher, President Reagan and their successors tore down barriers to trade through mechanisms like the General Agreement on Tariffs and Trade (GATT, which was established in 1948, but substantially reinforced from 1986-1993), the North American Free Trade Agreement (NAFTA), the formation of the European Union, and ultimately the World Trade Organization (WTO) which superceded the GATT in 1995. All these agreements and organizations were developed to promote free trade. In fact, upon the signing of the first GATT agreement, the US along with 22 other countries agreed to effectively lift 45,000 tariffs that existed. The result of these actions was the beginning of offshoring. These rules allowed companies to tap into cheap labor markets and have their product produced a fraction of the cost of what it would take here in the US.
Wage increases in cheap labor markets The biggest benefit for offshoring their manufacturing and operations overseas was to take advantage the cheap labor provided by other countries. This shift helped many companies realize considerable savings as a result of low cost production in China and Mexico. The purpose of any company is to maximize profits and that is what the offshoring provided. However, recently that gap in wages is decreasing significantly. As described by Ms. Harrington “Because wage rates account for 20 to 30 percent of a product's total cost, manufacturing in these areas of China will be only 10 to 15 percent cheaper than in the United States—even before inventory and shipping costs are considered.” If this trend of increasing labor rates continues it won’t be long before the wages in China and other low cost labor countries are the same as they are in the US. If some of the projections are correct it won’t be long that some places in the US will become some of the cheapest locations for manufacturing. If you consider the increase of wages and the inventory and shipping costs the cost savings that once existed are no longer there. There are more reasons that companies are considering reshoring but this is one of the major reasons that they are considering it.

Logistics Logistics is another huge reason for the shift to reshoring. Some of the components of logistics are order processing, inventory management, and freight transportation. When looking at these components a companies has to consider the costs associated with each compared to the savings in labor. These components each contribute to logistics and I will break each one down to better understand how these will improve with reshoring. When it comes to order processing in todays environment customers want it quickly and they are willing to pay premium for that option. The process can be long and tedious especially when the order goes in and then a manufacturing plant overseas has to produce the product and then coordinate the shipment back to the US. Another problem besides the lead time is dealing with manufacturers overseas wanting payment in full prior to shipping. This lead time and delay of shipment will compound problems with the financial strain of the company. If a company is able to manufacture their products in the US it will be able to process customers oders faster. According to Mr. Peck “When sourcing materials nearby, retailers are able to get products to market more quickly, and are more able respond to customers’ changing demands. In fact, the time to market is so much shorter.” The whole idea is to get to market faster since the product life cycle today is shorter than it was in years past. Inventory management can be greatly affected by reshoring. Companies that are thinking about reshoring should calculate how much less inventory they will need to carry since they do not have to take in consideration the long lead times of getting inventory back from overseas. Another thing to consider is how adaptable a company is when their overseas location is hit with a natural disaster and are they flexible enough makes changes in case of this type of emergency. Carrying a lot of inventory is not beneficial to a company since they aren’t making money with products that are sitting on a shelf. Some companies want to carry a smaller inventory but are unable to due to long lead times and the cost of getting products from their overseas manufacturers. If they do decide to carry a smaller inventory they run into the problem of running out of inventory and not making sales due to the fact of not having the product on hand. These are some of the opportunity cost that companies should consider whether or not to reshore or not. Freight transportation is the last part of logistics that I am going to talk about when it comes to reshoring. Previously, it was discussed about carrying a smaller inventory but in doing so you would have to place smaller orders more frequently then before and that would increase your transportation cost significantly. The costs of shipping by rail, road, water, and air are increasing and it’s more damaging to companies that make goods that are low volume. The fuel costs rising over the past few years have contributed greatly to the increased costs of transportation.
Other Factors Innovation is important to the health of the country. If we as a country can bring something new to the market first it help improve our position in the global market. “This investment will help accelerate and unleash the most promising ideas in advanced manufacturing, and bring those ideas to market. This will lead to good jobs for American workers, increase the nation’s competitiveness, and strengthen an economy that’s built to last.” stated the IEEE staff. Quality control is huge in the manufacturing business. The problem that some companies face when off-shoring work is ensuring that the quality of their products meets the high standards that are expected from their customers. Another problem is the process and proprietary information that you provide to off-shore business being stolen or your product being copied by another local business. Mr. Gallagher stated “In addition to cost savings, manufacturing companies are reshoring to avoid problems with product quality and intellectual property disputes. By manufacturing goods closer to where they are sold, companies can enjoy lower distribution costs and ensure quality standards are met and intellectual property remains safe.” Some countries like China are known to reproduce products at a cheaper cost since some of the copyright laws do not exist in that country. The business can lose a lot of money to these companies that are selling like items in the market. In the environment that we are in now with consumers where they like to stand-out customization is being sought out by the consumers. The ability for a company to be able to respond to their customers needs can be very successful. Reshoring will allow manufacturers the ability to adjust quickly to customer needs in less time than it would have taken if the company were overseas. It has been noted that even though US spending has decreased customers are still willing to pay premium for items that they are able to customize.
Conclusion
Though some companies will continue to offshore and seek the low labor work force to continue to improve the bottom line for their companies others have seen that come back to the US can be just as profitable than being overseas. This mindset will take some time for it to take hold and more companies will need to make the decision to reshore before the true benefits of reshoring are felt here in the US. This new thought will can and will help the US in not only improving the GDP but also creating jobs here in the US where there is a willing and able workforce looking for employment.

Work Cited
Harrington, L (2011) Is U.S. Manufacturing Coming Back? Inbound Logistics. Retrieved from http://www.inboundlogistics.com/cms/article/is-us-manufacturing-coming-back/
IEEE- USA staff (2013) Reshoring and the Resurgence of U.S. High-Tech Manufacturing. Retrieved from http://www.todaysengineer.org/2013/jan/reshoring.asp
Gallagher, Brian (2013) The reshoring of manufacturing Activities surges. Retrieved from http://www.onealinc.com/the-reshoring-of-manufacturing-activitie.php Peck, Robert (2013) US Manufacturing Makes a Comeback Part 1. Load Delivered Logistics LLC. Retrieved from http://www.loaddelivered.com/blog/trends/us-manufacturing-makes-a-comeback-part-i-the-reasoning/ Unknown, The Economics of Offshoring in the Software Industry. Retrieved from http://www-cs-faculty.stanford.edu/~eroberts/cs181/projects/offshoring/history.html \

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