Planning for Reshoring Production

Jan 20, 2024 | 0 comments

Are you thinking of reshoring? Not sure how to go about it. Here is a short list of things you should consider in your plan:

ROI: Reshoring is an investment, and like all investments, it will consume cash. Design changes may have to be made, new vendors will have to be sourced and approved, tooling may have to be re-manufactured, and someone will have to manage the process. Of course, there will be some return on this investment: quality may improve, the supply-chain risk may be reduced, the unit cost may go down or up, terms may improve, inventory carrying cost may go down, etc.

It’s important to quantify these costs and returns. What will these costs be, and how much will we get in return. Quantify these costs and returns and write it down in a simple spreadsheet that then calculates the ROI.

Like all capital expenditures, a decision should be made based on this ROI calculation to go forward or not. Obviously, if the return is negative (and you vetted the assumption — see the next point), then stop. However, even if the ROI is positive, you still may not want to move forward. If you’re like most companies, you have more projects than capital available to fund them. It’s a good idea to compare and contrast these capital investments before making this funding decision.

Test Assumptions: Your first estimate of the ROI was likely made up of guesstimations. Time to test if these assumptions are close.

It’s easy to get these wrong — and just as likely to be lower than higher. Don’t assume that just because labor is cheaper in Asia that this means the unit cost will be higher. Often parts are less in the US, and it may be possible to modify the product design to better suit automation — thus reducing the number of hours per unit.

Don’t forget or underestimate the management cost. Even if you are managing the reshoring completely in-house, there are always opportunity costs. If the team has never done a reshoring project before, they are likely underestimating the time needed, and the risk goes up.

Don’t forget to include the inventory carry cost. Most small companies have a very high cost of capital. If reshoring gets you several months closer between inventory payments and revenue cash, the savings, in terms of carry cost, could be significant.

Design First: Before talking to any new CMs/vendors, get the engineering completed. In all likelihood, changes will have to be made simply because the existing design has most likely been optimized for low-labor cost and not automation. Simply giving the existing drawings to a US vendor will likely result in a 2x increase in COGS.

Sourcing New Vendors: Vendor relationships have often been compared to interpersonal relationships. Good ones can help you grow, and bad ones can be toxic.

Don’t fall into the trap that is all about price. Price is important, but not nearly as important as fit. Is their quality system sufficient to meet your requirements, or is it overkill. Will you be the biggest or smallest customer for them — you want to be in the middle. Do they share the same values? Can we communicate with them?

Move Slowly: Don’t disengage the old supply chain until you are absolutely positive the new one is working — which means they have produced a significant quantity of product that passed DVT/HALT and has been in the field for enough time to know.

Some companies keep the old supply chain in place indefinitely. Even if they are only producing 20% of total at a higher cost, this can be cheap insurance to supply chain disruptions.

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