For North American manufacturers that have chosen to outsource manufacturing tasks outside their core competencies, the sourcing equation may finally be tipping away from offshoring back toward reshoring of precision machined parts.
After about two decades of offshoring largely for low labor costs, wages in emerging economies like China’s have risen substantially. Meanwhile the high transportation cost and complex supply chain of offshoring, so prone to delay and disruption, can no longer be overlooked, particularly when precision is required and the total cost of ownership is considered.
“Most companies make sourcing decisions based solely on price, oftentimes resulting in a 20 to 30 percent miscalculation of actual offshoring costs,” states the Reshoring Initiative, an advocacy group that provides a total cost of ownership estimator on its website.
According to the recent MarketWatch story “Record number of manufacturing jobs returning to America,” 2014’s net increase of at least 10,000 [manufacturing] jobs was the first net gain in at least 20 years.
“For the first time, some small contract manufacturers in the U.S. are beating bigger rivals in Asia, the center of global industrial production,” reports the recent L.A. Times story “After decades of exodus, companies returning production to North America”
More manufacturers today are opting for domestic precision part suppliers over offshoring as they absorb the lesson that local sourcing often lowers the total cost of ownership.
“We’ve had many offshore bids and samples sent to us but weren’t happy with the quality because they didn’t hold tolerances, properly clean or debur, and would be rejected if we put them in the field,” says Bruce Dobbs, CEO of Run-Rite/C.A.T. Products Inc., a Stroudsburg, Penn.-based provider of specialty cleaners, lubricants, and equipment to the professionally installed automotive service marketplace. “We found our total cost of ownership was actually lower and quality better with our domestic supplier.”
Run-Rite manufactures fuel system cleaning tools and other service equipment for the auto industry, and its domestic supplier Dial Machine (dialmachine.net), a full service precision machine shop offering custom metal and plastic components, makes a number of fittings and components for those tools.
“We have critical tolerances that must be met in size, shape, location, and some parts have micro-drilled vent holes,” says Dobbs. “One tool we make has to be very carefully manufactured so it properly atomizes the solution. We can’t afford to lose a customer over an inferior part.”
Run-Rite relies on Dial Machine for CNC machining, metal fabrication, aluminum die casting; forming of aluminum and acetyl parts; and for drilling, micro-drilling, deburring, anodized finishing, and inspection.
“It’s harder to ensure quality control or make design changes with an offshore supplier unless you have an office there,” says Dobbs. “That adds significant overhead and it’s still challenging to try to respond to the market and innovate because of differences in distance, time, language, culture, and currency.”
According to Dobbs, one of the greatest benefits of reshoring with a domestic supplier is fast, flexible response with enhanced quality control. “We do a lot of small, custom runs and Dial Machine is flexible enough to do those for us, including prototyping under sales deadline pressure,” says Dobbs.
When Run-Rite was trying to build an atomizing tool for a customer, for instance, the company had to make a number of changes until they got it to their customer’s liking.
“With Dial Machine’s help, we went from product concept to finished piece in two weeks with all the needed changes,” says Dobbs. “That’s resulted in ongoing sales with the customer and other customers. If we’d attempted that with an offshore partner, it would have taken 3-6 months, assuming no problems, and we would’ve missed our window of opportunity.”
When a manufacturer relies on product innovation to stay competitive in the market, offshoring production can expose their designs to patent infringement, counterfeiting, and even low-bid competition that copies their designs and undercuts them in the market.
“When offshoring, you have to be very careful to protect intellectual property,” says Dobbs. “Even with patents and trademarks, there’s no guarantee your designs won’t be copied and marketed at a significantly lower price than yours. The amount it costs you to fight patent infringement overseas has to be factored into the overall cost of doing business there.”
In the offshore versus reshore debate, a number of other factors also favor the latter. Reshoring with a high-quality U.S. supplier of precision parts can not only minimize or eliminate costly emergency air freight, scrap, and rework, but also significantly reduce necessary inventory and capital costs.
Required safety stock for offshore suppliers is typically three times higher than locally sourced products, and manufacturing capital is typically tied up several months longer with an offshore source. Because minimum reshored orders are much smaller than offshored minimum orders, this also reduces the potential downside of obsolete stock.
“Since Dial Machine does just-in-time work for us, it minimizes our inventory carrying costs,” says Dobbs. “We’re able to cut our inventory to about one-third the level we’d have to stock if we offshored, which frees up our cash flow to be more productive.”
Despite the low-cost allure of offshored parts, experts predict the rise in overseas labor costs will continue as those markets mature and more workers join the middle class, pushing wages upward.
In contrast, historically low U.S. labor rates make reshoring competitive today, and this edge is expected to grow as U.S. precision parts suppliers implement new technology that makes existing workers more productive.
For instance, Dial Machine handles not only primary processes such as CNC machining, metal fabrication, lathe and milling operations, but also secondary machining, finishing, coating, deburring, grinding, and some assembly. But the precision parts maker is not resting on its laurels. To gain even greater operational efficiency, it has gone beyond CNC machining to lights out manufacturing.
Lights out manufacturing is a trend where CNC equipment is set up to make parts overnight or longer, while staff is not around. This can speed part turnaround while also reducing labor costs, which can be passed on to the customer.
The technique often improves OEM production flexibility as well, leaving fully manned CNC equipment for day shifts to produce more complex parts that may require more tooling changeovers and monitoring.
As much as 80 percent of the work Dial Machine performs can be run as lights out manufacturing, provided that lot quantities are sufficient. These automated machines have automatic magazine bar feeders and safety mechanisms on them. This allows the company to run multiple shifts per day, including an unattended overnight shift, which can dramatically decrease OEM lead times and part costs.
“We’re considering doing lights out manufacturing at some point with Dial Machine, which would make reshoring even more efficient and cost effective,” concludes Dobbs.