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The Re-shoring Debate: Sentiment or Hard Numbers?, SupplyChainBrain

June 17, 2013

As manufacturers consider shifting production from China back to the West, the U.S. could become an economically viable alternative faster than you think.

According to the latest survey by Alix Partners, LLP, the U.S. is already equal to Mexico in “attractiveness” as a place to make product that was previously sourced in China. In terms of hard numbers, it’s on track to achieve cost parity with imports from China by 2015.

The comparison, of course, is based on more than just labor rates. Despite steeply rising wages, China still easily undercuts what most American factories pay. Add in elements such as transportation, duties, order lead time and the cost of buffer stock to prevent supply gaps, and the disparity between the two sourcing options narrows greatly.

Don’t expect production for all sorts of goods to shift from China to the U.S. overnight. As Alix Partners points out, companies need to assess their manufacturing strategies on a case-by-case basis, considering such variables as product type and value, plant location and transportation network.

Now in its third year, Alix Partners’ Manufacturing-Sourcing Outlook surveyed 137 C-level manufacturing executives. According to manager director Foster Finley, it was spurred in part by clients expressing interest in working with suppliers in Mexico. Since the survey’s launch, in fact, Mexico has continued to be the preferred location for companies looking to open manufacturing facilities in North America.

On a broader scale, Alix Partners has been identifying the lowest-cost places for manufacturing for about six years. Its evaluations are based on seven quantifiable factors: local wage rates, local cost of direct materials, local cost of overhead, ocean transportation costs, inventory expense, exchange rates and Harmonized System codes for tariff assessment. Claims Finley: “We’ve left all sentiment out of the discussion.”

A recent spate of natural disasters has brought one particular issue to the fore: supply continuity. Companies are waking up to the implications of a tsunami, flood or erupting volcano. Drug-related violence in Mexico has them thinking twice about siting factories in certain parts of that country. And port labor disputes have made some U.S. importers nervous about sourcing from anywhere outside their borders.

Local development organizations are also influencing the sourcing decision. Many have manufacturing facilities that have sat empty since the rush to China. Preferable tax treatment and other incentives are convincing businesses to come home and serve local communities. “It’s a non-trivial factor that is tipping things in favor of the U.S.,” says Finley.