The Business Case for Onshoring
Updated: May 1
The Onshoring Project (TOPs) has laid its primary objective in its initial 4 October 2021 Press Release, as described in an 18 October Industry Week article A sentence from the article is provided below;
“… shift the focus of original equipment manufacturer executives from an almost sole reliance on piece-price in sourcing decisions, a practice that has led to disastrous impacts to the health of U.S. manufacturing, the country’s overall balance of trade and employment,”
Some may interpret this statement as saying TOPs advocates both disregarding piece-price and resourcing all goods and services current provided by over-seas suppliers to domestic cases.
This is not the case.
Corporate decisions are (hopefully!) made based on Business Case deliberations. It is critical that the metrics and considerations they are based are on are significantly increased competitiveness. The dangers of not doing so were outlined in a 25 April 2014 article entitled “Management by the Numbers.”
The above being said, Business Cases for both domestic sourcing and overseas sourcing can be made! As per everything in business, the primary factor in both is related to the customer. In other words, can a product be provided to a customer when he/she wants to buy it and if not, can it be provided within the time frame that the customer is willing t
o wait before moving on to a competitive product. Also in this decision is the element of waste. In other words, how much does it cost to ensure a sale is consummated.
Essentially, the tie to the customer is best understood by a thorough understanding of the dynamics of the market the end use product will be used on, and the associated manufacturing flexibility needed to support acceptable Customer Fill Rates. Since most OEMs have high Inventory Turns --- which are directly related to “true” lead-times --- the critical factor in assuring this is the response agility of suppliers to changes in market demand from what was forecast.
Thus, a critical factor in selecting a source should be whether or not the suppliers are capable in supporting those same market dynamics as described above. Over the years in my interactions with Original Equipment Manufacturers (OEMs) this is not taken into account during the supplier selection process. Instead, the primary criteria selections are based on is piece-price.
It must be recognized that piece-price will always be a critical factor in source selection, but it should also be recognized there are other important factors that should be part of the decision (as Harry Moser outlines in his Total Cost of Ownership (TCO) Estimator Total Cost of Ownership (TCO) Estimator which is a
fundamental part if his Reshoring Initiative and my book “Better Business: Breaking Down The Walls Of The Purchasing Silo” (which is available by contacting me at email@example.com)
A bottom line in all of the above is that in addition to TCO, market dynamics should be taken into account in sourcing decisions. Which lead us back to the premise that both domestic and overseas sourcing decisions can be justified through Business Case analysis.
For instance, when market dynamics are very predictable --- making forecasts accurate --- depending on TCO analysis, sourcing overseas may be the best overall financial decision.
Along the same lines, when market dynamics are highly variable, it will usually make sense to source domestically since forecast will invariably have error, sometimes significant. Based on this conclusion, supply management not only affects a product’s cost-of-goods sold, but can also affect profits through supporting both hitting forecasts and also making incremental sales possible when demand exceeds what was anticipated.
It is important to note that consumer demand is varying more and more as instant gratification becomes the expected norm. At the same time supply uncertainty is increasing with climate change and geopolitical tension.
The is a message that needs to given visibility and a primary tenet of The Onshoring Project.
The members of The Onshoring Project are available to advise companies on this issue.