Talking Freight: Reshoring Overseas Manufacturing to the U.S and North America and Its Impacts on the Transportation System
July 15, 2015
Audio files require the Windows Media Player.
Nicole Coene
Good Afternoon or Good Morning to those of you on the West. Welcome to the Talking Freight Seminar Series. My name is Nicole Coene and I will moderate today's seminar. Today's topic is Reshoring Overseas Manufacturing to the US in North America and Its Impacts on the Transportation System.
Before I go any further, I do want to let those of you who are calling into the teleconference for the audio know that you need to mute your computer speakers or else you will be hearing your audio over the computer as well.
Today we have two presentations, given by:
Mr. Harry Moser founded the Reshoring Initiative to bring manufacturing jobs back to the U.S. after worked for GF AgieCharmilles, starting as President in 1985 and retiring December 2010 as Chairman Emeritus (A mer i tus). Mr. Moser was inducted into the Industry Week Manufacturing Hall of Fame in 2010 and named Quality Magazine's Quality Professional of the year in 2012. In January 2013 he won The Economist debate on outsourcing and offshoring and received the Manufacturing Leadership Council's Industry Advocacy Award in 2014. In addition, he participated actively in President Obama's Insourcing Forum at the White House in January 2012. Mr. Moser received a BS in ME and an MS in Engineering at MIT in 1967 and an MBA from the University of Chicago in 1981.
Dr. MD Sarder is an associate professor and assistant director for the Center for Logistics, Trade and Transportation at the University of Southern Mississippi. He has extensive research experience in various areas including logistics transportation & supply chain management. He was awarded more than 20 research grants funded by agencies including US DOT, NSF, Mississippi Dept. of Education, Mississippi Dept. of Transportation and other agencies. He served as PI and Co-PI of several US DOT grants with collaborative partners from various institutions. He has authored three books, four book chapters and over 70 scholarly interdisciplinary articles. Dr. Sarder is very active in professional organizations including TRB, IIE and ASEE. He served as research coordinator on AT045 and AT050 TRB committees. He also served as President in Lean division, founding president of Logistics & Supply Chain Division, and Assistant Senior Vice President of Technical Operations of IIE. He served on the editorial board for several journals and editor in chief for the International Journal of Logistics & Transportation Research.
Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. If during the presentations you think of a question, you can type it into the chat area. Please make sure you send your question to "Everyone" and indicate which presenter your question is for. Presenters will be unable to answer your questions during their presentations, but I will start off the question and answer session with the questions typed into the chat box. If we run out of time and are unable to address all questions we will attempt to get written responses from the presenters to the unanswered questions.
The PowerPoint presentations used during the seminar are available for download from the file download box in the lower right corner of your screen. The presentations will also be available online within the next few weeks, along with a recording and a transcript. I will notify all attendees once these materials are posted online.
Talking Freight seminars are eligible for 1.5 certification maintenance credits for AICP members. In order to obtain credit for today's seminar, you must have logged in with your first and last name or if you are attending with a group of people you must type your first and last name into the chat box. I have included more detailed instructions in the file share box on how to obtain your credits after the seminar.
For those of you, who are not AICP members but would like to receive PDH credits for this webinar, please note that FHWA does not formally offer PDHs, however, it may be possible to receive PDHs for your participation in Talking Freight if you are able to self-certify. To possibly receive PDHs, please download the agenda from the file download box and submit this agenda to your respective licensing agency.
Finally, I encourage everyone to please also download the evaluation form from the file share box and submit this form to me after you have filled it out.
I'm now going to turn it over to Harry Moser of Reshoring Initiative to get started.
Harry Moser
Thank you Nicole and thank you everyone for being here. We will talk about reshoring and specifically the benefits of it for companies or perhaps transportation organizations, the costs involved, how to recognize cost that are perhaps higher offshore, and by reshoring you eliminate those costs, the opportunities that arise from having a locally sourced product, and some of the risk considerations that should be taken into account. We'll go through all that, and we will go ahead with the next slide.
A couple of definitions, we call it reshoring, some people used to call it back shoring, sometimes you will hear on shoring, in sourcing, next shoring, right shoring and periodically someone comes up with the new terms, but it is really all about bringing back the manufactured products that will be sold or assembled here. For example if GM builds cars in Canada, or let's say that they build them in China to serve the Asian market, that is not offshoring, and therefore it hasn't been offshored it can't be reshoring. When they build cars in China they do it for the Chinese or Asian market, it is all about products that will be sold or assembled here. Transplants or FDI - Foreign Direct Investment apply the same logic, when Toyota decides to build cars in the United States for the North American market primarily they are doing that because it is more profitable for them to make it here than it is to make it somewhere else and ship it here. When GE brings back the production of appliances it is because it is more profitable to make it here, even though in both cases their manufacturing cost may be higher here, they recognize that their overhead costs come down more than there manufacturing costs go up and therefore it makes sense to produce near the consumer. Caterpillar calls it localization, making most of the products in the region in which the product will be sold, and therefore making most typical products in most regions rather than making all the product in one location and shipping it all across the world.
This map gives you a feeling for that, you have reshoring in the green, we are primarily in the US, we have a few people here from Canada, maybe other countries but for the perspective of the US reshoring is to bring work back to the US. Nearshoring would be bringing back from say, Asia, to either Canada or Mexico to the nearshores. Offshoring would be the rest the world. We as Americans, we support and encourage reshoring but sometimes nearshoring makes a lot of sense, there might be a product in China or India, it is so labor intense that if you try to bring it all back to the US you just couldn't do it, it would stay over there. In that case and may be better to bring in more labor-intensive portions back to Mexico, and more technology or skill intensive portions to the US, and in effect the US and Mexico compete with China or India, for the US it is better to be part of the winning team than all of the losing team which is what we would be if we did not make that partnership. Canada can also play a role of course.
Here's another perspective, if a company has a factory in Brazil, and that factory is largely supporting South American market, reshoring would be bringing the work back to Brazil and near shoring would be everywhere else in South America, and offshoring would be the rest of the world, including the United States. So where reshoring is depends on where the factory is, and what market you are supplying. A lot of the work went offshore because of faulty math by the companies, the majority of them looked at simple total cost models, wage arbitrage where can I get the lowest rate, or PPV, purchase price variance, where can I buy the product or make the product with the lowest standard manufacturing costs? Or maybe a little more sophisticated, what is my landed cost? So, price duty freight packaging to get it to the dock here or to the distribution center here or to the factory if is there is a component coming in.
We feel, in all those cases, they significantly understate the total cost of offshoring and should be looking at total cost of ownership, TCO, which would typically be about 20% higher than any of those more simplified measures. By thinking the cost is really 10 when it is 12, in some of the cases the company will make a mistake with their sourcing decision. But in addition to them doing the math wrong, times have changed. This chart shows the index unit labor cost in manufacturing in a varieties of countries. Index means back in the year 2000, whatever the US dollar labor cost was per unit of output to make a car or television or whatever it was, call them all 100, even though in dollars they were all different. Each year going forward, adjust that for the change in the average wage rate within manufacturing and for the currency relative to the dollar, and for the productivity in the country. For the US it is pretty simple we have had roughly 2% wage increases in roughly 2% productivity increases so it stays roughly flat at 100. Other countries are largely changing due to currency.
China is the outlier, with a total of about 400 in the year 2014 so their unit labor costs in dollars is about four times as high as it was before and the US has stayed constant. This has significantly closed the labor cost gap between the two, making the US relatively more competitive, US and other countries. Based on this kind of data and analysis, the Boston consulting group, which has done a lot of publishing and study in this area, predicted back in 2011 and 2012, by about 2015 which is now, net labor cost for manufacturing in China and the US would converge. What they meant, not that the labor costs per hour would converge for the labor cost per unit of output, but rather that the total cost would converge, because the labor cost gap would get small enough that when you then looked at the duty, the freight, the packaging, the carrying cost of inventory in the travel costs, intellectual property risks and the opportunity cost, because you occasionally lose orders because you can't deliver timely, the impact on innovation, depending on if you have a factory near engineering are far away from engineering, when you look at all of those things, when you look at the total cost the number would converge by about 2015, now, and that is specifically, it would happen in the southeastern states, in Texas, relatively lower wage rate areas of the countries. Also working its way north year by year as the Chinese wages just continue to go up. Chinese wages have been going up, about 15% per year over the last 15 years and realistically will continue to do so because it is largely driven by two things, most importantly, the one child policy, so even if they changed it and started to have less babies it would be 16 years or 18 years before they have more workers. Therefore, the supply labor falling off dramatically at the same time the demand for labor is up dramatically because of their 7% or growth rate of the economy.
The Reshoring Initiative which is my group provides several things to help accelerate this process. First, is this total cost of ownership estimator, TCO that helps calculate or quantify all of the cost I mentioned. Companies use it for sourcing, making their decisions where to source a product or component or where should I site that plant and suppliers can use it to sell to the bigger company to show the bigger company that their local product has some advantages, economic value to the company that is not expressed in the price differential. We also have a library with 2,400 articles about reshoring and you can go in there and see what is happening in your state, in your industry you are especially interested in and you can do all kinds of slicing and dicing to find a lot of interesting things. We have all kinds of statistics. I will show you that. We have case studies, a template for reporting cases, if any of your companies or clients or customers have reshored you can go there and post that on our website and get free publicity for the customer and company who is done it. Also whoever reports that gets a free manufacturing school T-shirt, made in the US. We believe we provide solutions for major supply chain problems. We obviously went to the West Coast dock dispute that delayed some things by weeks and months. That issue would not have been true if the products and components were being sourced domestically.
Another major problem in manufacturing is the skilled workforce shortage the shortage of toolmakers, welders and people like that. It isn't surprising we have that shortage because the smart student can read about offshoring and postindustrial society in the best way to convince them to consider going into those very well-paid, viable careers is to see that reshoring is happening in the work isn't just going away anymore but starting come back.
The total cost of ownership, TCO estimator, if you answer a bunch of questions about the US source in the offshore source in this case we did it against China, in this case the Chinese price was 70 in the US price was 100, so the logical thing for the purchasing or procurement was to say of course I will source it from China, but when they did TCO it came out to 98, and 108, so now a 10% difference instead of 30% difference. And then looking forward, seeing in about 3 years the total cost of ownership will be higher in China than the US. Hopefully the company will decide to expand, to hire, to train, find local sources and improve its transportation network, all the incoming products it has to receive because it now makes strategic sense to produce more here for the US market.
We take the data from the users who have done their analyses online, we took a batch, total cost 100% and found that the landed cost on average was 87% and the purchase price was 77%. The red portion shows the portion of the total cost that is not captured when you use the more simplistic measures. Another way of looking at the data, we took the first 19 cases of China versus the US, from the data that the users have run, in about 5% of the cases the US have the lower price, but in about 53% of the cases the US had the lower total cost. The difference 48% we think is probably a little extreme so we conservatively say that about 25% of what is offshored would be reshored if the companies shifted from those more simplistic measures such as price over to total cost for making the decision.
In addition to our total cost of ownership estimator there's another system put out by this professor, Suzanne de Treville, at the University of Lausanne in Switzerland. She is American, she has also taught at Harvard and MIT, a sharp lady. Her system takes two of the cost factors in the TCO estimator, and specifically says, when I change from a long delivery time, like two or three months down to a short delivery time like two weeks because I have local sourcing and maybe get just-in-time deliveries, what does that do to the amount of orders I lose because of stocking out? And what is it due to the inventory I have to dispose of because it is past the season or passed its life. By using her system, here's a typical example of this, you fill in the blank over here with various measures of the price and the cost and disposal value and volatility plan, and then it automatically generates a curve like this. This case concluded that you can afford to pay 39% more for the locally sourced product with the short lead time as opposed to the product with the long lead time. The 39% is probably not a typical case, a typical case might turn out to be 15% or something like that, and you can take that added to the output of the TCO estimator, but knockoff the opportunity cost in the postal cost and estimator, add the two together and you might come out with 25% or 30% in total.
At the end of this I will give you links to all of these so you can find them. Most of you know what lean is, Deming got this going, end the practice of awarding business on the basis of price. Instead minimize total cost. It sounds intuitively obvious something Moses may have put on the tablet and how could you disagree with that, and yet most of the companies that brag about their lean programs continuously ignore this key principle. Until all of you see this, I made a list here of the seven Toyota wastes. The waste listed in the Toyota production system, and shown here on the right-hand column, how offshoring makes each waste worse. I highlighted in red the four areas that seem most related to freight, as you can see how this attributes to offshoring being expensive and how reshoring would contribute to offshoring, to total cost being less expensive.
The single best case of reshoring is GE bringing them back appliances from a contract manufacturer in China to their own facility in appliance Park in Louisville. This is a huge move on their part, a big factory that used to have 22,000 people, it has traffic lights and a parking lot. It was down to about 2000 people and they invested about $1 billion, hired 1300 people, renovated a big portion of the facility, the way they did it, they brought in units of each of the appliances they were making, having made for them offshore, and put them in a room and had the design engineers and marketing people and factory workers and suppliers, all tore these things apart and figured out smarter ways to put them together. When they were done, and they remaking and here in the US, the thermal efficiency was improved, the warranty he costs were reduced, and even though the wage rate per hour time of the workers in the US is five times as high as China, the retail price in the US is 20% lower than when they were importing the product from China. It was a win-win situation. It doesn't always work out that well but it is a wonderful sign that it is possible to make it happen. Another big case here is Walmart.
Walmart has announced a $250 billion increase in their US purchase manufactured goods starting at zero in the first year and ending in 2022 the 10th year at incremental 5-0, $50 billion per year, which we calculate to be about 300,000 manufacturing jobs incremental. That alone is a 2% or something like that increase in total US manufacturing jobs. Boston Consulting Group says it will be 1 million total jobs when you take in the multiplier effect on incremental jobs around manufacturing. Another interesting case, I worked with Morey which makes industrial circuit boards, for Caterpillar, Deer and people like that. They are here in Illinois and they had a problem. They had a housing they were bringing in up China. I think it leaked but it has some kind of quality issue, tough for them and their customers, customers insisted that Morey source the product here in the US and they did so. They fixed the quality problem, but more important, they reduce the inventory by 94%, reduced it by factor of 18 because they didn't have the pipeline or big piles just in case the container didn't arrive and in case the stuff in the container was bad. A factor of 18, we think that a factor of two or three maybe better in the company could count on that, you know how hard the company has worked to improve terms and reduce inventory, the best way is to sourced locally, have just-in-time delivery to smash inventory dramatically.
Related to the issue of quality here's a case, daily hydropower that brought in hydraulic cylinders from India. One of the biggest issues, sitting there with deliveries not so good, and then a container comes in and most of the cylinders are bad, and delivery has got a lot worst. And they say to themselves, it isn't so bad, a week behind that there is another container ship and a week after that there's another one, if those are good were okay. We are going survive. We won't lose customers. But if those are bad also, then we really will lose customers. So do you sit and wait for the containers to get here or do you fly to India and make good units and air freight the units over at a cost that wipes out your quarters profits? There is no way to solve the problem because you can't get into the containers that are buried on the container ships, but if you make the product here or yourself or 50 or 100 miles away go to the factory and make sure the problems fixed and you've lost a day or two of production but you have not had the great unsolvable problem, because here you can get access to the information you need.
To take a 60,000 foot view of this, back roughly 10 years ago, we were losing net about 140,000 manufacturing jobs a year to offshore. And now we are gaining net of about 10,000 jobs. If confirmation huge loss, hollering out US manufacturing to a net gain, a small net gain but a huge improvement over the 140,000 we were losing in the past. We take our library which I mentioned, 2004 articles, at the end of 2014, we took all of the cases we knew of and sorted them by industry, these are basically next code industries, and show how many jobs and how many cases. A cases company or division like GE may have two or three cases, Caterpillar has a couple cases. You can see a tendency towards automotive and other transportation equipment, appliances, machinery, a tendency towards bigger, heavier stuff, where the Transocean freight, inventory probably never made good sense, before now, increasingly does not. Here we listed from all of those cases, we listed the reasons, the negative things about being offshore. I highlighted in red the items that mean the most to you, freight costs, delivery, supply Chain interruption, travel cost of moving bodies in this case, you can see relatively what is important, and the one I mentioned would all be related to distance, and some of the more specific to a country. For example, quality or intellectual property risk might be more likely to be a risk in China then Germany or Switzerland or Canada for example.
Here are the positive reasons to reshore, the things they said they found better here. Image brand, the fact that the product is made in the US and they can market it as made in the USA. Often automation is involved, higher productivity, if you use the same productivity level as you had in China, probably you can't justify bringing it back. Often they redesign the part, something like innovation that I talked about, government incentives are fairly common, and probably some that aren't mentioned in our sources. Walmart, in a significant number of cases, they said they did it because of Walmart. Natural gas chemicals we read a lot of. A variety of causes, many of which if you simplify it down, proximity or doing it at home countries are the major factors. About 60% of the work came back from China; you can see the prevalence of China. China five years ago one would never have thought we could bring that much back from China. Very little from Europe, you can see, here is Italy, Hungary, a couple of others if you go further down the list.
Why the difference? I think because in China, the companies mainly outsource whereas in Europe they mainly build their own factories in our competitors over there. In China, there is the intellectual property risk, high wage rate, etc., not so true in Europe. A lot of differences like that, longer-term relationship may be better language all of those kinds of things that tend to keep the relationship stronger in Europe than in Asia. The work has tended to go to the southeast of Texas, more or less as Boston Consulting Group have predicted. You can see the mixed priced date of a number of jobs in cases, you can see the jobs per facility, typically the big green field facilities going to the southeast in Texas, whereas bring it back inside old factory tends to happen more likely in the Midwest, that is where the bulk of the manufacturing has been in the past. Some of the benefits and impact of this, my purpose or objective is to balance the trade deficit or eliminate the trade deficit which is currently $500 billion-$600 billion a year. Doing that will bring back 3 million manufacturing jobs, maybe 8 million in total. It would cut the US budget deficit by about 50%, because there will be less money being given out people in states and more taxes paid by people in companies. Reduce unemployment, about four percentage points, probably 25% increase in manufacturing, if you spread it out over 20 years, that increase, maybe 25% extra annual capital equipment investment. You might be moving fewer appliances from the coast but you will move a lot more machine and capital goods to here to make the products. Because it has an impact on the economy, I would say good but not great support, a lot of interest in the Commerce Department.
We work closely with the MEP's, some linked up here, manufacturing partnerships, and with SelectUSA, the Foreign Investment Department works actively with them. Back in January 2012, I got two calls from Washington, one for the US China Economic and Security Review Commission, the other the White House National Economic Council. They both wanted to know how to bring manufactured jobs back from China and I was delighted to hear from them. Instead of having two calls from Washington one from the FBI and the other from the IRS, that would not have made my day as well, so that resulted in next week being at the White House and sourcing, there's obviously the president. This is Harry over here with the glasses on speaking to the President. I was giving him tips for the State of the Union Address that was coming up in a few weeks. He had said the message. That afternoon was a C-SPAN panel, the bald guy here making some points.
I mentioned skilled workforce, many of you, most of you are transportation companies, you don't have so many toolmakers or machinists, but you have mechanics, maintenance people and so on. I suspect you may have problems finding them. I wanted to highlight this, about two years ago the Department of Labor, US Department of Labor called me Washington to advise them how to get the workforce ready for reshoring, we were in the conference room and I stood up and said first we need to recognize the Department of Labor has been part of the problem and has to become part of the solution. Fortunately they did not kick me out and they said what you mean? I pulled up the Bureau of labor statistics website and said here's what you are telling the public, you have income going up with number of degrees, and headline education pays, and this is what the educators, guidance counselors, professors, etc., all used to say everyone has to go to university because they will make more money and have a better economy. It isn't literally true, this should say education and training pay and we should have in here the average income for someone who passed an apprenticeship, or has five or more certificates from AWS to show there are other ways to win. This is especially true because the Labor Department is responsible for the apprenticeships and the certificates. They said yes they agree 100% and they went ahead and changed the wording, to what I wanted, and they are doing the survey to get the data on the apprenticeships. I was delighted they were so responsive.
Based on that success, we have a program for skilled workforce recruitment. For example, we recommend in your company, in your community, you do what the Swiss and Germans do. You get rid of the words trades and locations and call them professions. Someone in the tool making profession or plumbing profession, you train them well, make a good income it is a profession. Get rid of the terms middle skills, who wants the middle skilled job. We recommend instead of high, middle and low skill, go to academic, technical and manual skills. Instead of suggesting a hierarchy, be more descriptive in the terminology. In your community, get the companies to report when they reshore and the local media to report so the students, guidance counselors see the reshoring is happening in safer Susie to become a welder. We also have an economic development plan. It is in place in Pennsylvania and Mississippi, and basically, goes to a company called Data Mine, gets the data on all imports coming into the US ports, and the state says, "Okay that is what is coming it to my state what company is it going to and which company is ordering it and can we convince them to have it made here instead, go to them, why aren't you making it here in Pennsylvania? The prices are too high, yes but are the total cost of ownership too high?" Educate them on total cost and in some cases they decide to bring the work back. So far we have 100 or 150 jobs back in Mississippi as a result of this effort.
To get this to go more rapidly, we have a More Boots on the Ground Program, where transportation companies can participate in. We invite the companies that have suffered because of offshoring, companies used to make products for components for the OEM or in your case used to transport components for the OEM. Come to our group and say, I used to do transport a lot for the company, but now we don't do that anymore because they are making so much more offshore. Okay, we will go in, call in the company and try our best to convince them to bring the manufacturing back so you can transport more goods for that. If that is of interest to you let us know. Things that you can do to help reshoring, use the tools, if you convince companies to stay in your territory to you can do transport for them, everything is free at the website. We have archived webinars like this, use this, we have more them. Post a link; get me to speak at your customer industry conferences to help soften them up. Submit cases of reshoring and win the T-shirt I talked about. How we can help you. We have data and you can look up who is reshoring in your region, maybe they need some transportation to help it happened. We can train you and help with the analysis, and also promote your successes.
I'm an amateur on freight, M.D., all of you are the experts, from my knowledge of reshoring here's what I think will happen. Relatively less incoming border freight, by definition, if you have reshoring it means that there are less imports. Fewer distribution centers close to the border, not just coming in at the border anymore, therefore the distribution centers don't need to be near the ports especially. Maybe a little less train freight because there are a lot of trains moving completed products from the ports to the distribution centers or distribution centers out further. More production especially in the southeast, Texas, Midwest and Mexico. Perhaps more distribution centers closer to production. Probably more truck traffic especially for local and regional component delivery. Instead of moving complete products from an Oceanport to a distribution center to a retail store instead there will have to be a lot of motion, hundreds of components into an assembly plant in the US where the product will be assembled and shipped from there. Probably a little more exports because you can't export something if you don't have the industrial capability to make and of that. If you are making in that category, to the extent we build our capability to make products that we are not now making, still be an opportunity for exporting so we may get a better balance of imports and exports which should be to some of your benefits.
Some of the tools we provided are listed here, AceTool is assessed cost everywhere, it analyzes data, the cost differential frontier I showed you, here's our estimator. We also have a how-to guide to get the company going on it, the library, submit a case study, and our economic development program. Most of the things I talked about are linked here see them and find them if you choose to do so. We are a nonprofit with 38 sponsors some of them are here, Bank of America for example. For some reason it doesn't say a AMT which is the Association for Manufacturing Technology which puts on the IMTS big show in Chicago every other year. Also a variety of trade associations, manufacturing groups etc. Machine, toolmakers and a whole bunch are noted here. This is my last the slide, before I go through them I will mention my plan is to include all of you on our mailing list for next six times per year newsletter. In the newsletter it is immediately obvious how to cancel if you don't want to get it to anyone who doesn't want to receive it just cancel and you are off the list and never receive it again I promise. I'm assuming the fact that you showed up for the webinar means you are interested and would like to take a look. This gives you a chance to get continued interaction with us.
This is the final slide. This is how we think of ourselves, this little Dutch boy in Holland and the dike keeps the North Sea out of Holland especially during the storm. Without the dike everything is flooded and there's no food, little Dutch boy is walking along and he sees the hole in the dike and the water and notices we are going to be flooded. He has to decide, should I go run and get the elders to replace it or should I stick my finger in the hole and hold it together. He goes for the finger story. And so conceptually, this is the US, this is offshoring, this is Harry when Harry had hair and you are the elders. If you say that is a nice presentation, but don't do anything, the economy does not get better the way it could and the jobs won't be as good for your children or grandchildren. Please take advantage of this and use it to convince your customers the US will be a better economy and better place for us all to live. That is the end of my slides, thank you for listening.
Nicole Coene
Thank you Harry, we will now move on to MD Sarder of the University of Southern Mississippi.
MD Sarder
Good morning and good afternoon to many of you. I have a presentation that lays out reshoring and in some cases, it is not something we are dreaming but it is really happening. I will talk about a project funded by USDOT to see fire consortium. And here we are trying to identify, if reshoring happens, what would be the impact on transportation infrastructure in the US economy? The multidisciplinary, institutional partners coming from University of Southern Mississippi, University of Wisconsin Madison, University of Memphis, and also University of Huntsville Alabama.
In this project, we have multiple objectives. We are trying to identify a dimensionless reshorability index for the manufacturing companies in the US. Like Harry talked about, different factors that contributes to reshoring decisions, and trying to quantify the factors in the cost items. So it is easy to compare. But we are trying to identify reshorability index for manufacturing companies, and that particular case the individual companies don't have to do the calculation, if they belong to a particular manufacturing industry, then they can see our companies are actually doing the reshoring so maybe it's our turn. Again, we are looking a little broader, to see what are the different companies that are willing to reshore or maybe it is ready for them to reshore. We would also like to do something like the manufacturing location quotient analyzes. The CFIRE is a consortium funded by the USDOT, as you can see on the map below, there are 11 universities involved with that, so we are considering this for these universities are located.
As part of this project, we also would like to see the potential impact as I mentioned for reshoring on the freight network, within this region. And maybe to identify the reactions like what is the distribution scenario if it happens? Again, I think Harry alluded to reshoring is happening. But how many companies will bring back? Even though the industry says we need to reshore it won't happen within a year or two, they already invested a lot of money and factories in China and other parts, so they cannot close it immediately it will take time. Also here in the US, maybe all of these infrastructures are not ready to do the reshoring yet, it will take over time. We would like to see the distribution scenario on the freight. We are getting all those containers through different ports in the US where are we going to get the same amount? What would be the impact on that? And if we know that, how will that impact the networks, the roads, the rails? We also would like to see how it will impact the economy for these particular states and locations. Part of this project we would like to develop a web-based tool, so anyone can use it, hopefully that would be helpful. In this project our focus is limited to things I will mention now, things we can't do for the whole US, we will target for the CFIRE, and we divided these into two, Memphis in the South and Chicago in the North. When you make two distribution points, these are the two distribution points. When we talk about reshoring, we are talking only about manufacturing operations, not the service reshoring, call center reshoring, not those.
For this particular project we are also focusing between US and China not any other countries, it would be too broad for us and I'm sure that isn't in our budget as well. Regarding transportation and distribution part we are focusing only on the major US ports that delivers those containers to those regions I just mentioned, Memphis in the South and Chicago in the North. It will be all US ports but the major US ports that receive the containers and ship it to these particular areas. As I mentioned I will focus on road, rail, and multimodal. Again, this product is funded by USDOT and we got the funding late in the last year, so this project is still in the beginning phase. We are expected to finish by the end of the year; at that point I share with you more results. Right now I will talk about what kind of results we are looking for, we are anticipating.
As I mentioned we would like to see the reshorability Index for manufacturing companies, and when we are doing these things what are the different factors that are driving reshoring. If you look at the 1980s and 90s and even the beginning of 2000 a lot of companies went for offshoring. They saw benefits there, but Harry mentioned those benefits, when they saw at the beginning but in reality not much benefit. Because of the administration changes in policy made in American movement, and bringing products back here, all those kinds of things erased those benefits completely. Now maybe a lot of companies would bring them back, but they need to have some type of information. What operations can we bring back? Not all operations can we afford to bring back because we are not ready. We would like to see what are the factors driving the reshoring. Harry mentioned several factors on TCO, cost analysis, what are the factors? We are done with these things at this point, several factors but we will focus on the top 15 or 20 factors, and see what is the relationship between these factors in the manufacturing companies doing the offshoring right now, and while we do these things we'll focus on manufacturing companies with the four digit NAIC's code. We would like to go into the details in the four digits.
Based on the relationship and the factors we would like to develop Reshorability Index. That will tell the manufacturing company, if you are falling into this particular category it is time for you to start bringing products back. If you are in this particular industry, maybe you're not ready, you won't be able to bring back, and also at the same time if you have some manufacturing companies in the middle, maybe deciding, we still need to wait. So now, once we develop those things, we would like to value this index with existing studies or published studies. Like Reshoring Initiative they already have a list of all the companies who are reshoring, and Harry, he is advisor of this project, so that is a great help for us. Also the Boston Consulting Group and other companies they already have those things and published so we would like to validate our index with that. On top of that, we would like to see the sensitivity is analysis with varying factors. For some companies, some factors are important, but over time maybe those important levels goes down or up, so we want to vary those factors and see how they will impact the index.
You'll look at something like in the slide we have several industries, textile, food manufacturing, paper, chemical and so on, and if we develop an index, some like that, in this particular case you can see on the website, 0 to 10, this is the reshorability index from a 1 to 10 of scale. These particular purple bars, showed the index, for example, if you look at transportation equipment industry, you can see the particular index is about eight, for machinery manufacturing you see something like 10 and so on. The textile industry is close to zero. Toy manufacturing is 0.3 or so. That will give us information, especially for the manufacturing industry, which are falling in this category, like heavy equipment industry maybe it is time to start bringing it back. If you look at the textile industry versus the toy industry you can see this is a very labor-intensive industry. America is still not ready, if we consider the cheap manufacturing, we do have very highly manufacturing profits and tools here and we can compete with overseas but for textile industries the manufacturing is so labor intensive and complicated it is not a standard process we can use here. We still have to rely on others. I think that is still not ready. Maybe it will change if we come up with a different reengineering process or something like that.
And how we validated these things, if you see on the top right here, you will see the list of companies, the Boston Consulting Group identified companies that should bring companies back. This is the best way that we will be validating whether this information makes sense or not. That would be great tool for the industries, especially manufacturing industries to see, where do we belong and what are the next actions we need to do? We would also like to see the location quotient analyzed. Where the manufacturing companies are located, and if we can talk to them, say most of this transportation equipment, the manufacturing companies, most of them are right here. So we can see the locations, and identified, if you look at here the quotient, the very blue, you can see these are the companies located concentrically right here. Based on this information we can identify what the potential impacts are going to be. When we bring the manufacturing operations back, show we reestablish, what centers close to this region? Or if we have to make a plan for transportation where do we invest? Maybe somewhat less to that we would like to see that. In an example not based on our research, this is done by Ben and Teresa from University of Wisconsin-Madison and presented at the TRB in 2014.
We would also like to see as I mentioned, what is the distribution scenario analysis for the change or expected change that happens because of reshoring. Right here you can see the US ports, and then right now this is a part of the products we finished last year for international capacity expansion, for the Panama Canal how will it impact the US infrastructure? We want to see similar things here. If reshoring happens, the volume is pretty insignificant, but maybe in the next five years it will make a big change. We would like to see the difference between freight coming into China and through the US ports. We can lay out the difference and see how it will be impacting the rail and road network. Maybe in the rail, it is going to be less movement and in the train, but we want to see how it will happen really. And based on that we would like to see, where the impact will be. For example some infrastructures, subnetworks could be, especially the South, if we see more and more things are happening maybe they will select a region where the lever cost is cheaper, or where the cost operations are cheaper. Maybe in the south part or Southeast or Texas, somewhere we may see some bottlenecks, maybe three spots some bottleneck we used to see, before reshoring. Those are the things we would like to see from this particular research.
And other parts, the economy impact, the cost of the changes of the containers, or movement, as part of the reshoring. In the next five years, if we see that the containers coming from China is going to be less, and there are more and more companies, within the state, how will it be impacting USD or GDP? We can also identify, if you see the blue dots, these other regions, the previous resource identified, the regions that will be the bottleneck, or the areas with the potential to expand, so the transportation planners, and those people interested to invest, they can focus on this particular area to identify maybe we need to expand these things and build a new infrastructure here. So that is where we are at this point, again this research is ongoing. We do not have any preliminary results at this point. We are expecting to finish it by December, at this point I am looking for help, many of you, sometime when we tried to convert these factors into decisions, we would like to quantify the relationship and it is very hard sometimes. Sometimes there are factors that are subjective factors and it is hard to come up with the relationship, so if any of you know some data that can help us to form that relationship that would be really appreciated. Why companies are reshoring, one of the different factors and what about reestablish relationships between the factors and decisions.
We also like to see some help with the real-time reshoring data from US manufacturing companies. I know some of you working for the transportation industry but if you know someone or are involved with someone who is doing reshoring we would like to see the real data. That would help to validate our model. Finally, we would like to get some access the databases. We have some databases but those are limited in scope. To identify the difference between the freight that will be coming to right now versus the next five years or so. We need some sort of data like that. Once our project is over we will post these things on her website, the website is listed right here. At that point you should be able to see the tools and the final report as well. Again, I'm not able to share too much about the results, but that is our goal and what we're doing, and hopefully by the end of the year you should see a better concrete picture of our project. Thank you very much. This is my contact information if you would like to send something toward database or something.
Nicole Coene
Thank you MD. I would now like to start out the question and answer session with some of the questions posted in the chat. The first question for you Harry. Do you have information on how freight transportation improvements (either capital or operational) could impact TCO, and thus, a company's decision to reshore?
Harry Moser
We wanted to emphasize that reshoring is both having the company's own facility move back and also the outsourcing of the product. Essentially it is the outsourcing, and often it is just outsourcing the individual product component you need now for the assembly you have. Other times it is outsourcing, the product. There can be an awful lot of the suppliers involved in this decision; we don't want to just focus on the assembly plant. When you come to this, the question, we do total cost of ownership and it starts with the manufacturing cost of the product or the purchase price of the product, whatever you call the manufacturing, the standard cost. So the extent, that freight cost is embedded in the cost is already included in the total costs and any improvements in the freight infrastructure might reduce the cost of moving the product from here to there would reduce the cost and therefore making the US relatively more competitive. In our model, we include freight from the port of exit of the other country, like the most common port in China for example to Chicago.
Take the product from there to Chicago, we do not include the US freight cost because we assume the freight from Chicago to where you want it to go is roughly the same as the US factory to where you want to go and we let those balance off. One thing we do not include and perhaps should, I've been told in the last week or two, that freight costs, inland China are substantial. There are costs and I have been told corruption in terms of getting product and sometimes you have to pay taxes to get it between different states in China, so would probably help a lot, is anyone has any data on that on what it costs to get the product from 1000 or 2000 or 3000 miles in land in China to ports, because then I could start to add that factor into the total cost. Anything you can do that reduces costs in the US will obviously help, it will go into the starting price, anything you can tell me that would help me model the cost or free in China, getting to the port, or other major countries that would be great too, we could add that as an additional factor in the analysis, and show that between that and the US.
Nicole Coene
Thank you Harry. Our next question, What kind of impacts do state "right to work" laws have on companies' decisions to reshore to the U.S., and if they do where companies will reshore in the U.S?
Harry Moser
We think it is obvious, the combination of right to work laws and relatively lower wages and lower taxes in the southeast in Texas have driven a lot of the major reshoring decisions. Especially for the Greenfield decision, the 1000 person, 2000 person factory in hundreds of million dollars, almost all of those have gone into the southeastern Texas, right to work, the whole combination of factors. Yes it is very important.
MD Sarder
This is MD, I would like to add onto that, we are trying to identify the different states in the US that provide Texans incentives for research and development typically involving investment tax breaks, and see if those will be impacting on the reshoring when the people are bringing. We are in the process of valuing does evaluating those facts in the data.
Harry Moser
This is Harry, I can comment on that, our observation is that the incentives the state diversity provide make the difference between whether the factory goes into Alabama or Georgia, but does not make the primary economic decision of coming back from China or India to the US, the factors that influence the decision are generally larger. For example you still have so much wage cost, wage gaps to overcome, any incentive politically the state can get away with giving away wouldn't be enough to make it happen. But you have these other cost, the freight, innovation, and all these other factors to carry cross inventory, finally, I think are more important than the incentives, but those factors are equal everywhere in the US, roughly equal then incentives make the difference between which state the factory goes into.
Nicole Coene
Thank you both. Our next question is there any information about Greenfield, Brownfield, Greyfield location choices for offshoring facilities?
MD Sarder
Harry, I think that we could tease out of our data, which cases are going back into the existing factory in which ones are green, generally the Greenfields, the company announces the investment, and if the investment is huge relative the number of employees it is surely a Greenfield. I think we could gather that. But generally, those Greenfields especially if they are large are in southeastern Texas.
Nicole Coene
Thank you. Our next question, Has either speaker studied or marketed reshoring as a way manufacturers and other shippers can shrink their carbon footprints? The 250 shipper and 500 logistics partners who participate in SmartWay (www.epa.gov/smartway) would certainly see that as a selling point. SmartWay tools will quantify marine vessel emissions as of 2016; currently covered are truck, rail, multimodal, barge and air?
Harry Moser
This is Harry I will take it first. I did not know this existed, I learned as much from this webinar as you have, and I appreciate Abby putting that in. We have taken a first shot at the green implications, when you go to the TCO estimator you will find there are three factors about green: the admissions, pollution, disposal of excess inventory and things like that so there are three green factors. We have not been able to create the algorithms to quantify those factors, we had a team of graduate students at the Ohio State University that was working on that for us and we had a first start at that and it was one of our projects to complete. Clearly, there is a big difference in the electricity. Electricity in China is largely coal. Here even if it is coal it is much cleaner. Just making a part in China, the electricity is dirtier, and many but not all the factories over there are less disciplined in their treatment of pollution so that is an important factor. A lot of that pollution gets over to the US and comes across the Pacific. In addition, the container ships don't release much carbon emissions because they are amazingly efficient in terms of the amount per ton mile, but they do release some other undesirable chemicals because of using the bunker fuel, this is what I read, and therefore it isn't all carbon foot print. It is the total environmental impact. We plan to start that up again and eventually be able to quantify that into the total cost so that the company can see what the environmental impact is of their offshore, reshoring decision.
MD Sarder
In our case, we are only focusing on some factors that could influence, not quantifying the carbon footprints that's for sure, that is not in our scope.
Harry Moser
This is Harry, if anyone has anything to offer, any studies that can help us quantify I would love to hear from you, if Abby can introduce me to the EPA group who has done this and help me get in with them and work with them I would appreciate it.
Nicole Coene
Thank you. Next question, what impacts is increasing port congestion due to labor issues, capacity constraints, or slow-steaming having on reshoring's or near-shoring's attractiveness to companies?
MD Sarder
This is MD, what we are doing is, one of the factories, delayed time, how long it takes coming from China to the US, and also how long it takes to process through the ports. One of the reasons we are bringing operations back to the US is to cut down on this time. If there are some ports that have long lead time to process the products and that could be an advantage, so that is one reason companies are reshoring, so yes we are considering that time.
Harry Moser
This is Harry, in our TCO estimator, one of the inputs is the shipping time from the factory to the destination, and it gets used to calculate the carrying cost of inventory for example and it would be use for the cost differential frontier I described to calculate the impacts that are calculated. We already do our best to consider it, as I mentioned the West Coast dock dispute. The dispute was a teachable moment. Companies that were maybe borderline thinking of reshoring, if it didn't wake them up there was nothing I could tell them that would. It finally comes down to, some say don't put your eggs all in one basket, or maybe put all your eggs in one basket and take good care of the basket. If you have your supply chain spread out across the world and you have 100 components coming in one from each company, and a chance of disruption in any one of them and they are all single sourced you could get shut down in one event in 1 of 100 places whereas if you have everything been produced within 50 miles of your assembly plant then it is only the event that happens that can shut you down. The events that happen around the world are irrelevant. It is better in that sense to have your locality your egg basket and take good care of the egg basket, and your probability of going down of being impacted by natural disasters or things like dock dispute are dramatically reduced.
Nicole Coene
Thank you both. I will wrap up the questions from the chat and open up the phone line, if you have a question for our presenters or over the phone press star one on your touchtone keypad it to be put in the queue. Our next question from the chat pod, and believe this is for MD, In one of your final maps, you show a thick grey line from Prince Rupert, BC to Chicago representing rail freight tonnage via CN. However, similar rail freight corridors linking west coast ports to Chicago, such as Seattle/Tacoma to Chicago via BNSF, LA/Long Beach to Chicago via BNSF (and also UP) are not shown. Can you please clarify what it is you are measuring in this graphic?
MD Sarder
This is part of the research we finished, maybe not this particular one that's showing, but I would like to show what we are trying to identify. In this particular one, we are trying to build some scenarios. One of the scenarios, one report, and the port is expanded by 2019 or 2020, and then what could be the impact on transportation? For the particular case, we found, if expansion is over, we receive more coming from Canadian ports to the Chicago market rather than the other ports in the US. This is a hypothetical situation, what will happen in 2020? This is a hypothetical situation, what will happen in 2021 once the ports are expanded.
Nicole Coene
Thank you MD. Our next question, Have you taken into consideration 3rd party bidding practices used by Corporations on the TOC?
Harry Moser
This is Harry; I am assuming they mean third-party bidding on outsourced manufacturing, or third-party bidding on transportation? I will assume for now it is the production. That is already reflected in the pricing used in the total cost of ownership through calculations as the starting point. If I am wrong, it is taken into consideration, if I'm wrong, and tell me what you mean and I will do my best to answer.
Nicole Coene
Glenn is typing into the chat pod, while we wait for his response, but to move on to the next question. And we will come back to Glenn's question. Are the factors driving company decisions to reshore or near-shore different based on the value and time sensitivity or perishability of the goods being considered for reshoring?
Harry Moser
This is Harry, absolutely. I showed you the cost differential frontier that is entirely based on time sensitivity, disposal value, etc. If you can justify a dramatically higher price if there is significant time sensitivity, it is seasonal product that you could run out of, on one hand you could run out of if you don't have enough or you have to dispose below your cost, if you have too much. That is done really well in the cost differential frontier, maybe more simplistically in our total cost of ownership estimator. The time sensitivity, unquestionably value is clearly the caring cost, clearly proportional to the value. You can think of it as, if you're trying to decide what to reshoring can think of it as looking for products were the freight cost is high, the value is high, and the labor cost is low. If you automate and maybe the design is frequently changed so you want engineering to be manufacturing. If you have the right mix of those things, that is a good place to start looking.
MD Sarder
We are also considering those factors, obviously.
Nicole Coene
Thank you both. We do have clarification from Glenn; Third party bidding to procure the product, in some cases did not include the cost of transportation.
Harry Moser
In the TCO, you start with exports price from the US source in the offshore source, so it eliminates, we do our best to calculate the transportation to Chicago. In the cases of, we say if companies are making the decision based on price and ignoring the transportation, and the transportation is a significant 5% or 10% of the total cost, to the extent that because the third-party bidding if the buyer is in seeing or recognizing or quantifying those transportation costs then that is certainly part of the That is occurring that we try to fill. If you have any detailed suggestions I encourage you to email and we can work together on it.
Nicole Coene
At this time that is all the questions we have in the chat pod, we will give it another minute to give people the opportunity to type in their questions. In addition I will remind everyone if you want to ask a question over the phone please press s*1 on your touchtone keypad. I see another question.
What impacts do fuel prices have on company reshoring initiatives, especially for cost-sensitive, lower-value goods, or are labor costs still the dominant factor when examining the feasibility of reshoring low-value, transportation cost-sensitive goods?
MD Sarder
What we are doing is one of the factors for our case is the energy cost. If the energy cost especially in the US is going down, that will have a positive impact on the reshoring decision. And vice versa. Yes, we are doing some of those things, and the energy cost will be towards the transportation costs as well, and also the energy cost towards manufacturing those groups. We are considering in this too front, if the energy cost goes down, how will be impacting the transportation costs as well as the manufacturing cost.
Harry Moser
I can quantify a little bit, in the energy perspective, shell gas, natural gas is so cheap here, and oil a little cheaper. It is a huge advantage in some industries. Our natural gas costs maybe one third of what it is in Asia or anywhere except the Middle East. For an industry in which natural gas is a raw material, for chemical industries, polypropylene, these things that lead to plastics and fertilizers, is an overwhelming factor in that is why we had commitments of something like $140 billion worth of refineries to process the natural gas. It does attract most investment in this field into the United States and it is wonderful.
So there it is overwhelming. When you step away from that, with natural gas being extensively used for heat, steel, things like that, it is important. If you get to machining and wire harness making and things like that, the average energy is reported to be 2% of total cost. And therefore, it is nice to have if our energy costs are half as much as somewhere else, it is therefore worth 1%, whereas labor cost has cost 20 or 30% differential so it isn't enough by itself. The recently lower oil prices certainly have hurt freight cost. I saw a graph yesterday. Freight cost from Europe to Asia to Europe, were below the cost of the fuel to get both there. Lower oil, certainly eliminates one barrier and makes reshoring harder to do. Those are my thoughts.
Nicole Coene
Thank you both. We have one last question in the chat pod. Do companies that reshore leave flexibility to outshore again if the TCO balances back to overseas production?
Harry Moser
I break that down into two pieces, if they are outsourcing, if the product being made is only for the US and if they are outsourcing the probably come back here and it is just outsourcing here. If it is being made for the US and they had their own factory over there, what we would recommend them doing is probably too sell the product in Asia, and keep the factory running, selling in Asia and invest back here to supply the US market. We have a hierarchy of things to do. First for a company, what to do, we say anything that has not yet been offshored to the homework for you offshore, the hardest thing is to bring it back. Second if it is outsourced, go after them, there is no capital investment, no layoffs or those political problems. No big investment. Third if you produce offshore, if you are 50% for Asia and 50% ship to the US, converted that to 90% Asia 10% US do into your investments here. The toughest thing is when you have the factory over there to shut it down and bring everything back here, we now most companies won't do it they don't want to bite that bullet; it gives you some feeling for where we stand.
MD Sarder
We tried to capture them through the proximate to market, if you are market-based is here, you'll get an advantage when you do the reshoring. If you're market-based is away from the manufacturing facility that also is an advantage.
Nicole Coene
At this time, thank you for attending the seminar. The recording will be available within the next few weeks at the talking freight website. I will send out a notice and will send you the information. The next seminar will be held on August 19th and the tentative topic is Supply Chain Needs and Industrial Site Selection Decisions. I encourage everyone to join the Freight Planning Listserv if you have not already done so. Thank you again everyone and that concludes today's Talking Freight webinar thank you for attending.
