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Focus: Manufacturing

Feature Article from Our Manufacturing Subject Area - See All

From SCDigest's On-Target E-Magazine

- June 25, 2014 -

Supply Chain News: Global Manufacturing Cost Competitiveness by Country Continues to Change, New Boston Consulting Group Study Finds

China, Brazil "Under Pressure" Report Says, While US and Mexico Claimed as Rising Stars

SCDigest Editorial Staff

Boston Consulting Group (BCG) recently continued with series of excellent reports on US and global manufacturing issues, most recently analyzing changes to relative manufacturing costs across the top 25 exporting countries.

SCDigest Says:

Will all this result in the numbers truly showing a return of manufacturing to US soil?

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The bottom line: a series of factors have led to "dramatic changes" in relative cost structures across the group, and the US and Mexico are cited as "rising stars" in terms of competitiveness. On the other hand, Russia, China and especially Brazil are seeing their competitiveness slip.

The BCG analysis looked at the largest 25 global exporters, which cover more than 90% of total world exports. It has created an index to measure relative cost competitiveness based on what is says are the four direct drivers of manufacturing costs: wages, productivity growth, energy costs, and exchange rates. It therefore does not cover other items that also affect total costs in a given country, such as tax structures, regulatory burdens, logistics costs, and more. Still, it seems to SCDigest a reasonable framework nevertheless.

The US is used as the baseline score, by definition therefore given an index score of 100. From that, the scores ranges from a low of 83 for Indonesia (meaning costs there on average are 17% lower than in the US) to a high of 130 for Australia (30% higher than US costs).

In total, 7 countries have scores lower than 100 (including China at 96), while the remaining 17 countries have higher index values than does the US, as shown in the chart below.

But of course, this index is only looking at direct manufacturing costs - it is not considering the other items listed above, as well as intellectual property risk, longer lead times, higher inventory levels, international shipping costs, etc. So, even at four percent below US manufacturing costs, China's score of 96 would seem to make it relatively unattractive on a cost basis alone for goods consumed in the Americas.

Source: Boston Consulting Group

But perhaps as important as the current scores are the trends - China's score for 2004, for example, was just 86, meaning it was 14% less expensive than the US, losing about 10 percentage points of advantage over the last decade.

(Manufacturing Article Continued Below)

CATEGORY SPONSOR: SOFTEON

Contrast that to the two countries BCG cites as "rising stars" - the US and Mexico. It says both are "Increasing competitiveness versus all others," and enjoy moderate wage growth, sustained productivity gains, stable foreign-exchange rates, and energy advantages.

It categorized five countries as being "under pressure" relative to their manufacturing costs. They are China, Russia, Poland, Brazil and the Czech Republic. Brazil's score has incredibly risen from 97 in 2004 to 123 this year

BCG also uses two techniques to estimate what the scores might be in 2018. Again with the US equaling the baseline score of 100, one method puts China little changed at a score of 97 in 2018, while the other approach puts its manufacturing costs above those in the US, at a level of 102.

Will all this result in the numbers truly showing a return of manufacturing to US soil? Or will the change primarily benefit Mexico in the end? Those are the trillion dollar questions.

What is your reaction to this BCG analysis? Does it seem correct to you, based on your experience? Let us know your thoughts at the Feedback section below.

Recent Feedback

This is a great report. I have also seen resourcing efforts back to the US. Also, since oil is costly, the economics have really shifted.

Peter
Senior Supply Chain Consultant
Operation Consulting Group
Jul, 01 2014

This is good news that the U.S. is considered a "rising star" in competitiveness as measured by the index.

However, as mentioned in the article, there are many other factors which are contributing to U.S. competitiveness and the reshoring trend which are not calculated into this index. Perhaps the U.S. score would be even better if total cost was considered into the index calculation.

By using TCO, companies will find that the costs measured by the index are just 4 of the 29 Total Cost costs used in the Total Cost of Ownership Estimator™ (TCOE). Use our free TCOE to quantify all of the cost factors.

The not-for-profit Reshoring Initiative’s free Total Cost of Ownership software helps corporations calculate the real P&L impact of reshoring or offshoring. In many cases, companies find that, although the production cost is lower offshore, the total cost is higher, making it a good economic decision to reshore manufacturing back to the U.S.
http://www.reshorenow.org/TCO_Estimator.cfm

The reshoring trend is primarily driven by higher wages in China and higher global energy and freight prices (but lower natural gas prices in the U.S.) and the fact that companies are beginning to adopt total cost of ownership (TCO) analysis to make their sourcing decisions.

Many companies are reshoring because they are finding that having manufacturing near customers gives them better flexibility to respond to customers changing needs, eliminates higher shipping expense, minimize supply chain disruptions and eliminates the larger production runs and inventories associated with long distance offshoring.

Companies are also finding that when manufacturing is moved next to engineering, they can improve design, eliminate waste, improve quality and increase productivity. And, many times producing domestically is more profitable and it makes good economic sense to reshore manufacturing back to the U.S.

This was the case when GE reshored manufacturing of the GeoSpring water heater from China to Kentucky. Design engineers, manufacturing engineers and factory line workers optimized the product. Material cost went down, the labor required to produce it went down and quality improved. Time-to-market also improved because consumers are located near manufacturing.

Regarding Mexico, reshoring the whole job to the U.S. is our first priority, however, if a product is extremely labor intensive, part of the labor intensive work may have to be nearshored from China to Mexico and the more skilled work or capital intensive work into the U.S. – it’s better for the U.S. to be part of a winning team than all of the losing team.

Sandy Montalbano
Media Advisor to the Reshoring Initiative
Reshoring Initiative
Jul, 09 2014