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Fastener Technology International August/September 2011 : Page 54

Total Cost of Ownership Calculation by: Harry Moser President and Founder Reshoring Initiative 21110 Buffalo Run Kildeer, IL 60047 USA www.reshorenow.org A Key to Bringing More Manufacturing Back to the USA Yuan on July 12, 2011, was only back to the 1993 level and still 75% below the level of 1980. The nonprofit Reshoring Initiative helps close the gap with offshore manufacturing now by helping USA companies understand their true cost of offshoring: their Total Cost of Ownership (TCO). Boston Consulting Group 1 and Accen-ture 2 recently reported that Chinese net unit manufacturing costs are rapidly converging on USA costs. Specifically, they stated that Chinese wages are rapidly rising (approximately 20% per year) and the Yuan is gradually appreciating (ap-proximately 6% per year). When these factors are combined with Chinese productivity, which is still far below the USA level, by 2015 Chinese unit labor costs will be close enough to the USA level so the other costs associated with offshore sourcing will make the total cost of ownership higher than for the same products produced in lower-cost USA states such as in the southeastern USA. However, for this economic trend to have a rapid impact on the behavior of major USA companies, the companies will have to calculate their TCO. Unfortunately, most companies’ calculations are rudimentary rather than complete, mainly comparing prices rather than the entire costs of offshoring. In fact, Archstone Consulting’s 2009 survey showed that 60% of manufacturers ignore 20% or more of the cost of offshor-ing. Accenture’s 2010 survey confirmed the results with 61% of respondents acknowledging the need to implement TCO. As a result, companies have offshored more than is in their own self interest. Total cost of ownership and other concepts and tools from the Reshoring Initiative help companies decide if it is in their interest to reshore more work. In the article, titled, Velocity Manufacturing , in the June/ July issue of this magazine, “Dr. Lisa” Lang described a range of work that makes sense to produce domestically and the benefits of applying velocity manufacturing, a concept from Theory of Constraints, to produce this range of work more competitively here. The purpose of my article is to now show that, based on global economic trends and increased use of total cost of ownership calculations by customer companies, the range of work in which the USA is competitive is increas-ingly broader than Dr. Lisa suggests. In a final, third article, Dr. Lisa and I will integrate our views more fully. I agree with many of the items in Dr. Lisa’s list (on page 44 of the article) of jobs where “moving overseas makes sense,” especially until recently. I would add to her list: • High labor content. • Work that lacks the characteristics listed below. To her list of jobs that “are remaining in the USA,” I would add: • Low labor content. • Shipping or material cost high vs. price. • JIT delivery. • Assemblies. • High intellectual property (IP) risk. • Tight regulatory compliance. For a complete analysis of the work that is most competi-tively made here for the domestic market and how to most effectively compete against low labor cost companies, see: http://tinyurl.com/37zut4z To Make Better Sourcing Decisions... High-Volume Work Must Return Also, I believe a significant percentage of the high-volume work, that Dr. Lisa suggests is gone, must come back. My reasoning is two-fold. First, much of this work can be made low-labor content. Second, there is not enough of the low-volume work to balance the trade deficit and reduce unem-ployment and the budget deficit. One or more of the following must eventually happen—companies will develop a better understanding of the cost of offshoring; we will figure out how to be cost competitive; or the USA dollar will decline in value to the point where we are competitive, as the Chinese did so successfully, cutting the value of the Yuan vs. the U.S. dollar by about 80% between 1980 and 1994. Despite the strength, stability and rising productivity of the Chinese economy, the 54 Fastener Technology International/August 2011 To help these companies make better sourcing decisions, the nonprofit Reshoring Initiative provides for free a Total Cost of Ownership Estimator™ software system. With clear evidence of the fragility of global supply chains, Chinese and other LLCC wages rising rapidly, the USA dollar declining and oil soaring, this is the perfect time for USA companies to re-evaluate their offshoring strategies and bring some of the sourcing home. Many commentators suggest we forget about manufac-turing and instead become an “innovation” country. Recent studies show you cannot have the one without the other. Professor Pisano and Professor Shih of Harvard Business School 3 , recently re-affirmed that USA innovation declines when manufacturing is offshored because the partnership of manufacturing and engineering is weakened. The TCO Estimator includes a cost factor for this impact and provides the comprehensive total cost calculation that can objectively justify keeping manufacturing close to USA engineering. The Reshoring Initiative offers a nonprotectionist, efficient way to reduce our imports, increase our “net exports” and regain manufacturing jobs. To help companies make better sourcing decisions the Reshoring Initiative provides: • Free Total Cost of Ownership software that helps them calculate the real offshoring impact on their P&L.

Total Cost Of Ownership Calculation

Harry Moser

A Key to Bringing More Manufacturing Back to the USA

by:

Harry Moser President and Founder Reshoring Initiative 21110 Buffalo Run Kildeer, IL 60047 USA www.reshorenow.org

Total cost of ownership and other concepts and tools from the Reshoring Initiative help companies decide if it is in their interest to reshore more work.

In the article, titled, Velocity Manufacturing, in the June/ July issue of this magazine, "Dr. Lisa" Lang described a range of work that makes sense to produce domestically and the benefits of applying velocity manufacturing, a concept from Theory of Constraints, to produce this range of work more competitively here. The purpose of my article is to now show that, based on global economic trends and increased use of total cost of ownership calculations by customer companies, the range of work in which the USA is competitive is increasingly broader than Dr. Lisa suggests. In a final, third article, Dr. Lisa and I will integrate our views more fully.

I agree with many of the items in Dr. Lisa's list (on page 44 of the article) of jobs where "moving overseas makes sense," especially until recently. I would add to her list:

o High labor content.

O Work that lacks the characteristics listed below.

To her list of jobs that "are remaining in the USA," I would add:

o Low labor content.

O Shipping or material cost high vs. price.

O JIT delivery.

O Assemblies.

O High intellectual property (IP) risk.

O Tight regulatory compliance.

For a complete analysis of the work that is most competitively made here for the domestic market and how to most effectively compete against low labor cost companies, see: http://tinyurl.com/37zut4z

High-Volume Work Must Return

Also, I believe a significant percentage of the high-volume work, that Dr. Lisa suggests is gone, must come back. My reasoning is two-fold. First, much of this work can be made low-labor content. Second, there is not enough of the lowvolume work to balance the trade deficit and reduce unemployment and the budget deficit. One or more of the following must eventually happen-companies will develop a better understanding of the cost of offshoring; we will figure out how to be cost competitive; or the USA dollar will decline in value to the point where we are competitive, as the Chinese did so successfully, cutting the value of the Yuan vs. the U.S. dollar by about 80% between 1980 and 1994. Despite the strength, stability and rising productivity of the Chinese economy, the Yuan on July 12, 2011, was only back to the 1993 level and still 75% below the level of 1980.

The nonprofit Reshoring Initiative helps close the gap with offshore manufacturing now by helping USA companies understand their true cost of offshoring: their Total Cost of Ownership (TCO). Boston Consulting Group1 and Accenture2 recently reported that Chinese net unit manufacturing costs are rapidly converging on USA costs. Specifically, they stated that Chinese wages are rapidly rising (approximately 20% per year) and the Yuan is gradually appreciating (approximately 6% per year). When these factors are combined with Chinese productivity, which is still far below the USA level, by 2015 Chinese unit labor costs will be close enough to the USA level so the other costs associated with offshore sourcing will make the total cost of ownership higher than for the same products produced in lower-cost USA states such as in the southeastern USA.

However, for this economic trend to have a rapid impact on the behavior of major USA companies, the companies will have to calculate their TCO. Unfortunately, most companies' calculations are rudimentary rather than complete, mainly comparing prices rather than the entire costs of offshoring. In fact, Archstone Consulting's 2009 survey showed that 60% of manufacturers ignore 20% or more of the cost of offshoring. Accenture's 2010 survey confirmed the results with 61% of respondents acknowledging the need to implement TCO.As a result, companies have offshored more than is in their own self interest.

To Make Better Sourcing Decisions..

To help these companies make better sourcing decisions, the nonprofit Reshoring Initiative provides for free a Total Cost of Ownership Estimator™ software system. With clear evidence of the fragility of global supply chains, Chinese and other LLCC wages rising rapidly, the USA dollar declining and oil soaring, this is the perfect time for USA companies to re-evaluate their offshoring strategies and bring some of the sourcing home.

Many commentators suggest we forget about manufacturing and instead become an "innovation" country. Recent studies show you cannot have the one without the other.Professor Pisano and Professor Shih of Harvard Business School3, recently re-affirmed that USA innovation declines when manufacturing is offshored because the partnership of manufacturing and engineering is weakened. The TCO Estimator includes a cost factor for this impact and provides the comprehensive total cost calculation that can objectively justify keeping manufacturing close to USA engineering.

The Reshoring Initiative offers a nonprotectionist, efficient way to reduce our imports, increase our "net exports" and regain manufacturing jobs. To help companies make better sourcing decisions the Reshoring Initiative provides:

o Free Total Cost of Ownership software that helps them calculate the real offshoring impact on their P&L.

O Publicity to drive the reshoring trend.

O An on-line Library of 98 articles about successful reshorings cases.

O Access to NTMA/PMA Contract Manufacturing Purchasing Fairs to help them find competitive USA sources.

The Initiative has received increasing visibility and influence including recognition by Industry Week magazine via its 2010 Manufacturing Hall of Fame; inclusion of the TCO concept in Congressman Wolf's (R,VA) "Bring Jobs Back to America Act" (H.R.516); numerous webinars; dozens of industry articles; presentations in major industry and government policy conferences in Chicago, IL, USA and Washington, DC, USA; and coverage by CBS, CNBC, WSJ and USA Today. The Initiative is actively involved in the fastener industry with presentations at:

o Mid-West Fastener Association, February 24, 2011.

O Fully Threaded Radio, April 4, 2011.

O PMPA Annual Meeting October 22, 2011.

O New England Fastener Distributors Association, Sturbridge, MA, USA, November 3, 2011.

O IFI Annual Meeting 2012 (tentative).

An integrated five-step Illinois Reshoring Initiative has been launched to demonstrate the Initiative's effectiveness. One step is the September 8, 2011, NTMA/PMA Contract Manufacturing Purchasing Fair, at which customers can find competitive USA sources. We anticipate improving companies' profitability while bringing "permanent" manufacturing jobs back at a cost of US$1000 each, less than 1% of the cost of one-year Stimulus Program jobs.

The current USA trade deficit is about US$550 billion/year.

Balancing the trade deficit by reshoring, will:

o Bring back about 3 million manufacturing jobs and 4 million to 5 million multiplier effect jobs for those who supply materials and services to the manufacturing companies and workers-at least 7 million total.

O Reduce unemployment from above 9% to below 5%.

O Dramatically reduce federal, state and local budget deficits by increasing tax revenue and reducing unemployment and other expenditures.

O Strengthen our defense industry capability.

Here Are Ways You Can Help:

o Large companies: Improve profitability and simplify and de-risk your supply chain by re-evaluating offshoring decisions using the Estimator.

O Suppliers: Use the Estimator to convince your customers to reshore.

O Both: Ask for help from the Initiative, propose local Reshoring Initiatives and send me successful reshoring cases to be publicized.

O Learn more at free reshoring webinars. Four are scheduled in August including an Industry Week webinar shared with Zurich America on how reshoring can play a role in reducing supply chain risk management. Links are at the Reshoring Initiative website.

Together we can bring more manufacturing back now. For more information, visit the website listed below.Www.reshorenow.org

Sources:

1 http://www.bcg.com/media/PressReleaseDetails. aspx?id=tcm:12-75973.

2 http://www.accenture.com/us-en/Pages/insightmanufacturings- secret-shift-gaining-competitive advantage- summary.aspx.

3 http://hbswk.hbs.edu/item/6664.html.

More About Reshoring Initiative...

The mission of the nonprofit Reshoring Initiative is to return manufacturing work and jobs to the USA by helping manufacturing companies recognize that they will be more successful if they reshore more and offshore less.

The Initiative was founded by its current president, Harry Moser, who was President of GF AgieCharmilles, an EDM and high-speed milling machine tool company, for 22 years. During Moser's transition to retirement, GF AgieCharmilles, NTMA, AMT and PMA supported his effort to found the Reshoring Initiative.

By far the most productive way to create American jobs is to reshore manufacturing. The Reshoring Initiative believes we can bring back "permanent" manufacturing jobs for US$1000 each, a tiny percentage of the US$250,000+ per one year government job created by President Obama's Stimulus Program.

The Reshoring Initiative, www.reshorenow.org and harry.moser@comcast.net, is supported by:

o Association for Manufacturing Technology (AMT), www.amtonline.org

o Sescoi, www.sescoi.com

o GF AgieCharmilles, www.gfac.com/us

o Association for Manufacturing Excellence (AME), www.AME.org

o National Tooling and Machining Association (NTMA), www.ntma.org

o BIGKaiser, www.bigkaiser.com

o Mazak, www.mazakusa.com

o TCI Precision Metals, www.tciprecision.com

o Science of Business, www.VelocitySchedulingSystem.com

o Swiss Machine Tool Society (SMTS), www.smts.org

o Hand Tools Institute (HTI), www.hti.org

o IBS, www.ibs-us.com

o Steel Founders Society of America, www.sfsa.org

Additional information on the NTMA/PMA Purchasing Fairs can be found at: www.purchasingfair.com.

For more information on the Illinois Reshoring Initiative, visit: www.illinoisreshoring.org.

Read the full article at http://www.bluetoad.com/article/Total+Cost+Of+Ownership+Calculation/806733/77825/article.html.

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