This Week's Herman Trend Alert

Leadership in Normal 2.0

  The Herman Trend Alert

January 9, 2012

In-Sourcing/Home-Sourcing Builds Momentum

Almost from its inception, the off-shoring boom was doomed to failure. Between cultural and language differences, the distances and costs for transportation, and other countries' lax policies about intellectual capital, many companies struggled to make offshoring work. We beat the drum about the difficulties of building productivity in these offshore locations and within a few short years, we saw companies like Champion, bring their production back from Mexico and China.

For most of the following years, there was a trickle of companies, returning their operations to the United States. Having been disappointed with the shrinking differentials between the costs of production at home and those in foreign lands, especially when the cost of shipping is included, now there is a growing stream of employers returning their factories to the US and other home countries.

Most recently, an article in the December 2012 "Atlantic Magazine", written by Charles Fishman ("The Insourcing Boom") and a piece on National Public Radio's "Tell Me More" returned the issue to our top of mind.

Companies like General Electric, previously a leader in offshoring, are currently finding major economies in bringing manufacturing home, including faster times-to-market, higher levels of innovation, lower materials costs, escalating wages offshore, and of course, significantly lower shipping costs.

Here are some of the clues as to why:
Oil prices are three times higher than they were in 2000. The fuel expenses for cargo ships have increased meaningfully as well.
Natural gas is now four times as expensive in Asia as it is in the US and is considered an excellent source for heating factories.
Wages in China are now five times what they were in 2000---and will continue rising by 18 percent a year.
American unions have become much more reasonable.
US labor productivity continues to climb; wages have become an increasingly smaller portion of the total cost of finished goods.

Though the examples outlined refer mostly to the US, other countries, like Brazil , saw a similar exodus to lower-cost labor markets. We expect to see a growing tide of HomeShoring in the coming years, as companies once again recognize the value of human and other resources they possess in their home countries. Their greatest challenge will be manpower.

NB: In the late 1990s, the term "InSourcing" was used to refer to a function handled by a services company on an employer's site. We much prefer the term "HomeShoring" or "HomeSourcing" to refer to bringing manufacturing back to its original country.

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