Weighing a production transfer? Keys to reshoring success

Supply chain disruptions, pandemic-related shutdowns, and geopolitical unrest have prompted many manufacturers to shift, or return, production to North America, motivated by the need for greater control over their supply chain and product quality to better serve customers. Additionally, the Inflation Reduction Act (IRA) of 2022 offers tax credits for certain businesses focused on renewable energy components and reducing greenhouse gas emissions, giving some companies added incentive.

While the benefits to reshoring can be significant, it also brings risks. Labor costs in the United States are typically higher than in many other countries, and availability of talent can pose challenges. Shifting production to North America can disrupt existing supply chains, in turn raising costs and reducing efficiencies. Navigating new and complex regulatory environments also presents risks.

Don’t let an unsuccessful production transfer snowball into production problems, delayed shipments, compliance issues, or lost customers. To successfully shift production, focus on the following actions.

1. Define the vision and develop a plan

Careful planning is essential to every production transfer. Production startup dates vary depending on myriad factors, including the complexity of your operations, equipment needs, whether you’re starting from the ground up, among others. There are ways to accelerate the transfer — taking over an existing operation or using contract manufacturers at the start, as two examples — but you must begin with a vision and a broad and robust plan. 

Businesses planning a production transfer often focus too narrowly. Define your vision and think broadly about your operations and production model. Once you have a clear vision, move on to the detailed planning. Remember, not everything can be done at once; you’re likely to be more effective and see results sooner if you work in phases. Put the foundational elements in place and build on them as production ramps up. Refine your vision as the detailed plan unfolds.

Businesses planning a production transfer often focus too narrowly.

Be sure your planning process also includes mapping out your supply chain, identifying potential risks to your supply base, and developing contingency plans. Don’t neglect talent development, change management, and communications with suppliers, customers, regulators, and staff.

2. Invest in Industry 4.0 technologies and automation

Companies can improve efficiency and competitiveness by investing in Industry 4.0 technologies. Increasingly manufacturers are using cobots — collaborative robots — to simplify automation, gain flexibility, and help address skilled labor shortages. They can be programmed and operated through a user-friendly interface, and they can allow manufacturers to leverage a lower-cost resource while providing employees skills to succeed in your new environment.

3. Focus on quality

Allow time for ample prototyping and testing to make sure your planned production capabilities can meet customer needs. The risk here is that you move production but can’t meet the required quality level, so you can’t ship — and your old facility can no longer produce what you need either. Simulation prototyping and trial runs provide confidence; be disciplined about the set-up process to reduce variation on production lines.

4. Manage costs and budgets, use estimate-to-complete techniques, and consider the full tax and finance picture

Companies need to manage costs closely to ensure the shift in production is economically viable. Keep careful track of your budget; how do expenditures track with your estimate to complete? Throughout the process, know where you stand relative to your budget, and make adjustments and tradeoffs as needed.

Businesses often forget to bake in contingency costs. There will always be surprises when making a change as complex as a production transfer, and you want funds budgeted so you can react. Then, as the transfer progresses and the risk of surprises declines, you can allocate any surplus elsewhere.

There will always be surprises when making a change as complex as a production transfer, and you want funds budgeted so you can react.

Businesses considering a production transfer to the United States should also look at tax credits and deductions outlined in the IRA. These include up to 30% of the investment for upgrades or new facilities for manufacturing (or recycling) certain renewable energy components — such as for renewable energy production, fuel cells and other energy storage, and electric vehicles and charging infrastructure. Also included in the IRA are credits for manufacturing plant updates that reduce greenhouse gas emissions. Businesses must apply for some programs. As you plan your production transfer, be sure to factor in potential tax impacts.

As you plan your production transfer, be sure to factor in potential tax impacts.

5. Strengthen partnerships

Strengthening relationships with suppliers, customers, and other stakeholders boosts flexibility and supports a smooth transition. Work closely with your customers and suppliers. Share information about dates, production volumes, and quality targets. Engage in deeper conversations with customers about your plans, their future needs, and how you can support them. Don’t forget about the supplier side. During the production transfer, expand supplier relationships to be less transactional and more strategic — you might be surprised to learn one of your suppliers can help solve a vexing production issue or develop a new product you’ve been planning.

6. Build in flexibility

Companies need to be flexible and adaptable as market conditions and consumer demands rapidly change. Flexibility is particularly important when shifting production back to the United States from a region with lower labor costs. Technology and automation can enhance flexibility. So can partnering with other businesses and local suppliers. The key here is to identify and focus on your core competencies and find capable resources to carry out the rest. This can help you make better use of your physical space and workforce, improve turnaround times, enhance quality, and more.

7. Adopt an agile manufacturing approach and optimize inventory management

Agility helps companies respond quickly to change. It helps increase efficiency and modify operations more quickly when doing changeovers. It helps move product through your facility as quickly as possible instead of holding inventory or work in process.

Is your inventory management system effective? Does it allow you to respond quickly to changes in demand and minimize the impact of disruptions? Diversify your sources of inventory. Look at how and how much you stock. Is your system optimized to support operations, with the right amount of materials at the right time? Have you identified the risks and taken steps to mitigate them? Now is a perfect time for an inventory analysis.

8. Diversify production

Diversification across products and markets helps reduce risk. As you plan to transfer production, consider developing additional products, entering new markets, or targeting new customer segments. Make sure you’re not reliant on one (or very few) products or large customers for the future of your business.

Don’t let risk deter action

Production transfers don’t happen without risk. Visioning, careful planning, and focusing on key success factors can help better manage the threats and capitalize on new opportunities as you shift production back to North America. What’s your vision?