Reshoring: A Cost Reduction Strategy
By Everett Frank, DigiSource LLC
Originally posted on DigiSource blog
Offshoring to China can be more expensive than building in the United States. Using objective 3rd party databases and actual prices we demonstrate why right-shoring, aka building “in region for region”, can be a cost reduction strategy.
By some estimates 2-3% of US companies are embracing reshoring each quarter and the trend is accelerating. The trend has been led by companies concerned about recent geopolitical disruptions threat to supply chain security, tariffs, and frustration with the many hidden costs of offshoring. Savvy OEM’s are realizing reshoring is actually a cost reduction opportunity. Here’s why.
The Example Product
For this example we chose a PCBA that most OEM’s would consider a prime candidate for China. The product is approximately 1″ x 2″ with a BOM cost of $24.62 and annual volume of 250,000 units. There are 136 SMT placements including several BGA’s and no through hole.
Calculating Benchmark Prices
To calculate benchmark prices we use models and data which to our knowledge are the most comprehensive and accurate available. Based on these models, here are the expected prices and cost breakdowns for this product if built in the US or China:
Calculating Total Cost of Ownership (TCO)
Total cost of ownership (TCO) calculates the cost of the product when all outsourcing costs are applied. TCO is the gold standard for understanding true total cost and comparing TCO for various outsourcing alternatives is the most accurate and complete method of evaluating outsourcing solutions. For this example we use the TCO calculator developed by the Reshoring Initiative. This calculator has been endorsed by the US Department of Commerce.
The TCO calculator relies on a range of inputs and assumptions which may or may not be valid for your company. We have tried to be conservative in estimating outsourcing costs.
As the example demonstrates, a company currently outsourcing this product to China can save 9.3% by reshoring.
Automation Levels the Playing Field
Advanced EMS companies both offshore and in the US are creating highly automated facilities and applying financial and efficiency models which not only reduce costs further, but also level the playing field because the price of direct labor is no longer a major cost input. We estimate this sample product built in highly automated facilities could be $30.31 in Asia, and $28.89 in the U.S., a 4.6% cost reduction before considering landed costs.
If you would like to see these models applied to your specific circumstances, visit our online cost model for instant price estimates.