They continued: "This overreliance on direct costs to the exclusion of other legitimate cost factors distorts the business case for offshoring, and likely many decisions to offshore were incorrectly made."
There's also, perhaps, a more sinister explanation to the reason for offshoring.
Supply chain managers, who are incentivized to find the cheapest way to manufacture, use a calculation called price variance--the standard accounting metric that reveals the cost-effectiveness of production--to inform their decisions.
The problem with price variance, however, is that it does not take into account many of the ancillary costs and variables--like overhead and corporate strategy development--that Moser believes are necessary to calculate true costs.
"Why do they do that?" says Moser. "For them and the chief executive officer, you can justify a bonus for an individual or the big-time guy for cutting $50 million out of the price by offshoring, whereas if you kept it here and worked hard on being lean and doing it a little better and saving $5 million, it's harder to justify giving yourself a bonus, and it's a lot harder to do.
"There's a ... personal incentive bias to take advantage of that price variance mechanism instead of looking at the total cost."
Currency Factors
Then there is China's currency manipulation, says Bill Waddell, a lean manufacturing expert and a vocal critic of manufacturing policy (or a lack thereof). When Chinese banks artificially reduce the conversion rates from yuan to American dollars, it makes it cheaper for American companies to manufacture overseas, and it gives Chinese manufacturers a better shot at competing.
But the issue affects different U.S. companies in different ways--an artificially lowered yuan benefits large, publicly traded companies that have already invested heavily in Chinese manufacturers, but increases pressure on domestic manufacturers--making it hard to build a business community consensus on the issue.
Though there have been bills proposed to combat currency manipulation, they've largely stalled in Congress.
"Within the manufacturing world there are two radically different communities," Waddell says. "One of them are the big publicly traded companies that you read about and they're the ones who are the biggest outsources to China. They oppose those bills because they do more manufacturing in China than they do in the U.S."
Calculating the Total Cost
To understand the total cost of going abroad, Moser and his team have designed Total Cost of Ownership software. It's essentially a matrix of 36 cost factors. Companies input various factors, and the matrix spits out where it's cheaper to manufacture here, or abroad. The tool is free and Moser recommends all small business owners try it out.
Among the 36 factors that create the "total cost of ownership," the algorithm calculates non-traditional ancillary costs, like overhead, corporate strategy and other internal and external business costs. It gets granular, too, trying to quantify what previously had been considered unquantifiable, including items like "the expected percentage price of IP risk" or the "Opportunity cost due to delivery and quality: lost orders, slow response, lost customers, [as a percentage] of price." In total, there 36 elements that make up the total cost algorithm.
The idea is that these ancillary costs often don't factor into a typical supply chain calculations, which have systematically undervalued the costs of manufacturing abroad, according to Moser.
Moser analyzed data from 10 recent examples. The results paint a clear picture of how the Total Cost of Ownership module might change an entrepreneur's perception whether or not to manufacture abroad.
Looking exclusively at the cost of products and labor, which is what many companies do, the U.S. averages 108 percent higher than manufacturing in China in terms of cost. But at total cost of ownership (TCO) levels, the U.S. averages only 12 percent higher. And in 60 percent of the cases, the U.S. total cost of ownership is actually lower than Chinese total cost of ownership, averaging about 22 percent less than China. In other words, for many companies, Moser believes you can empirically prove it's actually cheaper to produce products here.
Currently, Moser is working with U.S. Rep. Wolf (R-Virginia), chairman of the House Appropriations Subcommittee, to expand the use of the TCO calculater within the Commerce Department.
"Rather than reinvent the [TCO] software, they’ve come to me," says Moser.
To change status quo, you must work from inside out
A return to American manufacturing, however, will only be happen if the next generation of supply chain managers and entrepreneurs are less inclined to offshore, Moser says. When we spoke, he was gearing up for speaking engagements with scores of manufacturing groups--from the Institute of Supply Management to an association of Midwest Fasteners to a group of Surface Platers in his adopted home state of Illinois. He's also meeting with Clemson MBA students.
A big piece of the puzzle, Moser tells me, is educating the MBA students to consider the total costs of going overseas, and looking at the United States as a viable place to manufacture in scale.
"I'd love to see a day when companies report the number of jobs you brought back to America and the millions of dollars worth of improvements in our economy because of the actions you took," he says.
"If I could get people to put that in their annual reports, we'd be home."
