In the never-ending battle to keep costs in check, U.S. manufacturers are looking inward — not outward — to achieve margin growth, according to a new study.
The study, conducted by the Hackett Group, suggests that manufacturers are becoming less reliant on offshoring and outsourcing as a cost-reduction strategy.
Instead, companies are focusing on internal cost-reduction opportunities such as productivity improvements, strategic sourcing and supply chain optimization.
"Over the past few years, major companies have outsourced the large majority of the activities that can be managed by third parties, to take advantage of low-cost locations," said Dave Sievers, a principal and the practice leader of the Hackett Group's Strategy and Operations Practice.
"But in many cases, the labor-cost gap is shrinking, making onshore and nearshore manufacturing much more attractive."
Coinciding with this trend, stabilizing GDP growth in major economies around the world has reduced sales-forecast uncertainty, enabling manufacturers "to plan supply requirements and manufacturing capacity with far greater confidence," according to the study.
"At the same time, new opportunities for cost reduction are emerging, including internal optimization, materials cost cuts and reduced energy prices," Sievers added. "For 2013, companies are clearly focusing on building the skills and infrastructure they need to take advantage of these trending opportunity areas."
'Aggressive' Cost-Reduction Goals
The Hackett Group study found that U.S. manufacturers are targeting a 1.5 percent reduction in cost of goods sold to drive margin growth in 2013.
The business-advisory firm called that target "aggressive."
The firm asserted that "a significant portion" of the cost savings will come from a 1.7 percent reduction in internal manufacturing costs targeted by U.S. companies this year.
Meanwhile, manufacturers will continue to take advantage of lower energy prices and stable aggregate demand, as they target a 2 percent reduction in logistics costs and a 1.7 percent drop in warehousing costs this year.
"With demand really beginning to stabilize in 2012, companies began to optimize their existing distribution networks, reducing overhead and operating costs," said Len Prokopets, associate principal for the Hackett Group's Strategy and Operations Practice. "We expect this to be a significant trend going into 2013."
Manufacturers also will continue to "lock in savings" from favorable commodity prices, the Hackett Group said.
Offshoring Tide Turning?
The Hackett Group said its new study corroborates previous research indicating that U.S. manufacturers might have exhausted the cost savings they can achieve from offshoring and outsourcing to so-called low-cost countries such as China.
"Last year, the Hackett Group issued research showing that the tide has begun to turn on the flow of manufacturing jobs from the U.S. to China and other low-cost countries," the firm said in a news release.
"The research found that some companies are already reshoring a portion of their manufacturing capacity, and this trend is expected to reach a crucial tipping point by 2015, as the total landed cost gap between the two nations continues to shrink, driven in part by rising wage inflation in China and continued productivity improvements in the U.S."
Internal productivity improvements are expected to account for nearly 50 percent of manufacturers' overall cost reductions, according to the Hackett Group study.
"The Hackett Group found that while companies aggressively used outsourced manufacturing to reduce costs through 2011, starting in 2012 companies shifted away from this strategy, and expect to be much less reliant on outsourcing for savings in 2013 as well," the firm said.
Manufacturers also are turning their attention to their supply chains, the Hackett Group found.
Manufacturers plan to ramp up investment in their supply chains by nearly 3 percent this year, with much of that spending targeting IT, skills and training to improve processes, and developing joint capabilities and products.