Manufacturers Seek Cost-Cutting Alternatives to Outsourcing
MIAMI/LONDON — U.S. manufacturers are targeting an aggressive 1.5 percent reduction in cost of goods sold (COGS) for 2013 in an effort to drive margin growth, according to a new study from The Hackett Group Inc.
The study found that with GDP growth stabilizing in major regions of the world, manufacturers are expecting less uncertainty in sales forecasts, enabling them to plan supply requirements and manufacturing capacity with far greater confidence. The Hackett Group's research showed that companies are taking advantage of this stability by looking inward for cost reduction opportunities and other improvements, turning to strategic sourcing, improving their operations, and optimizing their supply chain networks.
According to the research, the focus for 2013 cost improvements will continue to move away from outsourcing and towards internal manufacturing productivity, which is expected to contribute nearly 50 percent of overall improvement. Researchers 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.
Last year, The Hackett Group issued research showing that the tide has begun to turn on the flow of manufacturing jobs from the United States to China and other low-cost countries. 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 United States. The new study's findings indicate that manufacturers are indeed shifting focus of improvement initiatives away from offshoring and outsourcing.
The research found that manufacturers are targeting a 1.5 percent reduction in the cost of goods sold for 2013. A significant portion of this will be driven by a planned 1.7 percent reduction in internal manufacturing costs, which is on top of a 1.8 percent reduction in 2012. In addition to internal manufacturing efficiencies, purchased material cost reductions are expected to reach 0.5 percent of total materials cost in 2013, 0.3 percent lower than 2012, as companies continue to lock in savings from favorable commodity price markets.
Favorable energy prices as well as stable aggregate demand also helped spur a 1.8 percent reduction in logistics and 1.5 percent reduction in warehousing costs during 2012. This trend is expected to continue in 2013 with companies anticipating additional savings of 2 percent in logistics costs and 1.7 percent in warehousing costs.
In order to achieve these performance improvements, companies are focusing on supply chain strategy and plan to increase investment in their supply chains by nearly 3 percent in 2013. Interestingly, the research showed that only 20 percent of the total investment will go toward upgrading or building new capacity (down by half from 2012). Instead, key 2013 investment priorities will include IT, skills and training to improve processes, and supply partners to develop joint capabilities and products.
For more details about the research findings, visit www.thehackettgroup.com/research/2013/manufacturing-cost/.