There is a great debate in the political arena about trade agreements and their impact on American jobs. In reality, it is quite possible for companies to keep jobs in the U.S. while increasing their profit margin. There is a reason almost every foreign automaker now produces vehicles in America. This article describes why manufacturing and assembly operations can be more cost effective and competitive when they are located in the United States. Of course the added benefit to locating domestically is that you can keep — or bring back — jobs to our country. The model proposed in this article will work; following it can provide your company with all of the benefits mentioned. Bear in mind that every industry model is unique, and not all these tools will be applicable to every circumstance. There may not be sufficient savings or competitive advantages to justify relocation, but these tools have been used by some specific companies to increase profit and gain competitive advantage. Any U.S. company currently manufacturing overseas or considering moving overseas should consider these benefits of domestic production/assembly.
1. Foreign trade zones — more flexibility, less cost, improved compliance.
Companies that have successfully located manufacturing and assembly activity in the U.S. are using foreign trade zones (FTZs) to improve supply-chain efficiency, reduce costs and stay compliant with Customs and Border Protection. FTZs are considered to be outside the “Customs territory” for the purpose of entering goods into U.S. commerce. This allows the operator to choose whether it will pay the duty rate on the finished product or the part, whichever is lower. If you manufacture or assemble within an FTZ, you do not pay duty on the “value added” to the product, and duty is not paid at all until the product is removed for consumption. Any exported product is removed from the FTZ without duty liability. In an FTZ, you can be granted special privileges, including “direct delivery” and “weekly entry,” that will substantially reduce your cost of importation and increase supply-chain efficiency. Of course, when the manufacturing or assembly activity takes place at your location, you have the opportunity to better control the process and accurately describe to Customs what is entered. Further, if you need to import capital equipment when setting up a zone, you don’t pay duty on that equipment until the factory is in production. FTZs were created to help businesses in the U.S. compete with foreign manufacturers and suppliers. The program works.
2. Reduced transportation costs.
Fuel costs, container transportation capacity and transportation surcharges all impact the cost of moving goods. Even the availability of “container space” will be an issue in the future. When you manufacture or assemble in the U.S., you reduce your need for container space and reduce your cost. In most industries, the parts for a finished product can be shipped in 10 to 20 percent of the space. Most parts are less fragile and better packaged for shipment than the finished product, so less damage occurs in transit. Why pay to ship packaging?
3. More efficient production lines.
In the Far East, where most manufacturing and assembly takes place these days, the advantage in the process is not efficiency; it’s the affordability of the work force. But the difference in wages may not be as much as you believe, especially if you are using surplus employees because the foreign business is reluctant to install equipment that would reduce staffing demands. Evaluate your foreign activity for waste, and look at what could be done with better-engineered assembly and additional automation in the U.S before deciding on which location offers the better opportunity.
4. More market flexibility.
Today’s consumer is fickle. Trends come and go, sometimes in a matter of days, often in weeks. The ability to respond to shifting market demands is more important now than ever. The lead time for merchandise manufactured or assembled overseas is at least three to six weeks — and even longer in many industries. Your largest market is in the U.S. When you are located here, your response time to a change in product popularity is days or, in a best-case scenario, hours. Overseas product that was already in the pipeline and couldn’t be canceled, well, there’s always the dollar store.
5. Protection of your property rights.
Copyright and trademark theft is rampant. You can protect your technology if the stages of assembly or manufacture that utilize the technology take place in the U.S. Your proprietary rights are much more vulnerable with overseas production. Customs every day seizes more than $650,000 in fraudulent merchandise in commercial cargo. What is your technology worth? What is your good name worth?
6. Quality control and product branding.
I mentioned that you have more control of the process when it’s located here. Have you considered how much waste you are paying for in foreign production? Product not manufactured to specification, delays in orders, dissatisfied customers — these considerations expand the quality-control issues every company should review. Did you know that under certain circumstances, foreign parts manufactured or assembled in an FTZ may be labeled “Made in the USA” or “Assembled in the USA”? I recently read a comment on a customer’s Web site in which the purchaser said they did not need the product but bought it to support a company who stayed in the U.S. What would that branding mean to your sales?
7. Product safety.
This is another “control” issue, but I separated it because of all the problems we have had in the area of safety, and the fact that Congress is considering legislation that would increase the costs of foreign manufactures by requiring additional testing in the foreign process and certified testing in the U.S. before distribution. Until the law is passed, we will not be able to determine the costs of these new requirements. I’m sure some large importers are trying to estimate the costs their reputation incurred when their product was found to be covered in paint with high lead levels.
8. Defer or reduce expenses.
In the section on FTZs, I mentioned briefly the possibility of deferring the duty until the product is shipped for consumption, as well as deferral on capital equipment used in a zone. When operating in an FTZ, there are even more opportunities for deferrals and savings. Cost of manufacturing or assembly takes place weeks closer to the sale. Customs charges up to $485 per entry as a Merchandise Processing Fee (MPF) on imported merchandise. The FTZ’s “weekly entry” I mentioned reduces whatever you are paying in MPFs to $485 for the entire week. Other entry charges also are reduced. Some states, including Texas, waive inventory tax on merchandise located in an FTZ to encourage job retention and creation.
9. Improved communication
How often do you have difficulty communicating with your foreign supplier? A simple misinterpretation of instructions can have far-reaching and costly ramifications. Think about how difficult it can be to find employees who speak and read the foreign language and understand the technical specifications. When business demands it, you must get up before the sun, or go to bed in the wee hours of the morning because you are needed on a cross-time-zone conference call. Have you evaluated how much time and material is lost through cross-cultural interface? To be fair, even in America you may need to speak Spanish or find someone who can, but many of the complications inherit in international business practices can be eliminated.
10. Savings from reduced errors, reduced breakage and handling product returns.
This subject is related to control and communication. I worked with one importer who was having a difficult time with Customs because of its compliance rate. Their problem area was “service returns,” which has traditionally been an issue. The company had no control over who sent them returned product or over how it was described. This resulted a multitude of errors in the company’s entry activity. FTZs are an answer for this issue. You are allowed to inspect merchandise before it is entered into your inventory and before reporting it to Customs. You never enter merchandise that is not repairable. This gives you the opportunity to be compliant and reduce costs in an area that is a problem for many importers.
FTZs are an oft-misunderstood and underutilized tool that, when used properly, allow companies to stay in or return to the United States. I have tried to highlight the benefits that are most applicable to the majority of businesses looking at this issue, but I have not listed them all. A word of warning: Don’t move into an FTZ if you are not going to do it correctly. You will be building your business practice based on “privileges” that may be revoked if you do not stay compliant. The disruption of your business can be traumatic and costly. Moving into an FTZ is a smart move to make, so make sure you are smart in how you go about the transition.