Industry TalkRegular Industry Development Updates, Opinions and Talking Points relating to Manufacturing, the Supply Chain and Logistics.
Made in the USA? Not so fast! The Country of Origin May Not Be As Simple As You Think.
Given the high profile of President Trump’s drive to keep manufacturing jobs here in the USA, the claim of Made in the USA has been the source of many conversations and debates amongst politicians and economists. When you see the label “Made in the USA” or when you hear that a factory is making things here in the US, there is some additional information you might want to consider.
Before I go any further with this narrative, let me state that I am using examples and analogies to make my point – in no way am I singling out any company or country as doing anything deceitful or harmful.
To start, the words “Made in the USA” imply that there is some manufacturing taking place (the “Made” portion). The rest of the phrase “…in the USA” implies the Country of Origin, which sounds like a simple concept but in reality it is very complex and has multiple definitions, depending upon the context of how it is used.
Let’s start with manufacturing. Whether you know it or not, we all see and experience examples of manufacturing in our everyday lives. For example, anyone who has done any cooking in their lives has been involved in manufacturing, even if he or she doesn’t know it. I will use one of the simplest examples for the purpose of this article: making cookies.
In its basic process, making cookies could be described as taking flour, sugar, milk and eggs and combining these ingredients in a mixing bowl before spooning it out onto a baking pan and baking until done. At that point, there might be an additional tasting task (quality control – my favorite for this example!)
Under most assumptions, if this was done commercially in say, Turtletown, TN., this would be considered made in the USA, right? Well, let’s consider the ingredients for a minute. Start with sugar. Where did it come from? Maybe it came from a sugar farm somewhere in the USA; but, what if it came from Brazil, which is the top sugar producer in the world.
While it would be a stretch to imagine that the other ingredients listed (flour, eggs and milk) would not be sourced in the USA, it’s not hard to imagine that ingredients (or parts) for a finished good (an assembly) might all be sourced from outside of the USA for other manufactured items. In addition, the dollar value of the foreign sugar might be more than 50% of the total dollar value of the ingredients. To further complicate things, imagine that the mixing and baking was done across the border in Mexico and the product was sent back in bulk to the USA for packaging. Even if USA based human labor was used for packaging and handling, the resource dollar value of the equipment (mixing and baking) to make a finished good (cookie) could many times exceed the dollar value of that domestic labor (packer/handler) to oversee or assist in the production.
So what we have is a possibility that the costs of the ingredients and the cost of the resource usage (labor and machine time) that are sourced outside the USA make up the majority of the dollar value of the assembled good, yet the assembled item might be claimed as “Made in the USA” because the end packaging took place on USA soil.
This becomes much more complicated the farther down you go into the production levels. For example, the ACME Company uses a set of cookies to create an assortment. For illustration purposes, let’s say that the assortment has 12 types and 5 of them are made in the USA and the other 7 are foreign sourced. One might consider that this assortment would not qualify for made in the USA status but what if all of the labor used to assemble the assortment was USA workers? This brings back the concept of “Country of Origin” (COO). We can further complicate this scenario by recognizing that some foreign trade agreements call for a specific percentage of COO to be from a preferred country to qualify for a different tariff rate. These trade agreements can potentially add up to hundreds of millions of dollars saved by a company just by recording and substantiating these COO percentages.
The capture and recording of this transformational value added can be very complex depending upon the context. I have worked with ERP systems for over 20 years and even some of the most robust (such as Oracle or SAP) have very rudimentary COO recording capability. Some of the issues that have to be addressed:
- For items that are bought by a company for re-sale to a customer, the company might be required by the customer to buy only from suppliers that provide product from approved countries. When these companies buy these items for later resale, do they track and provide the true origin? (This information is usually available from the supplier; but, it is common that the company who is buying and then re-selling does not or cannot record the COO without significant effort).
- A company might buy for resale an item that can be sourced from multiple countries. When this company sells to a customer, the customer might require that the items only come from an approved list of countries. Tracking the same item in a warehouse with various quantities of multiple COOs can be a logistics nightmare.
- Tracking the COO of on hand inventory can be difficult; but, one also has to consider the planning for such items. Most planning systems show the quantity on hand of items and the quantity expected to be received due to replenishment and the demand of that items for sales orders; but, the systems generally do not show on hand and on order by the COO.
There are multiple ways to work around these issues and many companies have created special information data systems that allow them to operate within their COO requirements. However, the cost of creating and maintaining these systems can be very high; and, they are almost always proprietary. Many companies simply resort to stone knives and bearskins (i.e. primitive or manual systems).
There are many reasons for tracking the COO of an item besides trade agreements. There may be a requirement by the local government for a company not to do business with a specific country or countries. This usually translates to a political regulatory requirement. There are other cases where there may be a perceived or real quality difference between items made in one country vs another. Other reasons might be freight cost differences, vendor performance issues, and others. Often, just understanding what the COO compliance issues are can be daunting.
Many times the COO can be linked or referenced to some other attribute or qualification. For example, an item originating in Scotland might be perceived as being superior in quality to that same item originating from Japan. That superiority might be real or perceived; and, it might also be related to an attribute of superiority, such as age, color, viscosity, etc.
To use another analogy, take for an example a person. We are all persons; but, someone might be considered preferential for a use or task if he or she originated in Country A vs Country B. There might be additional preference if this person also possessed an attribute of being college educated.
For another view of the meaning of “Made in the USA”, consider the genealogy of the item in question. For an assembly being made in a factory, the origin of the components would need to be considered (as in my previous example of the cookies) to determine the true origin of the assembly. This isn’t too far from the concept of a person’s national origin; but, this concept can vary substantially due to political consideration. For example, one country might consider a child born of two parents of one nationality to be of the same nationality. Another might consider the nationality of the child to be that of the country in which it is born.
In summary, the concept of COO is a complex one that will quickly cause some people’s eyes to glaze over in boredom or confusion. To others it is carried to the heights of religious duty, business obligation, or regulatory compliance. Each will have to make their own opinion as to its importance and then make sure the processes are in place to accurately determine the qualifications.