Effective soon, the new federal government procurement regulations will call for Local Manufacturing and up to 75% domestic content. However, after two decades of offshoring productions to low-cost countries, American companies have lost touch with manufacturing – the Association of Manufacturing Technology estimated a “technical debt” of up to $600 billion in U.S. manufacturing. How to turn offshoring to Local Manufacturing quickly to qualify for the higher domestic content? In this article, Paavo Kakela, VP of Sales at EID Robotics, the Industry 4.0 technology specialist, explains the impact of increased domestic content and how agile Microfactory technologies enable manufacturers to ramp Local Manufacturing fast!
On March 7, 2022, the Federal Acquisition Regulatory (FAR) Council published new rules that increase domestic content requirements for federal government procurements to 75% by 2029 and further enhance price preferences for domestic goods designated as critical to U.S. supply chains. The rule was, according to President Biden’s Executive Order of January 2021, aimed at maximizing the use of domestic products, materials, and services and improving supply chain resiliency in critical sectors, such as information and communications technology, clean energy, defense, public health, agriculture, and transportation.
New Domestic Content Rule
Domestic content determines whether solicited construction material or end products are domestic. Currently, the FAR uses a two-part test to assess domesticity for the Buy American Act (BAA). Firstly, the end products must be manufactured locally in the United States. Secondly, a certain percentage of the cost of the components used in the end products must be of U.S. origin, whether they were mined, produced, or manufactured in the country. Currently, the rate of domestic compliance is 55 percent. Effective October 25, the threshold will increase to 60 percent, followed by an increase to 65 percent in 2024 and to 75 percent in 2029.
Enhanced Price preference
Should there be a federal procurement case with a domestic alternative more expensive than a foreign offer, the procuring agency can apply the so-called price preference – that is, add a predefined percentage on top of the price of the foreign offer to favor the domestic alternative (the domestic price must not exceed the foreign price by more than the price preference). Under the current FAR, price preference is 20 percent for large businesses, 30 percent for small businesses, and 50 percent in the defense sector.
$665 Billion Federal Government Procurement Market
Federal government procurement is a vast market space. In 2020, the federal government spent more than $665 billion on contracts, increasing by over $70 billion from 2019. That is why domestic content is a big deal for U.S. companies – by qualifying for the required domesticity rate, they can ensure eligibility for federal procurements, opening significant, profitable, multi-year revenue streams.
The Challenge of Technical Debt
After two decades of offshoring productions to low-cost countries, many U.S. companies have lost touch with manufacturing. The Association of Manufacturing Technology estimated that the United States must invest $400-600 billion in manufacturing technologies to become competitive and balance its trade deficit with importers such as China. This technical debt is partly a result of the great offshoring boom; manufacturing skills and technologies were not needed locally during this epoch, creating a vacuum in the U.S.
Now U.S. companies are facing a tough localization challenge. To succeed in the $665 billion federal procurement market, they must rapidly increase skilled labor and advanced technologies investment, ramp up Local Manufacturing, and localize sourcing raw materials and components to meet the new domestic content regulations. But is it a mission impossible considering the lagging manufacturing readiness?
The location of manufacturing is the single most significant factor in the equation of domestic content. Offshoring manufacturing outside of the United States reduces domesticity radically; actually, it can be prohibitive for the company to qualify for federal government procurements. In an offshoring scenario, materials and components are typically sourced near the foreign production plant because it makes economic sense. However, the combination of offshoring and foreign sourcing negatively impacts domestic content and, in the worst case, disqualifies the company for federal procurement.
On the other hand, Local Manufacturing gives a company’s domestic content a positive boost. Local Manufacturing allows companies to centralize sourcing locally in the United States at the federal level. Manufacturing and production can be localized in a selected state using the agile Microfactory concept.
Local Manufacturing allows companies and manufacturers to capitalize on state subsidies, employ locally, establish a healthy give-and-take relationship with the community, and increase wellbeing. By optimizing supply chains with Local Manufacturing, manufacturers can reduce the delivery time by several weeks compared to offshoring. Local Manufacturing saves money via the lower working capital and increased resiliency against supply-chain disruptions. Also, logistics costs are decreased, lead times are shortened, forecasting becomes more accurate, and inventory and waste are reduced. Companies can increase quality when all operations are handled locally together with sub-contractors. Local Manufacturing can entitle U.S. companies to claim price preference in federal government procurements, stick a Made in the USA label on the box, and enjoy a substantial price premium!
Why Use Microfactory for Local Manufacturing?
A microfactory concept is a modular, automated assembly platform. Each module typically contains one application, and they are integrated through standard, pre-tested, and verified interfaces end-to-end. This enables manufacturers to customize and implement the line configuration and capacity flexibly according to their needs – yet the microfactory delivery time can be up to 30% faster than a traditional automation system. And, the onsite installation time can be even up to 90% faster – in fact, a microfactory can be installed in one day.
Modularity brings scalability. Start with a small assembly line and add more modules to increase capacity when the demand grows. That makes a Microfactory a perfect solution for Local Manufacturing, minimizing the initial investment costs and risks.
Microfactories require only limited floor space and operational staff compared to traditional factories, reducing operational costs and energy consumption. EID Robotics provides manufacturers with a full partnership, in-depth automation technology know-how, and 24/7 support.
About the Author
Paavo Kakela is the V.P. of Sales and Marketing and partner at EID Robotics, the global provider of modular microfactory systems. Paavo has extensive experience in international industrial automation. As a member of the EID Robotics team, he has developed the innovative ANT Plant Microfactory Concept to enable easy and profitable local production of different merchandise. Before co-founding EID Robotics, Paavo worked at several international manufacturing companies in project leadership positions. Paavo holds a BSc in Mechanical Engineering from the University of Oulu in Finland.
About EID Robotics
EID Robotics, founded in 2009, is a global provider of automation solutions and the revolutionizer of the production industry. EID Robotics’ modular microfactory manufacturing concept, ANT Plant, is an industry innovation. The company is located in Kuopio, Finland. The company has an extensive track record in customer-focused industrial automation, especially in electronics, electrical work, and lighting. Contact EID Robotics.