Reshoring Manufacturing: Supply Availability,Demand Updating, and Inventory Pooling
Li ChenSamuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853
Bin HuKenan-Flagler Business School, University of North Carolina, Chapel Hill, NC 27599
bin [email protected]
Reshoring refers to the emerging industry movement of once-offshoring manufacturers moving their factories
back onshore. Existing literature emphasizes reshorings demand responsiveness due to market proximity.
We however note that limited onshore supply availability may force reshoring manufacturers to remain
dependent on offshore suppliers for component sourcing. As a result, the advantages due to improved market
proximity may be offset by the disadvantages due to lost supply proximity. By accounting for the supply
availability issue, we show that manufacturers preferences toward reshoring boil down to trade-offs between
operational flexibilities under offshoring and reshoring. We characterize cost and demand scenarios wherein
manufacturers prefer reshoring, and further identify operational strategies that can swing such preferences.
Key words : newsvendor with demand updating, commonality, risk pooling
History : file version August 16, 2015
For nearly three decades, manufacturing offshoring has been a predominant industry trend, espe-
cially in the United States. The top driver of this trend has been the substantially lower labor
costs in emerging economies. However, the previous labor arbitrage gradually tapers off as wages
in developing economies such as China and India have increased by 10-20% annually for the past
decade, putting a spotlight on the drawbacks of offshoring, including shipping costs and lead-times,
lost manufacturing expertise, potential intellectual property leakage, increased disruption risks,
and political pressure (The Economist 2013). Accordingly, a growing number of US-based com-
panies started to consider bringing factories back to the USdubbed reshoringand some have
taken actions. In December 2013, Apple announced that they had started producing the Mac Pro
computers in a Texas plant as part of a US$100 million Made-in-the-USA push (Burrows 2013).
Google also assembled its Moto X smartphones in the US and heavily advertised this initiative
(King 2013). Nevertheless, the adoption of reshoring has been slower than many have hoped, gen-
erating much discussion (Schoenberger 2013). Divided views are abundant among practitioners on
whether reshoring is viable and scalable (Hertzman 2014, Wang 2014).
Most existing literature on this topic emphasizes onshore manufacturings cost disadvantage
compared with offshoring (Wu and Zhang 2014, Wang et al. 2014). However, practitioners discus-
sions about reshoring have not always been around costs. Chen et al. (2015) survey multi-national
companies operating in China about their recent supply chain re-structuring decisions and moti-
vations. The survey results indicate that manufacturing jobs are generally not coming back to the
US, and supply availability is among the top non-cost considerations. An article in The Economist
(2014) also quotes, the biggest problem with reshoring is that the decline in manufacturing over
the decades means that the supply chain has all but disappeared. In fact, an analysis of the
Google Moto X smartphone that we mentioned above revealed that nearly all of its parts came from
overseas (King 2013). On the other hand, Duhigg and Bradsher (2012) depict the convenience and
flexibility of the iPhone supply chain in Shenzhen, China: You need a thousand rubber gaskets?
Thats the factory next door. You need a million screws? That factory is a block away. You need
that screw made a little bit different? It will take three hours. These articles highlight the reality
faced by many offshoring manufacturers contemplating reshoring: as they extensively sourced from
local (offshore) suppliers, onshore supply bases have gradually withered. The limited onshore sup-
ply availability may force them to continue sourcing from offshore suppliers even if they reshore
manufacturing, until the reemergence of full-fledged onshore supply bases.
How does a manufacturers dependence on offshore suppliers impact its consideration of
reshoring? A widely-perceived advantage of reshoring is that it allows a manufacturer to be closer
to the market, potentially making it easier to adjust production in response to demand changes.
However, the dependence on offshore suppliers means that a reshoring manufacturer also moves
away from its suppliers, which may make it more challenging to procure components in response
to demand changes. This is not a straightforward trade-off, prompting several research questions.
Under what conditions do the disadvantages of losing supply proximity outweigh the advantages
of obtaining market proximity? What are the underlying operational drivers? And what strategies
may influence the trade-off in favor of or against reshoring?
To answer these questions, we consider the following model. An expected-profit-maximizing
manufacturer sources components from an offshore supplier and converts the components into
finished goods to meet random onshore demands. Production takes place in the manufacturers
(or its strategic partners) factory, which may be placed close to the supplier in the offshoring
mode (the as-is case), or close to the market in the reshoring mode (the to-be case). The supply
chain operates in two sequential stages. Under offshoring, the two stages are (offshore) production
followed by shipping (of finished goods), whereas under reshoring, the two stages are shipping (of
components) followed by (onshore) production. We assume all common costs under offshoring and
reshoring to be identical to isolate non-cost drivers.
To capture potential demand information updates during the production-shipping (or shipping-
production) process, we assume that the onshore demand may have two different typeshigh and
low, which is initially unknown to the manufacturer. At certain time before the selling season, the
manufacturer learns the demand type through a marketing event such as a trade show (Fisher
and Raman 1996). We assume that the demand update occurs before the second stage in both
production modes so that the manufacturer can always respond to it (otherwise the comparison
of the two modes would become trivial). As such, the manufacturer faces a newsvendor problem
with demand updating in either production mode.
One can see that the most crucial distinction between offshoring and reshoring in our model
is in the sequence of events. Under offshoring production takes place before shipping, whereas
under reshoring shipping takes place before production. The different sequences of events entail
different operational flexibilities in response to the demand update before the second decision
events. Upon receiving new demand information, an offshoring manufacturer may either adjust
the final inventory level upward by rushing a production order before shipping (without worry-
ing about component supply), or adjust the final inventory level downward by not shipping all
finished goods. By contrast, a reshoring manufacturer may either adjust the final inventory level
upward by expediting more components from offshore before production begins, or adjust the final
inventory level downward by not processing all shipped components into finished goods. While the
manufacturer has both upward and downward flexibilities to adjust the final inventory level in each
mode, the costs of these flexibilities differ in nature. Under offshoring, utilizing the upward flexi-
bility (rushing production) incurs rush production costs, whereas utilizing the downward flexibility
(discarding finished goods) is at the expense of component sourcing and regular production costs.
Under reshoring, utilizing the upward flexibility (expediting component shipping) incurs expedited
shipping costs, whereas utilizing the downward flexibility (discarding shipped components) is at
the expense of component sourcing and regular shipping costs. Therefore, despite the identical cost
structure in each production mode, the costs of flexibilities may differ.
Since in our model offshoring and reshoring mainly differ in their operational flexibilities, when
a production mode has both the cheaper upward and downward flexibilities, we find that it always
outperforms the other (see Table 1s diagonal quadrants). On the other hand, the comparison when
one production mode has the cheaper upward flexibility while the other has the cheaper downward
flexibility is less straightforward. Our analysis shows that in this case, whether reshoring is preferred
to offshoring depends on the prior probability of a high demand, or the demand prospect. The
intuition is as follows. Suppose a product has a low (high) demand prospect. This means that the
manufacturer is likely to plan a low (high) initial production quantity, which calls for an upward
(downward) flexibility in case demand turns out to be high (low). Therefore, for this product, the
manufacturer prefers the production mode with the cheaper upward (downward) flexibility. The
specific preferences depend on the cost parameters (see Table 1s off-diagonal quadrants).