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  • Reshoring Manufacturing: Supply Availability,Demand Updating, and Inventory Pooling

    Li ChenSamuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853

    [email protected]

    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

    1. Introduction

    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).

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    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.

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    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

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    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).

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