About fifteen years ago companies were massively relocating their production and assembly work overseas to take advantage of low labour costs, especially in countries like China and India.However, these same companies realized over time that offshoring also came with its own risks and costs.
Today, some prominent manufacturers are bringing work back home, prompting other companies from around the world to rethink the benefits of reshoring and its long-term implications.
Many manufacturing organizations moved their operations to China based on the assumption that the country provided tremendous cost advantages. This was true 10 or 15 years ago, but not anymore.
The reshoring decisionBRINGING PRODUCTION HOME SUCCESSFULLY
1 The Boston Consulting Group August 19, 2014, The BCG global manufacturing cost-competitiveness index, viewed April 22, 20152 Sirkin, H, Zinser, H & Rose, J April 25, 2014, The Shifting economics of global manufacturing, viewed April 22, 2015
According to the Boston Consulting Group (BCG) Global Manufacturing Cost-Competitiveness Index, the difference in manufacturing costs between China and the United States has become negligible. As a matter of fact, for every dollar required to manufac-ture in the U.S., it costs 96 cents to manufacture in China. And that is before taking other factors into consideration such as the cost of transportation1.
The Index measured changes in direct manufacturing costs from 2004 to 2014 among the worlds top 25 exporting countries, and indicates that old percep-tions regarding manufacturing competitiveness no longer hold.
China may still be the worlds largest exporter, but wages have risen 4 times faster than productivity over the past 10 years and higher energy costs for both electricity and natural gas have diminished its long-standing edge. Hence, the study found that the country with the lowest manufacturing costs is no longer China, but Indonesia, then India, Mexico and Thailand.
But regardless of where production has been outsourced, the cost of offshoring is almost always more than anticipated. Some of the tangible costs that are often underestimated include transportation, expediting, custom duties, warehouse space/costs, salaries for personnel overseas and domestic staff managing overseas suppliers, material handling, procurement staff, inventory carrying, debt, product damage, and potential hidden costs such as occasional trips to Asia.
Intangible costs are just as real. They include the cost of managing offshore suppliers, the cost of corruption, and the possibility of losing intellectual property or damaging customer relationships with late deliveries or poor quality.
Truth be told, assessing a countrys relative competi-tiveness is a complex task, because it is determined by a number of fluctuating factors. The past ten years have been marked by high volatility. Some countries have seen more than 10 years of 10 to 20% sustained wage growth. Productivity has doubled in many
countries while declining in others. Energy costs have increased in many countries, sometimes by up to 200%, and currencies have fluctuated greatly, ranging from -20 to +35% versus the U.S. dollar2.
Under these conditions, trying toidentify the best country to oshore production for the next 10 to 25 years is at best a guesstimate.
THE CHALLENGES OF OFFSHORING
From a locational perspective, manufacturers typically have three options: onshoring (within the nation), nearshoring (in a neighbouring country) and offshoring (in a geographically distant country). 3
Companies that have brought outsourced personnel and services back to the location from which they were originally offshoredwhat is effectively called reshor-inginclude large corporations like General Electric, Motorola, Lenovo, Google, Apple, Boeing, and Ford. However, several studies have confirmed that the reshor-ing trend is growing.
In 2014 the BCG published its third annual survey of U.S.-based manufacturing executives, which showed that more than half of the respondents were considering bringing production back, thus corroborating the findings from the previous year. In addition, the 2014 study confirmed that these executives were acting on their intentions: the number of respondents who said that their companies were already bringing production back from China to the United States had risen 20% from rough-ly 13 to 16% the previous year.4
Similarly, a 2013 study by Grant Thornton predicted that over the course of one year, about one-third of U.S. businesses would be moving goods and services back to the United States, and a similar percentage would be reshoring to places closer to home such as Mexico. According to the study, the trend would even hold true for sectors such as IT services and call centres, which have traditionally been largely outsourced abroad.5
In Canada, the reshoring trend may not have gained as much momentum yet. Nevertheless, companies are increasingly realizing the benefits of local manufactur-ing, especially with the volatility of the Canadian dollar. A 2014 KPMG report indicates that just 14% of Canadian manufacturers plan to source from China, compared to 31% the year before.6
Whether the reshoring trend accelerates or not depends on a number of factors, including the overall state of the economy, but one thing is certain: corporations are no longer just look-ing at labour costs when they elaborate production strategies.
THE RESHORING TREND
3 Zhang, M 2012 Sher-Wood Hockey sticks: global sourcing, Ivey Publishing4 The Boston Consulting Group October, 2014, Made in America, avgain, viewed April 22, 2015
5 Grant Thornton, November 19, 2013, Reshoring likely to radically reshape U.S. economy in next year, viewed April 22, 20156 Gigure, L & Matthew, D 2014, Canadian manufacturing outlook 2014, viewed April 27, 2015
Why manufacturers are reshoring production?
?
TOP MOTIVATORS FOR RESHORING
Although in the past the primary driver for oshoring was labour arbitrage, several studies show that today companies are not interested in lower manufacturing costs alone. According to a study by the global management consulting firm A.T Kearney, the main reasons manufacturers are bring-ing production home are delivery time improvement, total cost of ownership, quality improvement, freight cost improve-ment, wage cost improvement, customer responsiveness, and to a lesser extent image, higher productivity, innovation, and inventory improvement.7
Similarly, respondents to the BCG survey indicated that the top three motivators for reshoring are the needs to8:
Shorten the supply chain
Reduce shipping costs
Provide local control over manufacturing processes, in that order.
7 Van den Bossche, P, Gupta, P, Gutierrez, H, & Gupta, A February 2014, Solving the reshoring dilemma, viewed April 28, 20158 The Boston Consulting Group October, 2014, Made in America, gain, viewed April 22, 2015
9 Slavin, C March 24, 2015, Walmarts made in USA initiative bodes well for U.S. packaging sourcing, viewed April 30, 2015
SUPPLY CHAIN MANAGEMENT TOP MOTIVATORS FOR RESHORING
Closer geographical proximity with both customers and
suppliers helps reduce shipping costs and delivery times. As a
result, manufacturers dont need to keep large quantities of
finished products in stock, which in turn lowers inventory
costs. And since local suppliers typically offer longer
payment terms than their Chinese counterparts, companies
have the added benefit of improved cash flow.
Improved customer responsiveness is another reason
manufacturers want to bring production home, or at the very
least closer to home. In certain sectors, the ability to turn
around a product in days instead of months confers an
undisputable competitive advantage. This is particularly
important in sectors such as fashion apparel or for technology
products where demand varies unexpectedly and production
adjustments need to be made quickly.
Similarly, reshoring minimizes the risk of supply chain disrup-
tion. Manufacturers can oversee manufacturing processes
locally and should the unforeseen happen, they can react
much faster than if production was overseas.
From a quality standpoint, the label Made in America has
always been synonymous with higher quality for sensitive
products like food, baby items, or medicines, but the
phenomenon is gaining momentum. Companies are becom-
ing increasingly aware that this is what customers want. After
conducting its own research and realizing that the country of
origin was the second biggest indicator of purchasing prefer-
enceright after priceWalmart famously committed in
2013 to buy an extra 250 billion of made in USA products
over the next ten years.9 The widely advertised announce-
ment certainly benefited the company in terms of brand
image, but there was also a strong desire to support the local
economy.
More and more businesses see the benefits of maintaining
closeness between their R&D department and the manufac-
turing/assembly line. This approach reinforces collaboration
and minimizes the risk of miscommunication due to language
barriers. Besides, it makes it much easier to run tests or work
on prototypes in iterations. All in all, this translates into even
shorter lead times, and can even stimulate creativity and
innovation. This has proven to be quite beneficial for complex
products.
Some businesses are nonetheless deliberately deciding to
either stay local or reshore, even when t
