United StatesChange Country

“Reshoring” Considerations for SMEs

By Bill Camarda

The global multi-decade megatrend of offshoring manufacturing production to regions with lower labor costs appeared to slow—and possibly even reverse—in recent years, as “reshoring” production to a company’s home country began to make news. But this article’s review of recent research, including studies focused on small and midsize businesses (SMEs), demonstrates that offshoring versus reshoring is far from a binary choice but, instead, an increasingly complex decision—with as many potential answers as there are SMEs asking the question.

Why Offshore—And Why Avoid Offshoring?

 

Offshoring production to low-wage regions emerged as a viable option as globalization reduced tariff barriers and containerization—together with the development of modern intermodal transportation—made long-distance freight shipping faster, more efficient, lower-cost, and more reliable.1 For decades, the default for many companies throughout North America and Europe has been to offshore production wherever possible. Manufacturing in China and other emerging economies has often been viewed as essential to cost competitiveness and, in many cases, to business agility.

 

Even as many firms sent manufacturing offshore, some held back. Some had multiple small production batches that were difficult to produce remotely, or valued relationships with local suppliers. Others expressed concern about maintaining quality control when outsourcing to a distant partner, about goodwill among domestic customers who preferred products made at home, or worries over safeguarding intellectual property.2

 

These arguments are often relevant to companies reconsidering earlier decisions to offshore. Nowadays, three additional considerations may also be at work. First, as emerging market middle classes have grown, rising wages in these markets may erode the cost advantages of long-distance offshoring.3 Second, advanced automation is enabling some manufacturers to competitively manufacture domestically.4 Third, political and economic concerns have led some policymakers to restore (or consider restoring) tariffs, either as a negotiation tactic or indefinitely.5

 

Reshoring: Growing, Flat, or Declining?

 

Reshoring first drew significant attention early in the 2010s, with high profile examples such as GE’s $1 billion repatriation of appliance manufacturing from China, Apple’s announcement that it would make a high-end Macintosh computer in the U.S., and companies from Ford to NCR promising to reshore.6 U.S. organizations such as the Reshoring Initiative advocated for the return of domestic production, and similar initiatives appeared elsewhere.7 Data about the actual extent of reshoring, however, is ambiguous.

 

In March 2018, the Reshoring Initiative reported that reshoring and related foreign direct investment (FDI) announcements added over 171,000 U.S. jobs in 2017, totaling 576,000 jobs returned here since U.S. manufacturing employment bottomed out in 2010.8 Its researchers found reshoring especially widespread in machinery, transportation equipment, and appliances, but also found it accelerating in the apparel industry.9

 

John V. Gray of Ohio State University’s Fisher College of Business and a team of operations management scholars studied SME decisions about whether to reshore production from Asia in a March 2017 report. Six of the nine companies they studied had brought production home, citing reasons such as bad experiences with quality, partner relationships, intellectual property loss, and brand damage.10 Reshoring aimed to fix “unintended consequences of initial offshoring decisions” that were too simple, i.e., considering mainly (or only) production cost. These firms’ subsequent reshoring decisions reflected a more holistic, experience-based assessment of cost and performance. In some cases, local government incentives also shifted the economics towards domestic production.

 

More recently, A.T. Kearney found that the trend to reshore has stalled out. Its 2018 Reshoring Index found record imports from the 14 largest low-cost trading partners throughout Asia, and a substantial reduction of publicly announced reshoring decisions by U.S. firms. It cites several reasons why reshoring is falling short, including “the continued economic benefits of producing labor-intensive products overseas, the fact that significant offshore investments were made that are not easily abandoned, and the domestic shortage of skilled [manufacturing] labor.”11

 

One Size Doesn’t Fit All Supply Chains

 

These diverse findings reinforce the reality that no single solution fits every supply chain. Like the reshorers in Gray’s study, it makes sense for firms to step back and reflect on what they’ve learned through their own experiences, and also consider what might change going forward.

 

Questions companies are considering include: Have their own offshore partners been reliable? Have they been able to consistently maintain quality and delivery schedules with their current sourcing arrangements? Have the relative costs of offshoring versus domestic production shifted, or not? What are the true total costs of each arrangement? (As part of its work to encourage domestic production, the Reshoring Initiative offers an online Total Cost of Ownership Estimator® to help this assessment.12) Will new types of products be offered, and who is best positioned to manufacture them?

 

When assessments like these lead a company to consider reshoring, more questions arise. For example:

 

  • Do the skills and labor exist at home to deliver what’s needed?
  • Will new domestic production be captive—either owned outright or controlled through a strategic investment? Or will the business become dependent on a domestic outsourcing firm as much as it was on the offshore outsourcer?13
  • Is domestic reshoring the best option, or can “nearshoring” to a nearby location offer more value?
  • Would a hybrid mix of sourcing locations reduce risk and allow greater proximity to local markets? Or would that add too much management complexity?14

More companies are recognizing that changing sourcing strategies is complex and requires careful planning, whether moving overseas or back home. Meanwhile, it’s equally true in a fast-changing world that tomorrow’s best sourcing strategies won’t necessarily be the same as today’s—whether that involves reshoring or not.

 

The
Takeaway:

Reshoring isn’t taking U.S. manufacturing by storm, but is nonetheless a consideration for many SMEs. Reshoring has raised important questions that manufacturing and other companies may wish to carefully consider as they plan production strategies both for today, and for the future.

Bill Camarda - The Author

The Author

Bill Camarda

Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.

Sources

1. “Understanding Manufacturing Location Decision Making: Rationales for Retaining, Offshoring, Reshoring, and Hybrid Approaches,” Economic Development Quarterly; https://journals.sagepub.com/doi/abs/10.1177/0891242418800222?journalCode=edqa
2. “SME internationalisation: Offshoring, “backshoring,” or staying at home in New Zealand,” Strategic Outsourcing: An International Journal, https://www.emeraldinsight.com/doi/pdfplus/10.1108/SO-06-2013-0011
3. “4 Reasons Companies are Bringing Manufacturing Back to the U.S.,” Machine Design; https://www.machinedesign.com/blog/4-reasons-companies-are-bringing-manufacturing-back-us
4. “Why manufacturing jobs are coming back to the U.S. — even as companies buy more robots,” Recode; https://www.recode.net/2017/5/26/15656120/manufacturing-jobs-automation-ai-us-increase-robot-sales-reshoring-offshoring
5. “The New Face of Trade: Tariff Battles, Reshoring and Much More,” Supply Chain Brain; https://www.supplychainbrain.com/blogs/1-think-tank/post/28556-the-new-face-of-trade-tariff-battles-reshoring-and-much-more
6. “Why in the world did they reshore? Examining small to medium-sized manufacturer decisions,” Journal of Operations Management; https://www.sciencedirect.com/science/article/abs/pii/S0272696317300086
7. Reshoring Initiative, http://reshorenow.org/
8. Reshoring Initiative 2017 Data Report: Reshoring Plus FDI Job Announcements Up 2,800% Since 2010,” Reshoring Initiative; http://reshorenow.org/blog/reshoring-initiative-2017-data-report-reshoring-plus-fdi-job-announcements-up-2-800-since-2010/
9. Ibid.
10. Why in the world did they reshore? https://www.sciencedirect.com/science/article/abs/pii/S0272696317300086
11. “Reshoring in Reverse Again,” ATKearney; https://www.atkearney.com/documents/20152/1216814/Reshoring+in+Reverse+Again.pdf/c31a24c4-8125-f579-ffe9-03424ea83977
12. “Total Cost of Ownership Estimator,” Reshoring Initiative; http://www.reshorenow.org/tco-estimator/
13. “Entry modes in reshoring strategies: An empirical analysis,” Journal of Purchasing and Supply Management; https://www.sciencedirect.com/science/article/pii/S1478409218300530
14. “Exploring the reshoring and insourcing decision making process: Toward an agenda for future research,” Operations Management Research; https://link.springer.com/article/10.1007/s12063-016-0113-0

Related Articles

Outsourcing and Its Benefits in International Trade
Supply Chain Management Business Process Outsourcing Can Offer Efficiency and Cost Savings
The Evolution of Global Business Services