Economical fluctuations and the lower labor costs in emerging economies such as China and India have resulted in a predominant trend of offshoring manufacturing for nearly three decades. However, a recent increase of up to 20% in wages in such economies is forcing manufacturers to rethink their offshoring strategy.
In & out of reshoring
In 2013, Apple announced a $100 million Made-in-the-USA push, which started by manufacturing the Mac Pro, a top-of-the-line cylindrical desktop computer used by graphic designers and filmmakers, in a Texas manufacturing plant using domestic components. Accordingly, Google started assembling, though not manufacturing, its Moto X smartphones in the U.S. since nearly all of its parts came from overseas. Less than a year later, Motorola announced that it was closing of assembly factory in Texas by the end of 2014.
According to a recently published research paper's Abstract by Li Chen, Ph.D, from Samuel Johnson Graduate School of Management, Cornell University, and Bin Hu, Ph.D from Kenan-Flagler Business School, University of North Carolina, “limited onshore supply availability may force reshoring manufacturers to remain dependent on offshore suppliers for component resourcing.”
The paper, titled Reshoring Manufacturing: Supply Availability, Demand Updating, and Inventory Pooling, argues that the advantages of improved market proximity may be offset by the disadvantages due to the 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.”
Reconsidering reshoring, or reshoring partially?
Dependency on offshore suppliers impacts the feasibility of reshoring for most OEMs. According to the paper, usually the emphasis is put on onshore manufacturing's cost disadvantage compared with offshoring. However, the results of a survey on multi-national companies operating in China about their recent supply chain restructuring decision and the motivations behind it revealed that “manufacturing jobs are generally not coming back to the U.S., and supply availability is among the top non-cost consideration.”
For many manufacturers the slow adoption of reshoring may possibly be due to the lack of onshore supply availability. Offshoring manufacturers contemplating reshoring regularly source from local (offshore) suppliers. The limited onshore supply availability constitutes a complicated barrier. This reality may force OEMs to continue sourcing from offshore suppliers despite reshoring manufacturing, at least until the reemergence of onshore supply bases.
Dependancy vs. supply base development
The paper's analysis shows that “whether reshoring is preferred to offshoring depends on the prior probability of a high demand, or the demand prospect.” The researchers further investigate operational strategies that can swing manufacturers' preferences for reshoring. The findings reveal “a connection between the classic inventory pooling strategy and the emerging reshoring movement.”
The results of the research also confirm that “offshoring manufacturers' dependence on local (offshore) suppliers leads to operational trade-offs regarding reshoring, and that even under identical cost structures, reshoring does not always provide operational advantages.”
Whether an organization favors reshoring or not will depend on the product and operational characteristics. In the case of electronics, “they are typically more expensive to make than to ship by sea, but expedited shipping can cost much more than rush production.” This means that for this vertical, “reshoring is more suitable if the manufacturer has high confidence that the product will be a hit.”
Otherwise, it will not work, as it happened in the case of the Moto X that led Motorola to shutting down the factory soon after reshoring assembly of the smartphones.
Finally, the study, based on understanding currently-offshoring manufacturers' preferences toward reshoring and their dependence on offshore suppliers due to limited onshore supply availability, suggests that in order to help reshoring manufacturing “policy makers should focus on promoting and fostering onshore supply base developments, so as to reduce reshoring manufacturers' dependence on offshore suppliers.”
Many things still have to change before reshoring manufacturing can become viable and scalable. Let us know your thoughts on the biggest boons and barriers to reshoring in the comments section below.