The equation a manufacturer would use to determine if offshoring makes sense seems like a simple one. This is reinforced by the perception that the difference in labor savings companies can realize through offshoring offset any problems that come along with it. That may have true 10 years ago, but the global labor markets are changing fast.
The Cost of Labor Is Increasing Everywhere
As labor costs continue to rise in countries like China, the cost equation for manufacturers is different too. The difference in labor costs is shrinking and has many companies are seeing better the value in reshoring. This is illustrated by the rate at which reshoring production has increased - 250% since 2012 according to The Boston Consulting Group.
What is important to know is that the decision to offshore is not just about labor costs any more – there is a lot more to be considered. Here are 5 problems with offshore manufacturing and how they are mitigated by reshoring operations.
Delivery times are longer
One of the biggest pressures on manufacturers, equaled only by operating expenses, is lead time. Today, there is constant demand for supply chains to be faster and production more flexible. A clear disadvantage to offshoring is that it adds more time into the manufacturers supply chain – shipping from Asia to N. America adds weeks for shipping alone. This is in direct opposition to what companies need to meet the current demands of their customers.
More Supply Chain Risk
Offshoring takes away control from the manufacturer and adds risk to their supply chain, primarily because it almost always requires more 3rd parties to work. Whether it’s outsourced production or the fact it needs more transportation partners, offshoring always come with additional complexity. The result is more risk, and the threat of supply chain risk is only increasing.
It’s well understood that quality can be a concern when production is offshored. Establishing expectations and managing to those expectations for complex operations from a distance is made more difficult by other challenges like cultural and language barriers. Re-shoring brings production closer to home.
Loss of Intellectual Property
Companies who offshore can’t help but expose some of their IP to suppliers. These types of problems vary by country but working with suppliers is another form of risk manufacturers need to account for.
Lagging Manufacturing Capabilities
A lack of technology investment there, is a another force pushing production here. Growing markets, like ecommerce, are demanding more flexible and demand driven manufacturing capabilities. The smart factory and modern manufacturing is the industry’s response to these next level expectations.
The goal of this article is not to argue that offshoring is going to stop or that reshoring will offset all the jobs moved overseas. The point is to highlight that the economics behind any decision to offshore today are different today that at any point in the past. The cost equation is not that same and it’s worth the time for manufacturing companies to revisit the idea based on their own business model.