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Offshoring? Nearshoring? Reshoring? Both-shoring?

Sean Rollings, Vice President, Product Marketing, E2open - Friday, February 01, 2013

Balancing Location in Complex Networks: Part One

Time flies and manufacturing moves forward and backwards, backwards and forward, it seems. It’s been four decades since the offshoring of manufacturing became a commonplace practice for American-based businesses in the 1980s. But the current manufacturing buzz is about nearshoring and reshoring, talk that has grown in volume since Apple announced, just before the new year, that it would bring some manufacturing of Macs back to the United States.

Their move is not a solitary venture. “After decades of sending work across the world, companies are rethinking their offshoring strategies,” says Tamzin Booth, European business editor for The Economist, in an introductory essay to a special report on outsourcing and offshoring. A principal reason: the labor cost differential that drove manufacturing to China from the United States is diminishing rapidly.

In a Wharton School report, Hal Sirkin, senior partner and managing director of the Boston Consulting Group, forecasts that during the current decade, 2 to 3 million manufacturing jobs will be reshored “because of the fundamental shift in economics between China and the United States.” According to Sirkin, the rapidly declining divide between Chinese manufacturing wages and those in the U.S. will be the key driver of this process. In 2000, U.S. wages were almost 22 times higher than those in China, but by 2015, wages in the U.S. will be only four times higher.

Additionally, as the automation of manufacturing increases, labor as a percentage of total cost diminishes. Michael E. Porter, professor at Harvard Business School and a leading authority on competitive strategy, is cited in Booth’s essay as noting, “just as companies pursued many unpromising mergers and acquisitions until painful experience brought greater discipline to the field, a lot of chief executives offshored too quickly and too much.” Moreover, Marshall Fisher, professor of operations and information management at Wharton, is quoted in the Wharton article as saying the labor argument for reshoring "grossly oversimplifies the global supply chain" by focusing too much on wage rates. Other factors include transportation and logistics costs, costs incurred from holding the extra inventory needed to guarantee against supply chain risks, longer lead times for developing new products overseas, regulatory issues, customer service requirements, and the challenge of managing quality control and product development from a distance of several thousand miles.

In this context, nearshoring is also emerging as a growing strategic approach for manufacturers. Mexico, which has the strategic advantage of bordering the United States, is increasingly attracting production destined for the Americas that would previously have gone overseas. Average pay for Mexican manufacturing workers is now only slightly higher than for Chinese ones, and the time it takes for goods to travel to North America is measured in days, not months.

The fact that manufacturing jobs are coming back to the United States—or nearer, anyway—does not mean that they are not continuing to develop in Asia. In a recent report for the San Jose Mercury News, Mike Cassidy describes a move by a number of US-based manufacturers to expand manufacturing in both the United States and offshore: “In a global economy there really is no one-size-fits-all strategy. There is offshoring, onshoring, nearshoring and what you might call both-shoring.” This hybrid strategy represents a different kind of onshoring, in which U.S. companies establish or expand foreign-based manufacturing operations to meet the needs of markets emerging in those territories.

In other cases, governments are driving the impetus. A recent Wall Street Journal article details India’s proposals of sweeping curbs on the import of technology products. These regulations would create an expansive “Buy India” mandate requiring a significant percentage of high-tech goods sold in the Indian market to be manufactured locally.

The key point here is that manufacturing strategies are more dynamic and complex than ever, which means that supply chain operations and supporting technologies need to be equally nimble. The cloud offers the perfect environment for this level of flexibility and scalability, enabling companies to manage their global trading networks even as strategies, product mixes, customer markets, and partners continue to change. So even if you put your manufacturing on a barge and float it to continually take advantage of the latest low-cost production site, as Jack Welch once quipped, you need technology that can go where you go and support processes and practices as you need them to.   

The current global manufacturing landscape demands delicate decisions about the locations of manufacturing operations, ones that must take supply chain management issues into serious account. I’ll dive into these concerns in Part Two on this topic—stay tuned!

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