In the face of rising domestic labour costs, many companies moved their manufacturing and assembly operations to low labour cost countries, especially China. However, local wage inflation is eroding the advantage and earthquakes and floods are highlighting the fragility of long-distance supply chains.
Many organisations are re-evaluating their supply chains and moving manufacturing and assembly either to new lower cost locations, such as Vietnam and Indonesia, or closer to their key markets in developed economies, such as Mexico and eastern Europe. The speed of change means that risk factors must be monitored constantly and the supply chain footprint must be flexible, so it can quickly be reconfigured to remain optimal.
“Supply chain cost structures have become dynamic,” says Kelly Thomas, senior vice-president for manufacturing at supply chain specialist JDA Software. “They fluctuate significantly, causing once-profitable sourcing strategies quickly to turn unprofitable. Companies need dynamic processes to find the best strategy for profitable and reliable customer service at a given point in time. The balance between offshoring, nearshoring and reshoring will change continuously.”
Mike Evans, founder of Cambashi, a research and analysis firm, points out that earlier offshoring decisions merely moved costs to suppliers. Such aggressive treatment causes problems in the long run. “Risks can only be reduced by optimising the network as a whole, to add value for the final customer,” he says, “and some reshoring is the result.”
There are significant strategic risks associated with reshoring. If the objective is to move closer to markets, costs will generally be higher than for competitors who remain offshore. There is also the probability that offshore locations in emerging economies become important markets in the long term. Importing from a distance could be difficult compared with local manufacture.
“The risks in reshoring are often as great, if not greater, than the risk associated with offshoring in the first place,” says Steve Healings, group supply chain director at eXception Group, an electronics manufacturer. He advises companies considering reshoring to start by reviewing the drivers and assumptions that caused them to offshore in the first place.
Were the original models simply driven by labour costs, while other factors such as logistics costs, inventory levels, quality, responsiveness, exchange rates, travel costs and so on, ignored? Are changes since the original decision likely to reverse again in the next few years? Or is the rationale still valid, but a poor supplier was selected?
Cost is an important but complex issue in its own right. Darin Buelow, principal at Deloitte Consulting, says the risk of cost escalation lies in six crucial geographically variable components. These are: logistics, labour, utilities, real estate, taxes and government incentives.
By contrast with the economies of scale from long runs typical of offshore manufacture, realising the benefits of moving closer to markets requires the company to manufacture efficiently in small batches, make rapid production changes and quickly introduce new products.
This means that local skills must be available to prevent constant travel by specialists, whether global or regional.
Part of the network effect is the need to examine the supply chain. The risk of disruption and high inventories persists if components continue to be sourced from near the original offshore location, including second and third-tier suppliers. However, there are also risks if new tiers of suppliers are recruited at the new location.
There are also issues of protecting intellectual property and managing the rundown of the offshore facility or contract.
“There are always operational risks in managing the transition,” says Michael Stock, board member for offshoring at the UK’s National Outsourcing Association. “Without the strongest governance, it is impossible to guarantee your outgoing provider will collaborate to its maximum ability.”
One risk is that the company may be using the local outgoing contract manufacturer’s proprietary software. Alternatively, the supplier could use the company’s intellectual property to take up with one of its direct competitors.
Planning the transfer, changing systems and training new staff all present operational and financial risks.
Mr Stock also warns of disruption to ongoing projects. “There will be a period in between notice being given and the final exit date, when there is a lack of resource to begin new projects,” he says. “Inactivity here can delay efficiency gains and result in missed revenue by hampering the timely delivery of new products.”
Even if the reshoring exercise is properly planned and successfully executed, work on risk management must continue.
James Wright, manufacturing and supply chain expert at PA Consulting, warns that few organisations have the framework, policies, skills or culture actively to manage their risks.
Risk management is often the reserve of senior executives and does not include the views of those who are closest to the risks.
“It is also too often an annual spreadsheet exercise,” Mr Wright laments. “The best organisations have clear risk governance in place, establish an active risk management process and integrate this within the business so that mitigations are managed and updated and latest risks identified.”
Members of a supply chain network are exposed to a wide range of risks that could increase costs, cause delivery delays or prevent access to the plants. Sue Butler, director at management consultancy Kurt Salmon, says: “You need to avoid having all your eggs in one basket as a result of concentrating your activity in one region.
“Companies should develop a balanced sourcing portfolio for each product category across regions. If one area is in turmoil, then it can extend its relationships in the other regions that are unaffected.”
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