Although the trend toward offshoring is believed to be driven by one factor—labor costs—there are dozens of other factors that impact the effectiveness of an offshore manufacturing strategy. One, of course, is the location of the end-customer. Another is the location of suppliers. Recent research suggests that efforts toward reshoring – i.e., bringing manufacturing back to the Americas – may be hampered by the industry’s supply base.
Much of the debate around reshoring has focused on labor costs which, in many parts of the Americas, remain higher than offshore. Although wages in the Far East, particularly China, are beginning to increase, many companies find paying domestic workers still too expensive. Several experts in the electronics industry have long maintained that in electronics manufacturing labor costs are not the biggest factor in site location, but offshoring has nevertheless become the norm.
Onshore manufacturers’ dependence on offshore suppliers may be hampering reshoring efforts, according to the research paper Reshoring Manufacturing: Supply Availability, Demand Updating, and Inventory Pooling. One of the conclusions: using offshore suppliers means that onshoring is less cost-effective than it could be. “The reality faced by many offshoring manufacturers contemplating reshoring [is]: as they extensively sourced from local (offshore) suppliers, onshore supply bases have gradually withered,” the report said. “The limited onshore supply availability may force them to continue sourcing from offshore suppliers even if they reshore manufacturing." Manufacturers not only have to consider shipping costs, researchers said, but inventory management practices. Relying on offshore suppliers makes it more challenging to procure components in response to demand changes, for instance.
Supply chain management has evolved in response to this type of problem. Using common components across a variety of end products is one way to optimize an offshore supply base. However, large-volume orders of components that are received all at once lead to inventory and related holding costs for manufacturers. Receiving smaller orders more frequently also adds expense. For some industries, researchers conclude, onshoring can only be optimized if the supply base is also onshore.
What it boils down to are the trade-offs. “Even under identical cost structures, reshoring does not always provide operational advantages,” the research found.
For example, designer apparel, which is expensive to make but relatively cheap to ship (in terms of both regular and rushed/expedited costs), may be suitable for reshoring. Furniture, which is bulky and relatively expensive to ship, may not be suitable for reshoring. Another example is electronics. “They are typically more expensive to make than to ship by sea, but expedited shipping can cost much more than rush production (The World Bank 2011 estimates air freight to cost 12 to 16 times as much as ocean freight),” researchers found. “For such a product, reshoring is more suitable if the manufacturer has high confidence that the product will be a hit.”
The conclusion, researchers said, is the advantages associated with improved market proximity may be offset by the disadvantages due to lost supply proximity. “We show that manufacturers' preferences toward reshoring boil down to trade-offs between operational flexibilities under offshoring and reshoring,” the study concluded.