Reshoring supply chains is currently high on the political agenda. However, while there may be merits for some businesses in reshoring, it is far from risk-free.
The coronavirus pandemic has highlighted some of the vulnerabilities of international supply chains, but while reshoring may be one of 2021’s current trends as a consequence of the pandemic, it is worth noting that globalization was a political target well before the Covid-19 pandemic started. Driven by the belief that globalization leads to job losses “at home” and causes national security concerns, Western governments have increasingly considered the benefits of relocating global supply chains to the home market.
This notion has become most visible in the tensions between the U.S. and China, which saw many companies consider moving their supply chains out of China (but not necessarily to the U.S.) in order to avoid new tariffs. However, it is not just the U.S. Government that is focusing on national supply chains. In the UK, the Government has recently decided to prevent telecoms operators from using equipment produced by the Chinese firm Huawei in the UK’s 5G network, citing national security concerns. It has also been reported that wider plans are being drawn, “Project Defend”, up to reduce UK reliance on Chinese imports.
While reshoring supply chains is something which many Governments would like to see happen, it’s not as simple or risk-free as they might wish for. So, all things considered, is reshoring a risk worth taking?
The Benefits of Reshoring
- Reduced lead times: The greater the distance between the manufacturing location and where the end-customer is located, the longer lead times are expected to be. However, the distance traveled isn’t the only factor that can impact lead times. If a product is shipped from one country to another, lead times can be extended by variables such as border inspections and shipping transfer time. When a business chooses to reshore and decides to move production to where their customer is located, these factors become non-issues – as the product can be transported directly from the manufacturing facility to the end-customer without having to deal with any type of border inspection. Thus, this greatly reduces lead times and transportation costs and as a result enables businesses to react to changes in market demand faster.
- Fewer import tariffs: One of the primary reasons why businesses began to use offshoring was due to lower costs and these lower costs were traditionally supported, in part, by low import tariffs. However, the recent increase in import tariffs have caused some of these cost advantages to shrink, for example due to the U.S.- China trade war or due to the UK leaving the European Union. As tariffs are typically only applied to products entering from a foreign country, reshoring means that businesses can avoid a portion of the import tariffs. It is likely, however, that some of the components businesses will be using will originate “off-shore” so therefore, the associated tariffs will still need to be paid.
- Higher quality products: The idea of offshoring is all about taking advantage of lower costs of production which are available overseas. However, cheaper production costs may often mean that the quality of the products produced are not necessarily the best. While cheap manufacturing was all the rage a few decades ago, many consumers have grown tired of poorly made goods produced with lax manufacturing laws. Due to consumers having a growing interest in quality, value and sustainability (and often willing to pay more for sustainable products), it could be an ideal time to reshore production processes in order to benefit from this consumer trend.
The Risks of Reshoring
- Having to start from scratch: Many of the companies who shipped their manufacturing bases overseas will have to start completely over again if they bring manufacturing back to the domestic market. This is because all of their manufacturing infrastructure may have disappeared when they started offshoring. As a result, companies who reshore will have to build new factories and plants and set up brand new supply chains. While doing this may help the company in the long run, in the short-term it could mean that production slows down for a while. This could cost the company a significant amount of money during the switch.
- Higher labor costs: Labor costs are still generally higher in the west than they are in Asia, the Middle East or Africa. For example, a manufacturing worker in China may get paid only about $5 USD per hour for what it would cost an American or Canadian worker $12-20 USD per hour. So as a result, the cost of wages is significantly higher when reshoring production and therefore may lead to increased prices for the consumer. However, it could be worth noting that the rising cost of labor overseas, combined with the other expenses of offshoring manufacturing e.g., shipping, tariffs, may be more expensive than the increased labor costs associated with reshoring
- Unskilled workers: With manufacturing being offshored for several years when reshoring production, there is the possibility that a business may not be able to find the skilled labor needed for production. As a result, firms will need to invest a lot of time or training in order to bring the workers to the same standard of skills of those in the offshored company, or alternatively, higher wages may need to be paid in order to attract those who already have the required skills.
To reshore or not to reshore? That is the question.
Reshoring needs strategic thought. It’s very easy to change tactic quickly in reaction to changing events, but the long-term view needs to be considered if the move is to be successful. Businesses should avoid a knee-jerk reaction to the Covid-19 crisis and instead explore how to implement resilience into their supply chains, ensuring they are able to handle a range of risks, not just pandemics.
If you conclude that reshoring is not in your best interests, you can still take steps to improve resilience in your supply chains. These might include:
- shortening and simplifying supply chains and ensuring that every “link” in the chain has appropriate plans to cope with a global crisis such as Covid-19 and any similar risks.
- creating reserve “just in case” storage or supply capacity at home.
- multi-sourcing, which involves managing parallel supply chains, with one item of supply sourced from various suppliers.