Shifting market, financial and operational issues are proving a game changer for globalisation, with Backshoring increasingly attractive for UK manufacturers. Trend or fad? Colin Chinery reports.
Is the fizz starting to leak from the golden elixir of outsourcing? The headlines suggest so, with reports of manufacturers moving production back to Britain, driven by concerns over higher costs and poor quality.
A recent EEF survey of 300 manufacturers reported that over the past two years one in seven companies have moved its manufacturing operations back to the UK. Three in five were said to be concerned about the financial health of their overseas suppliers.
Suddenly outsourcing, erstwhile alchemist of UK manufacturing, is being jostled by a new kid on the block — backshoring.
A trend that will gather momentum or a blip? A mix, says Dr Jagjit Singh Srai, head of the Centre for International Manufacturing at the Institute for Manufacturing, University of Cambridge.
“Manufacturers are becoming wiser about the complications of outsourcing and the total supply costs involved,” he says. “They are also becoming more careful about new product introduction where there may be sensitivities over intellectual property.
“And they may be more conscious of exchange rate fluctuations which might make an overseas or outsourcing agenda attractive in a particular moment in time, but may not be the case now or from a longer term situation.” Backsourcing can send a good signal about British manufacturing and the UK as a place to do business, says EEF chief economist, Lee Hopley.
“We see it continuing, but not the trickle of one in seven suddenly turning into a flood.” While surveys have failed to identify backshoring as sectoral distinctive, rising logistic and wage costs, shoddy goods, and stock and cash tied up quayside are high among across the board reasons for ‘coming home.’ Hopley identifies others; the increasing competitiveness and efficiency of UK manufacturing, and firms taking more control of strategic manufacturing processes.
“Manufacturers in the UK are now seriously reviewing some of their offshoring policies,” says Simon Griffiths, chief executive of the Manufacturing Advisory Service – West Midlands. “They now realise that whilst piece costs may be cheaper in low cost countries, the total acquisition cost can be far higher. Products sourced in the Far East often have to be paid for before leaving the port. Include six to eight weeks shipping time and safety stock in the UK and you can see two to three months of stock tying up significant amounts of cash — a scarce resource at this time.” “Add in the difficulty in flexing volumes and changing product mix — from a left hand drive to a right hand version, for example — and sourcing offshore can be quite unattractive. We are seeing increasing numbers of companies ‘repatriating’ offshored work and this offers great opportunities for UK suppliers,” says Griffiths.
Even so, the balance of favour is still running strongly on the side of outsourcing. “Clearly companies have made outsourcing work for them, both in terms of delivering cost savings and also in some cases proving an ‘in’ to the market,” says Lee Hopley. For low volume Dutch niche car-maker, Spyker, relocation from the Netherlands to Coventry was prompted by the need to be nearer key suppliers. The weakness of the pound against the euro is believed to have made shifting production to the UK even more attractive.
Lander Automotive of Birmingham B32 is backing both home and away. A leading supplier of sector products including coolant and oil system pipes, seat structures and IP beams, Lander manufactured soft trim components at two plants in Hungary. But rising inflation, wage rates, taxes and logistic costs forced a re-appraisal. The factories were sold and Lander has now backsourced to the West Midlands.
“We have done a complete reversal and reinvented the Birmingham factory,” says MD Roger Whitehouse. “Now we are on a mission to grow significantly from the current £28m to £45m over the next four years.” But Whitehouse discounts talk of a reverse globalisation. “I would hate to give a message saying that everything in the UK is rosy and we can buy everything from here, because we certainly can’t. In fact, we buy in most of our materials from low-cost countries and are increasing our bought-in content from Asia.” In contrast to the EEF report, a survey by the Cambridge University Centre for International Manufacturing showed the vast majority of manufacturers reporting overseas supplier quality and cost as exceeding their expectations. “Where I have sympathy with the EEF report is, yes, quality maintained to a point, but its maintained through lots of manual checking, manual supervision, manual intervention,” says Dr Srai.
“It depends on the product you are after. If you are very much in the low cost category or commoditised products I would anticipate that some quality defects are tolerated by the OEMs or brand holders. More premium products would not be able to accommodate even a relatively small quality failure. The product sector can be a major player as to whether it makes sense or not.” Roger Whitehouse rounds on allegations of poor quality, blaming lack of control by the outsourcers.
“People were naïve and thought they could get something for nothing. Outsourcing through a third party with an agency magically getting parts from somewhere in the world without having to do Advanced Product Quality Planning (APQP) and all the logistic planning and so on — and somehow they would magically get good quality.” “And surprise surprise, they got crap. We’ve done it properly. We’ve got our own manned station out there surveying all potential suppliers, all the APQP correctly and so on. There’s a cost in doing this but it’s worth it.” Size and location of the market are critical factors. “Going overseas in order to get lower cost is rarely attractive,” says Dr. Srai. “But going overseas to also tap overseas markets is extremely attractive. So if your market is closer to home, the outsourcing agenda is less attractive and most firms would not consider this unless they had a market growth potential as well.” If backsourcing is good for UK manufacturing, what are the constraints? “The main one at the moment is lack of capital for significant investment around any restructuring of supply chains,” says Paul Christodoulou of the Centre for International Manufacturing. “However, arguably this is just building up a latent need which will come in a rush when capital flows free up.” The skills issue is another. “Recruiting the right people to bring production back to the UK is critical,” says Lee Hopley. “But those skills may have been lost to the business. It’s an issue many British manufacturers face in increasing capacity here or returning production back to the UK.” The manufacturing location decision is often a very dynamic agenda, says Dr. Srai — written by factors such as market size, operational costs consideration, including total supply costs, new product introduction and exchange rate fluctuations. “It’s a very dynamic environment.
We’ve come across firms that have moved production out of Eastern Europe and put it into a population centre in the UK where one could argue it’s more expensive.
“But what they are doing is building scale and capability for the long term and therefore it makes sense for them. Others will move production in and out of the UK on a more short-term, tactical nature.
It’s a dynamic environment and one should not be too conscious of a trend, one way or the other.
A trend or a fashion? My expectation is that it will fluctuate.”