Reshoring the right way

Posted on 31 Oct 2013 by The Manufacturer

Advice for manufacturers from supply chain specialists.

The past couple of decades have been marked by a stream of organisations shifting operations abroad, lured by the promise of cheap labour and production. However, this dynamic is changing amidst rising costs and an increasingly complex global supply chain and, as such, it is becoming more and more commonplace for manufacturers to consider bringing their operations back home.

Two organisations give their advice on how to get reshoring right from a supply chain perspective.

Les Brookes, CEO of business consultancy firm, Oliver Wight, stresses the importance of making an informed comparison, with the future in mind.

Not so long ago, offshoring represented the cutting edge of business thinking as companies scrambled to leave Western Europe and its high cost of production behind.

Today, many of these same organisations are considering their options, as they face more challenges than they had perhaps bargained for in managing a trans-continental supply chain.

Managing quality and long lead times were to be expected, but now wages for Chinese manufacturing workers are going up by around 20% a year, as the country’s currency continues to strengthen, and the ever-increasing price of fuel is piling upward pressure on costs.

Throw in the risk from potential economic or political turmoil plus the odd natural disaster, and it threatens to compromise the very concept of offshoring as a sound business strategy.

Considered decisions

However, organisations should learn from history and not run for the exit in a similar fashion to which they arrived. Offshoring can still be a highly profitable solution and organisations must ensure they have both quality data and the right processes in place before making any decisions.

There is complexity in understanding the true cost of ownership because of the multiple inputs of the cost base, and organisations need to establish the level of performance – current and future – for each and every one to be able to ‘grab the bar of soap’.

What’s driving you?

It is important to decide whether you are optimising the supply chain around cost, customer service, factory efficiency, a combination of all three, or some other parameter.

Plus you need to take account of your own position in the supply chain, recognising the relative size and influence of different entities within it.

A particularly powerful customer like a supermarket chain for example, will have a major influence on what you do, even if they are two or three tiers downstream.

Analysis shouldn’t be treated as a one-off event but a continuous process of monitoring and evaluation.  The important thing is to create a ‘futuristic’ model that initiates a true cost comparison by capturing all the parameters; for example the cost of shipping; labour; inventory in the supply chain; customer location; the required service response and so on. From this, one can derive the suitability of either path A or B, not just today but also in 12 or even 24 months time.

The quality of demand planning over a minimum 24-month horizon is critical, and staying on top of what the data is telling you will ensure your organisation is always making decisions built on fresh analysis.

Technology tips

Using Integrated Business Planning in the supply chain is one way of providing the means to determine which changes to make and the right time to make them.

It also provides the capability to conduct comprehensive scenario planning that covers a range of “what ifs’, so if you anticipate a sharp rise in the future cost of shipping coupled with an expected increase in demand over the next 24 months, you can model the effects of this and make your move accordingly.

Of course you’ll benefit from some software tools for automated analysis of your data and there are various options here; one such is AIMMS supply chain solution, which supports this process of continuous optimisation.

The challenges of re-shoring are not simply expelled by using the right comparative framework, however.  Organisations also face the task of developing in-house supply chain planning expertise when previously it had been outsourced along with production.

Re-shoring is a substantial decision for any organisation and must be built on solid data and robust processes.  By repeatedly assessing the myriad of variables, organisations will be better placed to make informed decisions with the future in mind.

Phil Bulman, supply chain specialist at Vendigital, examines cost comparisons and support networks available to potential reshorers.

It is unlikely that manufacturers planning to re-shore production of components and products will have found cheaper unit prices, or even delivery costs in the UK.

The tipping point in the decision is often the total cost calculated, considering the obvious freight and duty implications, but often the wider costs of stock-holding, warehousing, scrap and obsolete stock. Not to mention the investment/travel costs associated with managing a long distance supply relationship.

Another key consideration is not just current cost comparisons but the expected trajectory of costs, which often suggest increased labour and freight costs in low cost economies compared with flatter costs in Western Europe, that would further close the gap.

The final decision on whether to reshore or not however, is often heavily affected by softer factors which are less directly included in a TCO (Total Cost of Ownership) calculation.

These include flexibility of supply, faster response times, lead times, quality issues and product development activities. These factors can have significant effect on the success of a business in winning and maintaining business.”

Support available for reshorers

Trade associations and organisations will help businesses looking to reshore production by identifying potential UK-based suppliers through their databases. There are also company databases, such as Kompass UK, which link buyers and sellers worldwide.

Using databases, however, is only part of the picture and it is important that businesses have sought advice on where they should look to source the right supplier.

Often the process requires a more in-depth review and consultant-led businesses can offer the service of headhunting suppliers, providing due diligence checks and matching suppliers to businesses on a number of criteria.”

This process can be an emotional one and it is critical that the business decision is founded on a good business case.”

Hard to find supply bases in the UK

The general perception, in sectors such as the electronics and textiles industries, is that a 360 degree manufacturing capability no longer exists in the UK or European markets.

In the past 15-20 years, these industries off-shored their manufacturing hubs to Asia to drive low-cost, high-volume production and as a result, suppliers and supply chain capability in the West has shrunk considerably.

Some manufacturing capability does still exist in such sectors however. It has simply tended to become much more niche.

Within the electronics sector, for example, UK manufacturers are focused on producing specialised, high-tech, low-volume products where a shorter supply chain can allow for smaller stock holding and greater flexibility in supplying customer demand. The key to growing this capability again will be investment.

Opportunity for efficiency

One of the great advantages of having a local supply chain is the flexibility it allows in responding to customer needs.

When re-shoring production, it is important to assume that a different supply chain will be needed.  More often than not, a shorter supply chain will allow for simpler, slimmed down operations. OEMs should take advantage of the benefits this brings, including the ability to work much more closely with the supplier.

Far-reaching supply chains and outsourcing management responsibilities can become a complex affair which can easily expose businesses to problems because they aren’t fully aware of what is happening in their supply chains.

By taking control of the supply chain, businesses have the opportunity to differentiate their offering when re-shoring, as shorter supply chains can improve lead times, reduce stock holding and allow for variations in the product being manufactured.”