Ruth Andrew, Senior Associate at Pinsent Masons, debates the issues surrounding the emerging trend of right shoring.
“The concept right shoring recognises, is that pure cost is not the only factor to be considered when making a decision to re-locate all or part of your manufacturing operations.”
Much has been written about the new buzzword in contracting: right shoring. As a concept, it is not complex – it’s about looking for the right place for parts of your manufacturing operations, whether that is on shore or off shore.
The concept right shoring recognises, is that pure cost is not the only factor to be considered when making a decision to re-locate all or part of your manufacturing operations. The decision will need to take into account multiple financial, commercial and reputational factors to achieve the right end result.
In our increasingly connected world, businesses have more data and information at their fingertips relating to the performance of their supply chain which can be used to make an informed assessment as to the best place for elements of the manufacturing process. In addition, technology is driving consumer demand such that there is an expectation that products will arrive quickly, impacting on the decision as to where products are manufactured. The right shoring decision will be also driven by geo-political issues and the instability of certain countries; the recession which has created wage parity in developed and emerging economies and volatile fuel costs which encourage manufacture near the customer base. From a wider, corporate responsibility angle, businesses need to demonstrate their sustainability credentials and ensure ethical working practices and this may mean a distant manufacturing location is not the right way forward (even if it is the cheapest option).
Moving manufacturing location raises a number of legal challenges for businesses, all of which need to be factored into, and considered as part of, the initial decision to re-locate so the end result is one which is right for the business. These legal challenges include:
- Current contracts: are there any current supply contracts which cannot be switched off to allow the relocation? Or can they be terminated but at a cost?
- Employment issues: would a move cause a redundancy exercise and, if yes, what are the cost (and reputational) implications? In terms of the new location, has it a ready supply of employees with the correct skill sets? Are there employment laws in that country which may prevent the establishment of a flexible workforce going forward?
- Taxation: what is the tax treatment in the new location? Can you obtain any subsidies to help finance set up/ongoing costs? Are there import/export issues and costs to consider which affect the ultimate landed cost of the manufactured items? If you are moving from one location to another, are there any subsidies which will need to be repaid when you leave the original location?
- Finance: how easily can you obtain finance for any set up costs?
- Protecting IP: if the product to be manufactured is complex and requires the disclosure of valuable intellectual property rights and know how, does the proposed country of manufacture have a robust legal system to help you protect those rights?
- Tooling: do you need to relocate tooling? Are you able to transfer it from its current country to the new location without significant cost and disruption? Does the tooling need to meet different legal requirements in the new place of manufacture which would mean it becomes unusable/requires significant and costly re-work to make it compliant?
- Local regulatory requirements: you will need a clear understanding of any local regulatory requirements which will apply in your chosen country. For example, are there restrictions on foreign ownership? Are there local content requirement which impact on your supply chain? What health and safety rules will you have to comply with. What is the impact of complying with the local regulatory requirements on your costings and overall business plan?
- Cultural challenges: is there a cultural fit with the new country? Are there any increased risks of bribery and corruption? Does working in that country give rise to any consumer concerns that the products may not have been ethically produced?
Given the purpose of right shoring is to make a decision which fits emerging business needs, any resulting contracts implementing the right shoring decision need to be flexible in order to future proof the business. The right decision now may not be the right one in two or three years time. All contracts underpinning the right shoring decision need to secure (as far as possible) the benefits for the business in moving location; protect the business from any identified risks and allow for change in the future at the minimum of cost if business conditions change.
Right shoring can bring significant benefits for a business but to make that decision right, it is important to consider all of the issues and pitfalls.