Why bosses should think about rightshoring, not reshoring
18 July 2014 -
A government funding initiative is tempting managers to repatriate overseas production – but they should keep their minds as open as possible, writes a leading supply-chain expert
As the government rolls out more incentives to bring production back to the UK, businesses are being advised to consider their options carefully and make sure that their operational structures are geared to meeting the needs of the marketplace.
The government has recently opened bidding for a new round of funding from the Advanced Manufacturing Supply Chain Initiative, to support domestic supply chains and attract manufacturing back to the UK. With £100m up for grabs, businesses with production facilities in some far-flung parts of the world may well be tempted to consider reshoring some or all of those assets. However, while there are likely to be pros and cons when it comes to bosses considering a move to reshore, it is not a decision that they should ever take lightly.
When reviewing a company’s operational footprint, a number of factors should be considered before taking a decision about where to make efficiencies or drive value. In today’s fast-moving markets, proximity to customers can be a significant advantage. Locating your factory close to your key marketplace will allow the business to work to shorter lead times, which tends to require less stock. This is important, because with interest rates in the UK expected to rise this year or next, keeping stock in the domestic supply chain could soon carry more cost.
Deciding where to locate your production facility also requires a bit of foresight and an understanding of how your product portfolio is likely to evolve in the future. If you are planning to invest in new product development, it is a good idea to keep both your own and your suppliers’ R&D teams close at hand, so they can inform the process and bring next-generation products to market quicker than before. Future technologies should also be considered, particularly if there is likely to be a move to 3D printing, which could allow an operational structure that is more geographically-spread, comprising a number of smaller factories rather than a single, larger facility. Businesses should also take care to ensure that local emotion is removed from the decision-making process, as clearly some changes could result in job losses.
Ideally, a production facility should also locate close to a highly competent, expert supply chain. This will also ensure a shorter supply chain, giving the business greater control over quality and a reliable supply source. Any move to lengthen the supply chain, on the other hand, could increase risk and impact on quality.
Of course, some shoring decisions will be easier to reach than others. For example, if the business relies on the supply of electronic components, reshoring a production facility from Taiwan or Asia back to the UK is unlikely to bring efficiencies. Conversely, if a production facility relies on supplies of automotive or aerospace components, the UK may be exactly the right place to locate, due to its established supply chains and access to skilled labour.
Costs are an important consideration too. Of course, wage costs need to be considered, and while the differential in the costs that apply in the UK and China has closed significantly in recent times, labour can still be bought much more cheaply in some parts of the world. Businesses that use more energy may also find that locating production facilities in the US can drive value because access to shale gas is helping to keep energy prices low.
Despite the variety of factors that should be taken into account when deciding where to locate, the reshoring trend seems to be taking hold. Earlier this year, PwC published a report estimating that it could generate 200,000 jobs in the UK in the next 10 years. A report by the manufacturers’ organisation EEF has also found that one in six companies have reshored production back to the UK in the last three years.
Instead of rushing to reshore operations, however, businesses should be assessing their supply chains globally and basing any restructuring decisions on sound strategic considerations. Instead of thinking ‘reshoring’, the term ‘rightshoring’ is always going to be the best way to secure a more successful and profitable future.
Roy Williams is managing director at Vendigital, a firm of supply chain specialists operating globally and across industry sectors
For resources that address the issues in this article, check out CMI’s change management toolkit.
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