#2 in a two-part series – Read part one
When thinking about off-shoring, companies have to weigh risk versus reward. Off-shoring can reduce costs, while at the same time increasing a number of serious risks. The practice is being re-evaluated by Boards of Directors around the world. In part one, we examined some of the factors contributing to a resurgence in re-shoring—returning off-shored production to the home front. In this conclusion, we’ll look at some additional factors.
Loss of intellectual property rights
Many companies are also citing patent issues as a main concern. A huge sector of Chinese manufacturing is focused solely on creating cheaper knockoff versions of products belonging to overseas companies, from the “hiPhone 5” to carbon-copies of Ford trucks.
With the legal hurdles facing organizations seeking to protect their intellectual property, the battle over patent protection is yet another obstacle sending manufacturers back to friendly shores.
Climate, geophysical and infrastructure issues
The 2011 Thailand floods demonstrated that cheaper production locations often carry an inherent risk. Climate and geophysical risks, accompanied by a region’s inability to prevent or recover from disaster, can escalate costs rapidly. Since most major hard drive manufacturers had plants in Thailand, the floods created a significant increase in the cost of disk drives, with an accompanying drop in supply.
This, in turn, had an effect on numerous companies that depended on drives as a production input, as well as companies that simply needed to purchase drives. Without a rapid crisis response, the impact on the downstream supply chain can be considerable.
When products are shipped from a foreign country, it’s the company that markets and sells them that puts its reputation at risk. When you literally don’t see your product at all from first step to store, quality control can easily suffer. Local management from another country may hold different standards, or simply not be as invested with the product as you are, resulting in quality lapses or other damaging failures.
In addition, supply chain disruptions due to local politics or natural disasters can result in a loss of business and reputation damage when customers in need can’t get ahold of your product. With operations at home, it’s much simpler to keep a firm grasp on the factors that influence your reputation with all of your stakeholders.
Shipping cargo from Asia to America via ocean takes around 3-4 weeks. Add to that time for customs, inland transport and delays. In the best of times, it’s difficult to establish a just-in-time supply chain when there's a big lead time between manufacturing and delivery.
A company can react much more effectively to market trends and needs if they can receive goods in 4 days rather than 4 weeks. In many industries, being first to market or adapting rapidly to market forces can provide a huge competitive edge.
Re-shore or off-shore?
Offshoring has been shown to reduce costs, at least in the short term, but in the long term it is a prime contributor to a lack of stability and decrease in both quality and innovation. As the debate goes on, several influential factors may still play a role in tipping the scales towards a mass re-shoring movement or shifting major economic players toward a balance between the two.
In the U.S., politicians are promoting competing ideologies—tax benefits for companies that return operations to U.S. soil and tax credits for offshore operations. In the meantime, progressive companies in off-shoring havens like Asia are shifting their thinking toward producing innovation of their own rather than supplying cheap labor and facilities.
Whether re-shoring is right for your company is for you to decide, but there is no doubt that it’s a trend that is raising business continuity, crisis management, and reputation control concerns for organizations world-wide.
For more information on Supply Chain crisis management, read the White Paper "Supply Chain Recovery is a Competitive Capability".