The rush to offshore manufacturing and back-office services was created by the promise of reduced costs. Now, many companies are realizing that they’ve created more problems than they’ve solved. There is more to the total cost of operations than the obvious costs of off-shored production costs and back-office labor. It has an impact on supply-chain disruptions, risk, delay and reputation. It can also reduce the amount of control and the ability to influence outcomes.
What can companies do when taking operations off-shore creates significant supply chain, cash flow and crisis management risks? It’s simple; they can on-shore or re-shore operations. You bring it home.
Is sending business off-shore the best solution?
When it comes to operating a successful business, companies have to weigh risk versus reward. Your bottom line can catch a boost by shifting production off-shore or sourcing supplies from another region, but that creates potential business continuity threats. Off-shoring has been taken for granted as a sound business practice, but that premise is being re-evaluated by Boards of Directors around the world.
A survey by the UK manufacturers’ organization EEF found that:
“the globalised nature of manufacturing and its supply chains... brings the potential for disruptions to business continuity. The survey shows that UK companies are now very aware of future threats to supply chain continuity, with one third of companies viewing it as an issue requiring Board level attention.”
This attitude isn’t unique to the UK. An April report from the Boston Consulting Group shows that 37% of U.S. manufacturing companies with revenues of $1 billion+ were considering re-shoring operations from China to the United States.
The primary forces behind re-shoring
A new report from PricewaterhouseCoopers, “A Homecoming for U.S. Manufacturing?”, identifies the primary catalysts influencing companies to consider re-shoring. They include:
- transportation and energy costs
- currency fluctuations
- domestic market demand
- labor costs
- domestic talent
- availability of capital
- tax and regulatory climate
The report also notes that localizing production can mitigate supply chain disruptions, which totaled $2.2 billion in financial impact for U.S. industrial products companies in 2011.
The price gap is closing
Some companies are actually paying higher wages to workers in other countries, and are seeking to cut those costs by bringing operations back home. For instance, U.S. machinery manufacturer Caterpillar relocated its Canadian locomotive plant to the United States this January due to the fact that Canadian wages, benefits, and pensions were more costly than those at home.
At the same time, wages and manufacturing costs in places like China are steadily climbing, narrowing the gap that allowed companies to pay the price of international shipping and still make a hefty profit.
With off-shore business costs no longer at rock bottom, factors such as extra shipping expenses, quality issues, and mounting supply chain disruptions have caused many companies to realize that they can do it themselves for the same price or less.
Exchange rates also play a role. The US Dollar depreciated during most of the last decade, while the Chinese Yuan currency was rising, narrowing the cost gap between producing domestically versus importing from China.
Customer experience as a competitive edge
Adverse reaction from customers dealing with offshore service desks have caused organizations to repatriate some or all of their customer-facing functions. The cost of replacing disenchanted customers is likely to be expensive compared to operating service desks domestically. More and more organizations are featuring on-shored customer service as one of their differentiators.
Unstable political, cultural, legal and financial climates
Our article on the LonMin disaster illustrates some of the dangers of foreign production, even when it is a necessity. LonMin’s platinum mining operations were all but shuttered by a controversial and bloody strike—over 40 people were killed in the violence. When LonMin’s production ground to a halt, organizations that relied on platinum from LonMin’s South African mine were left in the lurch, while those that paid the extra cost to source from more stable operations were able to continue with business as usual.
Many companies react to events globally by implementing processes that are only adequate for the home territory, and fail to understand the speed and flexibility required to deal with offshore events.
On Thursday, the conclusion will look at intellectual property, geophysical, reputation, and supply-chain issues.
The White Paper "Corporate Crisis Management: Minimize the Chaos" helps executives and other leaders understand the need for a crisis management program and the keys to making it succeed.