reshoring

What is reshoring?

Reshoring involves a company moving its manufacturing operations from a foreign country to the country in which it is based. The process is the opposite of offshoring, where manufacturing operations are moved overseas to access cheaper labor markets.

Understanding reshoring

Reshoring is the process of transferring product manufacturing from a foreign country back to the country where the products are sold or the company is based.

Reshoring may seem counterintuitive at first – especially if the company will be subject to higher operating costs in its home market.

But there are several reasons why reshoring may be a worthy endeavor:

  • Increasing costs – when costs increase in an overseas market relative to the home market, it becomes a less attractive place to do business. Many companies discover that the small difference in cost is not worth the hassle of maintaining international operations.
  • Trade instability – geopolitical tension can also impact the viability of operations in other countries. China’s increasingly dominant global presence and the trade implications of Brexit are two examples.
  • Regulatory factors – when a business establishes a presence overseas, it may be impacted by various factors such as different materials standards and quality control issues. The country may also fail to recognize intellectual property rights. Reshoring means the company only has to conform to one set of rules or standards.

Industries where reshoring is common 

Reshoring is common in the following industries:

  • Aerospace production.
  • Automotive production.
  • Component manufacturing – such as injection molding, die casting, and computer numerical control (CNC) machining.
  • Complex or intricate product manufacturing.
  • Electronics – in March 2022, for example, the U.S. government prepared to approve a $52 billion incentive package to reshore products such as semiconductors and printed circuit boards (PCBs).
  • Aluminum and steel – in some countries, these industries have benefitted from government support for domestic production.

The future of reshoring

The pandemic has made many businesses aware of the very real risks of having their manufacturing based overseas.

COVID-19 continues to place immense pressure on global supply chains, with factory shutdowns, increasing transportation costs, lower demand, and port closures now so commonplace as to be accepted. 

Technology and its ability to deliver leaner and more automated manufacturing will also be important for the future of restoring.

As labor costs become a smaller fraction of total costs, businesses that once offshored to take advantage of cheap labor are starting to favor markets in closer proximity.

In fact, according to a Gartner survey of 1,300 supply chain professionals, 56% believe automation will make onshore manufacturing economically viable in the future.

Key takeaways:

  • Reshoring is the process of transferring product manufacturing from a foreign country back to the country where the products are sold or the company is based.
  • Reshoring is common in industries such as aerospace and vehicle production, component manufacturing, complex or intricate product manufacturing, steel and aluminum production, and electronics.
  • Reshoring is a practice many believe will increase in popularity. COVID-19 has exposed vulnerabilities in offshore manufacturing operations, while automation is also allowing businesses to reduce labor costs to a point where domestic production is viable.

Connected Business Concepts

Vertical Integration

vertical-integration
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Horizontal vs. Vertical Integration

horizontal-vs-vertical-integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Decoupling

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

Entry Strategies

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.

Disintermediation

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.

Reintermediation

reintermediation
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

Scientific Management

scientific-management
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.

Poka-Yoke

poka-yoke
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.

Gemba Walk

gemba-walk
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.

Dual Track Agile

dual-track-agile
Product discovery is a critical part of agile methodologies, as its aim is to ensure that products customers love are built. Product discovery involves learning through a raft of methods, including design thinking, lean start-up, and A/B testing to name a few. Dual Track Agile is an agile methodology containing two separate tracks: the “discovery” track and the “delivery” track.

Scaled Agile

scaled-agile-lean-development
Scaled Agile Lean Development (ScALeD) helps businesses discover a balanced approach to agile transition and scaling questions. The ScALed approach helps businesses successfully respond to change. Inspired by a combination of lean and agile values, ScALed is practitioner-based and can be completed through various agile frameworks and practices.

Kanban Framework

kanban
Kanban is a lean manufacturing framework first developed by Toyota in the late 1940s. The Kanban framework is a means of visualizing work as it moves through identifying potential bottlenecks. It does that through a process called just-in-time (JIT) manufacturing to optimize engineering processes, speed up manufacturing products, and improve the go-to-market strategy.

Toyota Production System

toyota-production-system
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.

Six Sigma

six-sigma
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.

Read Also: Vertical Integration, Horizontal Integration, Supply Chain, Backward Chaining, Horizontal Market.

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