More than a decade after many manufacturing companies started moving their production operations to lower-cost countries—especially China—the industry is again on the brink of a major global shift. Many of the offshore cost advantages that once existed are beginning to erode. Wage inflation, rising oil prices and even natural disasters are among the factors affecting offshore supply chain profitability, agility and risk.
Many manufacturers underestimated the offshore impacts of long lead times and high inventory carrying costs. They are discovering that maintaining service levels—in addition to the inventory and logistics buffering costs necessary to support the long-distance supply chain—far outweigh any labor cost advantages. In addition to higher than anticipated overall product costs, offshore production also introduces a latency lag in bringing new products to market and responding to market trends.
Consequently, companies have begun to re-evaluate and consider production shifts to locations that will yield more profitable sourcing strategies. New research published by The Boston Consulting Group highlights the significant economic impact of an emerging reshoring trend to the United States. According to the study, the U.S. is poised to add approximately $100 billion in manufacturing output during this decade via higher exports and the return of production from China across industries—such as machinery; computers and electronics; appliance and electrical equipment; fabricated metals; furniture; transportation goods; and plastic and rubber products—that historically have engaged in offshore outsourcing.
The research further estimates that production of 10 to 30 percent of the goods that the U.S. imports from China in these industries could return to the U.S., and that this added production could create 600,000 to one million direct factory jobs and two million to three million total jobs. Additionally, 20 percent of Asia-sourced finished goods and assemblies consumed in the U.S. will shift to the Americas, according to Gartner Inc.’s “Predicts 2012: Supply Chain Predictions: Talent, Risk and Analytics Dominate” report.
While it’s clearly time for companies to reassess their global manufacturing strategies, they should do so with a deliberate, balanced approach that considers the total cost of manufacturing a product for a specific market, including location, before making any long-term capacity decisions.
Find the balance with supply chain segmentation
Thoughtfully approaching this paradigm shift can help manufacturers avoid repeating the same mistakes made in the initial offshoring surge. Blindly reshoring the entire manufacturing footprint is likely not the right answer. Striking the “right” sourcing balance requires continuous holistic analysis, dynamic processes and the flexibility to rebalance with the speed of change.
To address fluctuating global cost structures and pinpoint the best production strategy for reliable, profitable customer service, manufacturers should leverage supply chain segmentation and create strategies based on those results. This approach should start with understanding the markets that the company serves—the customers, regions and products that are grouped together to define a market. Under this model, different customers associated with different channels and different products are served through different supply chain processes, policies and operational modes. The overarching objective is to derive the best supply chain processes and policies to serve each segmented market at a given point in time while also maximizing profitability and customer service.