In having manufacturing facilities closer to end customers, “you have to think about what makes sense to be held in your manufacturing facilities in different parts of the world,” explained Sean Adkins, Director of Workforce Optimization, West Monroe Partners. “And also understand that it needs to be a truly collaborative environment and view.”
For example, if there is a demand for a particular product in Asia, it would make sense for the production capacity of that product to stay in Asia if it is already there.
“So it’s not necessarily about bringing manufacturing back to the U.S.,” said Marc Tanowitz, Principal for outsourcing advisory firm Pace Harmon. “It’s about bringing it closer to your customer, wherever that customer is. And again, it’s those customers where the transportation costs and carrying costs are so impactful on your overall economics. So companies are realizing that there is product that makes sense to have near your customer.”
On the other side of the spectrum, as manufacturing continues to experience this evident shift, companies must also consider what processes or strategies they can best utilize effectively to assess which global region works best for what specific production segment is at the core of their business model.
“Our perspective has always been that outsourcing doesn’t mean offshoring,” Tanowitz continued. “Offshoring is one particular lever. More than outsourcing, our approach has always been a bit more objective. One of the key types of projects that our clients ask us for is an assessment: ‘Give us a cost model, give us an assessment of where we should do a particular function or activity business process and what that cost model might look like to help us make a decision of where the right place for us to invest our resources should be.’ We’ve always evaluated domestic versus foreign opportunities and tried to fit those within the context of our clients’ particular problems. So while the majority of the work that we do is under this umbrella of outsourcing advisory services, more than half of our clients find their outsourcing agreements take on a domestic component.”
While regionalization continues to take center stage, businesses in the U.S. must also not underestimate their competition. For example, while manufacturing accounts for only 16 percent of India’s Gross Domestic Product (GDP), it contributes 53 percent of exports and receives 79 percent of foreign direct investments into India, according to “The India Manufacturing Opportunity” report from the Boston Consulting Group (BCG), together with CIL. BCG also cited that India could become the fourth largest manufacturing hub by 2020, verified Devesh Nayel, Senior Vice President & Global Head of Manufacturing and Financial Services, BPO business unit, Capgemini.
“India will be a competitor, provided it can solve some of its issues with infrastructure,” said Nayel. “It has not yet passed the test when it comes to ports or building roads—unlike China. Building a road in China is easier. You draw a straight line on a map and you go and build it. In India, you cannot do that—there is a price of democracy.”
“Thailand is developing as a great manufacturing location but it suffers from political issues and instability,” continued Nayel, citing other global regions of manufacturing opportunity. “People are talking about Vietnam, not only for outsourcing but also for manufacturing. But Vietnam suffers from scale—it’s likely the size of one—if not half—of the cities in China. There is also interest in setting up manufacturing in Brazil because of its natural resources and the cost of labor is more expensive—more expensive than India or China. Mexico is still a suspect case. It has structural and corruption issues and transparency is a big problem there, not unlike India or China.”
Out of sight shouldn’t equate to out of mind