Why Companies are Reshoring Manufacturing

The more we think the internet, technological innovation and globalization have forever changed the way we do things, the more that seemingly eternal verities demonstrate their resilience.

The popular belief is that offshoring production won out because of cheaper costs. That is true to a certain extent, but the reality is more nuanced. Consumers were not particularly finicky about quality or about their options, so moving manufacturing to China, Bangladesh or other export platforms required less management attention and therefore raised margins for the companies making the transfer.

But enterprises are now finding that the old saw about the only thing wrong with business is customers and employees remains true. Business has created a monster: the empowered and enabled customer who wants what she wants, in the color and size specified. Oh, and as for delivery, today would be good. Otherwise, just cancel my order.

So, the need for speed and for what used to be called control, but was really better oversight (since the notion of control is illusory in most situations) has returned. To be responsive to the person paying the bill, nearer trumps farther. That costs in the once-developing nations are no longer declining and may be rising doesnt hurt, but it is that shorter leash on both manufacturer and manager that is pulling this process. JL

Alan Tovey reports in The Telegraph:

“With speed to market becoming ever more important and manufacturers seeking greater flexibility to respond to customer requirements, the value of shorter supply chains is on the increase,”

The ebb and flow of global economic tides is increasingly turning in favour of the UK with a growing number of our manufacturing businesses bringing back work to British shores.

A major new report released today from manufacturers’ association EEF found that one in six companies has “reshored” production in the past three years, up from one in seven when a similar study was carried out in 2009.

Having once looked to cut costs by moving production to low-cost emerging nations, more and more businesses are heeding Prime Minister David Cameron’s call in his World Economic Forum speech to come home as these countries’ economies mature and labour costs rise, according to the report Backing Britain – a manufacturing base for the future. But cost isn’t the only reason. Other factors include capitalising on Britain’s reputation for excellence, the ability to create shorter, more responsive supply chains and ease of communication with customers.

“The trend may be gradual but it is highly encouraging to see more reshoring,” said Terry Scuoler, chief executive of EEF. “While it will always be two-way traffic, the need to be closer to customers, to have ever greater control of quality and the continued erosion of low labour costs in some competitor countries mean that in many cases it makes increasingly sound business sense.”

The UK’s manufacturing sector has undergone huge changes over the past few decades, with the relatively high domestic cost base meaning it has stopped focusing on price and now concentrates on offering quality and expertise.

This means manufacturers have to deliver every time – something that can be a problem with factories on the other side of the world and long supply chains.
“With speed to market becoming ever more important and manufacturers seeking greater flexibility to respond to customer requirements, the value of shorter supply chains is on the increase,” the report said. “Among the top reasons for reshoring… is greater certainty around shorter delivery times.”
About a third of companies said this was the prime reason to reshore.
Meeting deadlines is also of extreme importance, with almost a quarter saying the reliability that comes with domestic production was the reason for bringing it home. “This challenge has been heightened by a number of recent events and disruptions – from natural disasters and recession to international transport failures and increasingly congested cargo terminals,” the report noted.
Fluctuating transport costs were also cited by some respondents as a factor.
Meeting the standards required to deliver high-quality products was the prime reason for reshoring production for many companies, but particularly so for smaller businesses where reputation is all and losing a contract because a product did not come up to specification could see a company fail. Quality was the prime reason in 50pc of the cases of reshoring among smaller companies.
“Almost half of manufacturers believe the quality of goods sourced from lower labour cost countries is getting better, with larger companies seemingly better able to secure quality improvements, but confidence that overseas operators will supply to the required specification is not sufficient to many,” the report said.
The benefits of moving work closer to home are also being felt on a pure financial basis for many. Although 3pc of companies said their revenue fell as a result of reshoring, half said it remained stable and two fifths saw it rise. Interestingly, more report seeing profits increase rather than turnover, with three in five saying profits had risen as a result of reshoring.
Inevitably, reshoring delivers a jobs boost but the increase is small, the report found. More than two thirds said employee numbers either remained stable or rose by between 1pc and 5pc.
However, the jobs brought home tend to be worth having, with the report noting that they “are likely to be highly skilled, technical and well paid”.
But reshoring is not without its problems – common issues cited were disruption to production, taking up management time and finding suppliers.
In line with the Coalition’s drive to rebalance the economy, the EEF is now calling on policymakers to take on board the report’s findings. It wants ministers to “think long term. Developing new products, fostering new suppliers and investing in new capacity delivers returns measured in years for many businesses. Government decision-making in many key areas such as tax, skills, climate change policy and our relationship with Europe must become more aligned with the reality of manufacturing investment cycles.”
The EEF adds that a particular concern is high energy taxes for industrial users.
Mr Scuoler adds: “It’s now key that government policy supports the most competitive business environment possible so that we continue to see more companies backing Britain and bringing production back to the UK.”