It’s time to weigh the options of reshoring, nearshoring, or sticking to the status quo. Enhance your reshoring conversation with these expert perspectives.
Companies indicate that approximately 25% of global supply and manufacturing will move much closer to home over the next three years, according to data from the Capgemini Research Institute. This will only accelerate the trends in reshoring and FDI (Foreign Direct Investment) that we’ve seen surge in recent times. Given government incentives coupled with ongoing global uncertainty and risk, it’s not surprising that the topics of reshoring and nearshoring are at least on management’s radar, if not already on the boardroom agendas, of most organizations.
Wherever your company finds itself in the reshoring discussion process, you may have more questions than answers. To help shed light on the issue, I recently discussed several of those key questions with my colleague, David Pate, Vice President of Operational Excellence, and Harry Moser, founder of the Reshoring Initiative and active participant in President Obama’s insourcing forum.
Here’s a snapshot of what we discussed during the latest edition of TBM’s OnDemand Webcast: Making the Decision to Reshore, Nearshore, or Do Nothing.
The key insights from our talk can help shape the reshoring dialogue happening at your company right now:
- How does reshore/nearshore fit into your company’s strategy?
Assuming that for most manufacturers, every decision must map back to the core competitive requirements of cost, cash, and/or delivery, the reshore/nearshore discussion must be framed within the context of how it impacts these factors and, ultimately, how the company wins more business.To dive deeper, companies need to consider why they (and the U.S. in general) import so much in the first place. Almost always, this comes down to price. However, that price advantage has been steadily eroding over the years, initially because of the numerous and compounded complications of overseas supply chains. And more recently, by frequent, massive, and potentially existential supply chain disruptions we’ve all experienced in recent times.As a result, there’s been a shift in mindset and supply chain strategy as companies start prioritizing the revenue impact over the cheapest price option in their decisions of where to source or where to produce. Obviously, there are tradeoffs to make in any decision. With reshoring and nearshoring, localization may come at a higher price. But if companies look at that price as an insurance policy against disruption, they often find it well worth paying.
- What is the best candidate for a reshoring/nearshoring effort?
As companies think though how they will strategically and tactically change their supply chains to meet competitive requirements, a good approach is to go after the biggest pain points first. After all, companies, like people, respond to stimuli. Organizations are often highly motivated to rethink supply chain strategies for components that are consistently impacting production and driving up lead times due to constant shortages and delays, or those that are always causing quality problems.Other candidates for reshoring include anything coming from overseas subject to 301 tariffs, items with highly volatile demand, and those with a high freight cost to labor cost ratio. Such items may make more sense to source locally, assuming the components are available in your part of the world.
- What criteria should be considered when evaluating nearshoring/reshoring?
Hands down, total cost of ownership is the biggest factor worth analyzing. Companies that have traditionally based supply chain decisions on FOB price or landed cost must think bigger picture and start factoring in everything that affects the P&L and balance sheet. This includes the costs of geopolitical risks, delays and stock outs, carrying extra safety stock, and poor quality, to name a few factors. It also includes value-producing factors, such as the value of a Made in the U.S.A. label for some products and the environmental and social benefits of manufacturing at home or closer to home.Organizations will have to put in some time and effort to think through all the variables and quantify the dollar value of each—plus or minus—to facilitate analysis and create a more accurate picture of the true cost. The Reshoring Initiative offers a free TCO estimator that can help. Based on this tool, company input data, and its own algorithm, the Reshoring Initiative has shown that considering TCO versus simple component price dramatically increases the proportion of items that can be made more profitably in the U.S. vs. China. This number jumps from just 8% based on item price alone to nearly 50% when all costs are fully considered.
- What is the role of operational excellence in the reshoring decision?
As companies look at bringing work back to the U.S., they must consider whether the capacity and capabilities exist to handle that work in profitable ways. Remember that global outsourcing became a thing in large part because overseas companies could do the work more cost-effectively than U.S. facilities could locally. When we began relying so heavily upon facilities in other parts of the world, U.S. manufacturing capabilities atrophied even more in some cases.Now, companies have the opportunity to strengthen those manufacturing muscles and come back stronger than ever. The pursuit of operational excellence and a focus on the concept of “lean shoring” is a great way to do this, and it needs to be a proactive effort integrated early in the process. In other words, companies can’t bring back the work and expect results without investing in improvements to the way the work is done. With labor shortages, automation will be part of the solution. But factory design, workflows, and employee engagement must be part of driving efficiencies as well. As companies invest in new facilities, equipment, and training, they must do so in ways that not only increase capacity, efficiency, and productivity, but also with an eye on being seen as a great place to work. In this way, they can gain an edge when it comes to attracting and retaining labor and building the workforce of the future.
- How can a company check evaluation results against metrics, goals, and tradeoffs?
As companies go through the process of evaluating what and how to reshore or nearshore, they will need better data and a better understanding of their true costs so they can do the math in a meaningful way. Costs, risks, inventory turns, productivity impacts, service levels, and even the larger environmental and social implications of reshoring need to be factored into the equation.
The Reshoring Institute estimates that most companies can bring back around 20% of what they import today, eliminating a great deal of supply chain risk without negatively impacting current profitability. While some materials and components may always need to be part of a global supply chain, U.S. manufacturers have significant opportunity to do more at home or closer to home and realize the many benefits of a reshoring or nearshoring strategy.
Keep the dialogue going at your company.
The decision to reshore, nearshore, or do nothing is a major choice with many implications for the supply chain both strategically and tactically. But it’s one every manufacturer needs to be having. There are many tools available to facilitate analysis and simulate impact as you get deeper into the conversation. And the Reshoring Initiative as well as the supply chain and operational excellence experts at TBM are always available to help. In the meantime, this recap should give your team some additional points to consider. For more insight, download the full OnDemand webcast Making the Decisions to Reshore, Nearshore, or Do Nothing.
