Right-Shoring Versus Offshoring
For more than a decade, companies have used offshoring as a primary strategy for maximizing value in the global manufacturing supply chain. However, due to rising wages in overseas locations, volatile fuel costs, product quality/safety, global security concerns and the worldwide economic crisis, the advantages of offshoring are eroding. In response, some US manufacturers and parts suppliers are pursuing “right-shoring” – bringing operations back to, or near, the United States – to regain a competitive advantage.
In order to make an informed decision between offshoring and right-shoring, companies must capture, analyze and manage all direct supply chain costs as well as the indirect business costs due to risk and extended management to establish a total landed cost analysis. In addition to straightforward expenses, such as labor, raw materials, property, transportation, warehousing and customs fees, companies must consider the costs of high levels of total inventory from the originating country, on the ocean and at the receiving levels of total inventory from the originating country, on the ocean and at the receiving country. To guard against supply chain disruptions, many companies build in added “safety” stock in anticipation of rejected stock arising throughout the chain.
Products best suited for a right-shoring type of supply chain strategy are ones that have the following traits:
- Complex design that requires closer collaboration with the manufacturer or company headquarters
- High-value intellectual property (minimize pirating)
- Large size and weight
- Proximity of raw materials and final markets
- Short lead times for order delivery and response to changes needed in the marketplace
One of the biggest challenges to right-shoring efforts, however, is not the ability to produce low cost components to compete with the existing offshore base but to be able to provide a “total manufacturing solution” at competitive economics (as described above). In many cases, the original decision to go offshore was made because the US manufacturing base was not capable of providing a concentrated “turnkey” source of the final product.
There appears to be five major hurdles that a “right-shoring” effort must overcome:
- Most offshore component assemblies have labor designed in.
- Offshore suppliers typically offer a complete “one stop shop” supply of finished and packaged assembly.
- Capital incentives (commonly in mold supply) were typically offered as incentives to move offshore in the first place.
- No matter the driving forces, the overall delivered cost must be competitive.
- The psychological fear/hesitation that “once I leave China, I cannot go back”.
When considering whether Right-Shoring is the best solution for your manufacturing facility, bear in mind the volatility of world markets. Is the political situation safe and stable and is there a steady stream of trained employees with top level skills? Also, working across borders or overseas can be challenging.
Permian Plastics understands the challenges associated with manufacturing in today’s global market. We are aware of the importance for manufacturers to be able to adapt to changing market conditions, transportation costs, and a fast response to reduced lead times.