Today, global supply chains suffer from volatile transportation costs, political instability, and higher offshore labor. At the same time, U.S. onshore operations are becoming more attractive due to availability of AI automation, our desire to reduce our carbon footprint, and U.S. government incentives. In this article I’ll explore the many aspects of onshoring to include the pros, the cons, and the factors driving onshoring.
- Why Do Businesses Choose To OnShore, ReShore, NearShore, or OffShore?
- Recent Factors Making OnShoring Attractive For Manufacturing and Supply Chains.
- Onshoring Considerations Based On Industry And Type Business.
- Pros And Benefits Of OnShoring.
- Cons And Risks Of OnShoring.
- Will OnShoring / ReShoring Continue To Grow In The United States?
Why Do Businesses Choose To OnShore, ReShore, NearShore, or OffShore?
U.S. businesses have been offshoring operations such as manufacturing, coding, customer service, and supply chains for decades. However, in recent years, more companies are now onshoring, reshoring, and nearshoring. Basically, businesses are seeing more opportunities to move their operations closer to their customers in the United States.
So this begs the question, “why do businesses relocate their operations?” The answer is usually two-fold – to save money, to enhance services, or both. Further, this may result in a business outsourcing manufacturing, customer service, or particular supply chain activities to an external service provider. For an example and explanation of outsourcing, see SC Tech Insights’ Outsourcing IT Services – Best Advice On The Benefits And Risks. To detail what all these relocation activities are, below is an explanation of onshoring, reshoring, nearshoring, and offshoring.
“Everybody has a plan until they get punched in the mouth.”Mike Tyson
1. Reshoring Defined.
“This is where a business already has an operation, usually an outsourced manufacturing operation, overseas and transitions it to the United States. In this case, the business may operate the U.S. based facility or could outsource it to a 3rd party company.”
2. Onshoring Defined.
“Many use this term interchangeably with reshoring. However, it can also include establishing a new operation in an U.S.-based facility, not just relocating an established operation. Also, it could include relocating an operation from one domestic location to another. For example, a manufacturer may decide to relocate a manufacturing site from one state to another as a way to reduce labor costs and taxes.”
3. Nearshoring Defined.
“This is the process of setting up operations, usually manufacturing, in the same region or continent as the company doing the nearshoring. For example, a company based in the U.S. may nearshore their manufacturing plant to Mexico or Canada. Lately for U.S. businesses, this is a popular option. This is because of rising labor costs or instability in offshore countries.”
4. Offshoring: Outsourcing Overseas.
For several decades, U.S. companies have offshored manufacturing and services to countries mainly in Asia to save on costs. Originally, offshoring had blossomed due the advent of the internet and lower transportation costs. Recently, labor and transportation costs have risen as well as instability in some regions of the world.
For a more detailed discussion of both offshoring and nearshoring, see SC Tech Insights’ Offshore Vs Nearshore Outsourcing: 11 Practical Decision Factors That Will Help You Make The Best Decision. Also, see Thomas’ What is Onshoring? for information on this topic.
“Master your strengths, outsource your weaknesses.”Ryan Khan
Recent Factors Making OnShoring Attractive For Manufacturing and Supply Chains.
In recent years, onshoring has become an attractive option for many companies. For example, this is evidenced by a recent survey by Thomas where “83% of North American Manufacturers Are Likely to Reshore Their Supply Chains in 2021”. Indeed, this is up significantly from 54% in March 2020. To detail, below are the major reasons that there is a dramatic uptick in U.S. manufacturers looking to onshore.
1. More Global Supply Chain Disruptions.
First, the global pandemic caused unprecedented supply chain disruption. Additionally, instability and anticipated instability in traditional offshore countries like China are major drivers of U.S. interest in onshoring.
“The line between disorder and order lies in logistics…”Sun Tzu
2. Soaring Shipping Costs.
Second, shipping costs have increased across the board. This includes the skyrocketing cost of ocean shipping containers that were in short supply during the pandemic.
3. Major Uptick In Green / Environmental, Social, And Corporate Governance (ESG) Initiatives.
Indeed, transportation and logistics operations are major contributors to carbon emissions. Additionally, companies are implementing Enviironmental Social Governance (ESG) initiatives. Also, many countries are putting in place restrictive regulations and reporting in regard to carbon emissions. As a result, these green initiatives are encouraging companies to onshore to reduce their logistics and transportation footprint.
4. Advances In Smart AI Robotics.
Furthermore, robotics is becoming a driving factor in nearshoring. Without a doubt, robots are getting cheaper and smarter. As a result, this enables U.S.-based productivity to increase. Additionally, smart, autonomous robots are now enabling the automation of many logistics and warehouse tasks. Thus, many of these types of operations and automation initiatives are becoming economically feasible within the U.S.
5. Rising Offshore Labor Costs.
Unquestionably, offshore labor costs continue to rise in countries like China and India.
6. Targeted Increases In U.S. Government Incentives.
Lastly in select industries such as semiconductor manufacturing, the U.S. government is offering incentives to manufacture in the U.S.
For more references on factor making onshoring more attractive, see Yardeni Research’s Onshoring: Back to the USA, SC Tech Insights’ Robotics In Logistics – Stunning Technology With Unlimited Operational Applications and Package Delivery – See How To Stop Surging Costs And Make Your Customers Happy
Onshoring Considerations Based On Industry And Type Business.
When considering onshoring, the type of business and industry must be taken into account. For instance, certain industries, such as automotive and electronics, require specialized components and materials that may not be available in the United States. Additionally, labor-intensive industries, like apparel manufacturing, may be more cost-effective to produce in other countries. Moreover, select industries are currently benefiting from government incentives and tariffs that encourage onshoring operations. Finally, companies are increasingly leveraging smart robotics and AI to reduce the cost of US-based products and services.
When onshoring, businesses should ask the following seven questions:
- Are there local or national financial incentives in the specific industry?
- Is there a good choice of third-party production sites to handle the manufacture of specific goods?
- Are materials and suppliers readily available locally?
- Are there enough skilled people to work in production sites or factories?
- What are there opportunities to optimize the supply chain?
- Will onshoring reduce or increase costs over the long term?
- What is the cost of land and facilities to operate in-country?
Many of the questions above came from Thomas’ What is Onshoring?. Also, for more insights and thoughts on onshoring by industry and type business see, AreaDevelopment’s The Pros and Cons of Onshoring, and Engineering’s Automation Is Making Onshoring Cool Again.
Pros And Benefits Of OnShoring.
Onshoring has several advantages, including improved quality control and faster production times. Also, advantages include reduced risks due to improved communication and shorter shipping times. Additionally, onshoring can lead to increased job opportunities in the United States. Another benefit includes increased tax revenues for the government. To detail, see pros and benefits of onshoring below.
1. Reduces Shipping Costs.
Obviously shortening your supply chain will reduce your shipping costs, especially inbound, international shipping.
2. Reduces Carbon Footprint.
Reducing your transportation and logistics network, reduces your carbon footprint.
“Do not burden future generations with requirements for maintenance or vigilant administration of potential danger due to the careless creation of products, processes or standards.”William McDonough
3. Shorter Lead Times.
Shorter lead times enables your company to be more flexible. Additionally, it is easier to forecast and cash flow can improve. As a result, overall there will be an increase in customer satisfaction and higher service levels.
4. More Proactive With Introducing New Products / Product Mix.
As a result of having more control and having shorter distances between your operations, you can be more proactive. In particular, it is easier to introduce new products and change your product mix quickly.
5. Enhances Operations Communications – Same Culture / Time Zone.
This streamlines your communications and improves the efficiency of your operations staff.
6. Streamlines Supply Chain Management And Costs.
The supply chain is now less complex and costly. In particular, supply managers can both streamline operations procedures and have more flexibility to optimize operations quickly. Also, processing exceptions should be reduced. Further, inventories and inventory management are streamlined. Lastly, it is easier to have full visibility over operations and be more proactive in managing operations as well as with forecasting..
7. Decreases Risks To Supply Chain Disruption.
With a smaller supply chain, there are less disruptions. For example, disruptions include weather, political changes, internal 3rd party changes, communications outages, and so on.
8. Streamlines Compliance and Quality Control.
Now you only need to deal with regulatory compliance within the U.S. and not other countries. Additionally, you are able to streamline product inspection processes and you can be on-site quickly to proactive address quality issues.
9. Takes Advantage of Government Incentives.
U.S. government bodies are offering more and more incentives to onshore operations. Additionally, you can take advantage of government incentives in regard to investment and R&D.
10. Increases Brand Loyalty / Local Support.
There are several onshore advantages to increasing brand loyalty. For instance, there is currently an uptick in the U.S. to buy American-made products. Also, many consumers are concerned about the environment and will be happy to see you are reducing your carbon footprint. Lastly, onshoring increases the number of U.S. jobs. Because of this, onshoring increases loyalty for your brand. Furthermore, you are supporting your local community as well as increasing U.S. tax revenues.
“The real competition is between supply chains, not companies.”Martin Christopher
Cons And Risks Of OnShoring.
Onshoring is not without its risks. For example, companies must consider the cost of relocating operations, the potential for additional regulations, and the risk of labor shortages. Additionally, onshoring can be difficult to implement, as it often requires the company to rework its supply chain and production processes. To detail, see the cons and risks of onshoring below.
1. Higher Labor Costs.
Traditionally, this is the main reason that companies offshore overseas. U.S. labor costs are significantly higher than traditional offshore countries. However, the gap is closing. For example, in China the manufacturing hourly/ labor cost was $4.99 in 2016 and by 2020 it was $6.50. That is over a 30% increase. For more examples and details for other countries, see Statista.
2. Costs And Risks To Relocate.
Relocating a manufacturing or supply chain operation is risky. When it comes to relocating, a company can easily become a victim of poor planning, under budgeting, and subpar execution.
“If you want to kill any idea, get a committee working on it.”Charles Kettering
3. More Government Regulations / Taxes.
When onshoring operations, government regulations and taxes must be taken into account. In a lot of cases, this can result in long lead times, unanticipated costs, and an increase in ongoing costs to comply with regulations. Obviously, planners need to factor in any additional taxes and fees into their budgets.
4. Limited Talent Pool.
Besides high labor costs, you may have challenges attracting qualified people for select job categories. In some cases, this may be just a regional issue depending on skills needed.
5. Limits International Commerce.
If a company elects to manufacture only in its home country, this can limit being competitive in other countries due to shipping costs and lead times.
6. Higher Cost / Less Availability Of Real Estate and Supply Chain Infrastructure.
For some companies and industries, an U.S. operation can be costly in terms of purchasing real estate and building the necessary infrastructure to support operations. Especially for supply chain operations, the U.S. may not have the infrastructure and suppliers necessary to support a manufacturing operation versus traditional offshore countries.
Will OnShoring / ReShoring Continue To Grow In The United States?
Onshoring and reshoring are expected to continue to grow in the United States due to the increasing costs of labor and transportation in traditional offshore countries. Additionally, the availability of skilled labor and improved technology is making onshoring more attractive. Furthermore, as companies continue to look for ways to reduce costs and improve efficiency, onshoring and reshoring are likely to remain popular options.
If you’re thinking about onshoring or reshoring, the outlook is favorable for a variety of industries and businesses. Even if the business case isn’t entirely convincing right now, it could be a better option for your company in the future. To prepare for potential onshoring opportunities, here are some things to consider and plan for.
1. AI and Smart Robotics Opportunities.
Stay abreast of what artificial intelligence (AI) can do for automating and expanding your onshore operations. This may be the time to invest. Further, AI is moving out of the research lab and there are many more opportunities to automate. This includes not only improved efficiency and productivity, but even improving customer experience.
2. Purchase Real Estate.
Looking long-term, this may be a time to purchase real estate to prepare for expanding onshore operations.
3. Build Relationships With Onshore Partners.
Most companies have extensive partnerships and vendors to support their manufacturing and supply chains. So if you are considering relocating some of your operations onshore, you will need new or expanded onshore vendors and partners to be successful.
For more information on things you can do to make onshoring a viable option for your company in the future, see Manufacturing’ The Golden Era Of Onshoring, SC Tech Insights’ 10 Examples Of Artificial Intelligence Technology That Will Empower Your Business, and Logistics Robots – 12 Reasons This Technology Is The Best For Operations And Customer Results
For more information from SC Tech Insights, see Future of Remote Work and Outsourcing IT Services – Best Advice On The Benefits and Risks. Also for more managing supply chain risks, see Unvarnished Facts’ Risk Mitigation For Supply Chains: How To Best Identify, Make Assessment, Overcome.
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