A Legacy of Offshore Production and Outsourcing

For decades, manufacturing trends have been characterized by an emphasis on American companies sending operations overseas in the name of cutting costs and acquiring new business in emerging markets.

The exodus began in the late 1970s and 80s, as large multinationals began offshoring production and outsourcing to foreign contractors in low-wage environments like China and Southeast Asia, paving the way for mid-market companies to do the same. According to Jack Welch, former CEO of GE and a pioneer of the practice, it would have been ideal to “have every plant you own on a barge to move with currencies and changes in the economy.”

Indeed, GE would send more and more of their manufacturing operations abroad, while also pushing their parts suppliers to make the move. Across industries, production continued its overseas migration, sparking similar moves among mid-market companies.

According to a 2014 report released by The Keystone Group, the vast majority of C-Level mid-market executives surveyed reported having experience with offshoring and/or outsourcing.

Growing Manufacturing Trends: Reshoring Production

The tides may be turning, however, as talk of reshoring production increases in what may prove to be a real trend among American businesses.

In 2013, appliance manufacturer Whirlpool announced that it would be moving some of its production from Mexico to a plant in Clyde, Ohio to save on energy and shipping. Last year, retail behemoth Walmart pledged to buy $250 billion worth of goods made in America over the next ten years––an unmistakable PR move to be sure, but a PR move with an emphasis on Walmart’s bottom line. At the 2013 National Retail Federation Expo, Walmart’s U.S. CEO Bill Simon explained, “manufacturers have…defined the “tipping points” at which manufacturing abroad will no longer make sense.” Even offshore manufacturing pioneer GE has been moving production back to the United States.

The reality is, labor and energy costs are increasing overseas, and there’s a growing pressure to get merchandise into stores faster. According to A.T. Kearney, the industries with the strongest tendencies toward reshoring include electrical equipment, appliance and component manufacturing at 15% of total surveyed, transportation equipment manufacturing at 15%, and the fast-moving, high-turnover apparel industry, with 12%. The top three reasons for reshoring included faster delivery time, improved quality, and positive effects on brand and company image.

Considerations for Mid-Market Companies

For mid-market firms, there are unique challenges at play in making the decision to offshore or re-shore production, requiring a more nuanced approach.

According to the Keystone Group, the “primary rationale for offshoring and outsourcing initiatives” among mid-market companies “included both cost savings and emerging market entry.” However, “nearly a quarter of the respondents did not achieve the level of savings expected prior to beginning the effort. Nearly all respondents reported experiencing increased costs, especially in the areas of labor, raw materials and freight.”

Indeed, managing overseas production can be an especially daunting challenge for mid-market companies, who have fewer resources, on-site employees, and established infrastructure than large corporate enterprises. It requires extremely strong leadership and experienced talent to maintain quality standards and ensure on-time delivery in a more volatile, less transparent overseas supply chain.

The decision to reshore production also presents its own challenges to mid-market companies. Reshoring production is a difficult transition, requiring significant investment and no small amount of risk. Challenges common to companies of any size include higher domestic taxes and the prospect of finding skilled labor in a country where it’s been decades since certain types of manufacturing jobs existed.

Regardless of where the trends are going, commodity prices and labor costs are not necessarily the biggest concerns for mid-market companies. They require a more holistic approach that evaluates multiple factors, including quality control, legal frameworks, management needs, and hidden costs and risks.

At the moment, the Keystone Group reports that just 19% of mid-market executives expect more companies to reshore production in the future, and only 6% have concrete plans to bring manufacturing back to the United States.

A More Balanced Approach: Nearshoring

Another interesting finding in the Keystone Group report was the fact that 25% of executives planned to relocate manufacturing operations to other locations abroad. The report does not provide specifics as to where those operations are going, but it does emphasize that proximity is becoming a more important consideration for the mid-market.

“Nearshoring” is the idea of bringing production closer to key markets in order to reduce the time and expense required for management oversight. Nearshoring would allow companies to build stronger relationships with local teams and vendors and gain more supply chain control. For mid-market wholesale brands and manufacturers in the United States, this could mean moving production to Central and South America. It’s an interesting approach that could provide a more optimal balance between proximity and cost.

In general, when deciding between going abroad, bringing manufacturing back home, or bringing it just a bit closer to home, mid-market wholesalers will have to thoroughly evaluate potential risks and opportunities, and consider long-term strategy as well as cost.

Questions about offshoring, reshoring, nearshoring, or any of the other manufacturing trends we talked about in this post? Experiences to share from the perspective of your own supply chain? Let us know in the comments below.