Offshoring vs. Right-shoring: How to Decide
For more than a decade, companies have used offshoring as a primary strategy for maximizing value in the global manufacturing supply chain. The advantages of offshoring are eroding, however, due to rising wages in overseas locations, volatile fuel costs, global security concerns, and the worldwide economic crisis. In response, some U.S. manufacturers and parts suppliers are exploring "right-shoring"—bringing operations back to, or near, the United States—to claim a competitive advantage.
In considering a right-shoring strategy, manufacturers must evaluate how supply chain adjustments affect their ability to serve customers and remain competitive. To make an informed decision between offshoring and right-shoring, companies must capture, analyze, and manage all supply chain costs 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 indirect logistics costs. For instance, every country has hidden costs related to the maze of legal, cultural, and logistical details essential to operations.
The analysis must also include inventory costs, which are perhaps the most significant hidden logistics expense. With offshore production, companies carry high levels of inventory near target markets to guard against supply chain disruptions such as storms or port strikes. Indirect costs such as obsolescence and lost sales represent a significant portion of diverse products such as clothing, cars, and personal electronic devices.
LESS IS MORE
In a challenging economy, reducing inventory costs is a primary benefit of right-shoring. Lower inventories also help companies adjust more efficiently to changes in customer demand. Products best suited for this 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. Pirating has been one unfortunate by-product of offshoring. Closer proximity of right-shoring can increase management oversight and help protect intellectual property.
- Large size and weight. A product's size and weight is a major factor in shipping costs, so right-shoring can be a good option for larger products such as copiers, televisions, and auto parts.
- Proximity of raw materials. Given unpredictable transportation costs, it may be cost-effective to bring production closer to the source of raw materials rather than continuing to ship overseas.
- Short lead times. Closer proximity to the manufacturer can speed delivery times and responsiveness enough to offset the offshore operation's cost advantage.
THE OUTSOURCING OPTION
Because global offshoring and right-shoring programs can be complex, manufacturers may use third-party logistics providers (3PLs) to help navigate a supply chain strategy that derives the greatest value to the business and provide existing infrastructure that reduces capital investment and distribution costs.
Evaluating the right-shoring approach requires in-depth expertise and global resources. The right 3PL may help manufacturers claim a competitive advantage by managing complexity amid the changing global supply chain.