Onshoring: Truth or Consequences?

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Conventional wisdom supported offshoring for many years. It was only a matter of time before it would seep into pop culture. The NBC show “Outsourced” poked fun at the cultural differences between an American novelties company and its call center employees in Mumbai, India. But while the program in 2010 lay bare the seemingly benign side effects of big business putting its money—and faith—in foreign countries, the more serious consequences were already beginning to erode that faith behind the scenes.

Now, in 2012, there’s an “onshoring” renaissance in the U.S., largely an outgrowth of the long trajectory of difficult issues that offshoring has created. The classic assumption that offshoring always saves money is no longer necessarily true. And even small cultural differences have had negative effects on quality, especially in high-tech environments where quality is the main goal. The latest report in 2012 from The Boston

Consulting Group (BCG), which continues to study how onshoring will shape American manufacturing in coming years, has numbers to back up the trend. According to the report, titled “U.S. Manufacturing Nears the Tipping Point: Which Industries, Why, and How Much?,” the U.S. will add 2 to 3 million jobs by 2015 and an estimated $100 billion in annual output in a range of industries. Much of this activity, the report states, will be precisely because of the recognition that keeping operations close to home has its advantages.

Now this may be a surprising revelation, even among business leaders who must constantly evaluate their manufacturing and supply chain options. For some, the impulse to go offshore remains strong. Ultimately a business must weigh many individual factors in order to choose the best strategy. But when you examine closely three overarching reasons for the onshoring phenomenon in the U.S., you begin to understand why in many instances it makes sense.

NCR, the maker of automated teller machines (ATMs), also moved their manufacturing from China to the U.S. to combat chronic quality issues and a disconnect between U.S.-based engineers and designers and the China-based manufacturers. NCR’s customers had also started to require very sophisticated machines with scanning capabilities, and NCR felt they couldn’t risk quality control with an overseas manufacturing operation. Now these sophisticated machines are made at a manufacturing facility in Georgia.

Complex supply chainsThe onshoring renaissance is strong also because of the logistics that are often involved in complex supply chains. Companies are finding that when products are manufactured in other countries, there are many things that managers can’t control simply because they’re not there. With products like clothing and other consumer goods, this usually isn’t an issue, and that’s why these types of products will probably always be manufactured overseas.

There are many documented instances, however, where companies have faltered in the realm of high-tech goods like computers because of quality control issues. In order to keep tabs on these sophisticated products, organizations have had to spend thousands of dollars in travel costs, as well as costs to fix manufacturing mistakes and other missteps. This is one of the main reasons NCR chose to move the manufacturing of their most advanced ATM product to the U.S.—to simply get rid of all the logistical headaches that came with trying to put it together overseas.

Changing feelings in ChinaChina has long been known as the world’s cheap labor manufacturing platform, but China doesn’t see this as a positive anymore. Sure, the country has attracted big business over the last 30 years with its cheap labor message. Now China’s goal is to restructure the economy. The government has already begun to demand intellectual property rights, and it is starting to demand that foreign companies conduct more research in China as well.

This all means that the cost savings of manufacturing in China rather than in America is not such a simple equation anymore. In fact, when it comes to sophisticated products for the American market, it may actually be more expensive to manufacture in China.

“When higher U.S. productivity, logistics, and the many indirect risks and costs of sourcing products in China are taken into account,” says Harold L. Sirkin, a coauthor of the BCG report, “More companies will find it makes good economic sense to make many products in the U.S. for consumption in North America.”

If anything, the China problem has taught this lesson that was perhaps overlooked during the outsourcing boom: Factors other than price are sometimes just as important when determining whether or not to go offshore.

The media has documented countless cases of companies that considered this complex equation and decided to stay home. Simple Wave, a California housewares company, experienced numerous benefits when it decided to bring manufacturing from China to the U.S. Among them were better quality control and the ability to fill orders more quickly—two things that directly affected the company’s bottom line.

Loss of innovationFinally, there is evidence that innovation could eventually be lost to undisciplined offshoring, despite the fact that some of the world’s most creative and “disruptive” ideas still come out of the U.S. Companies can only take advantage of this deep knowledge base in the U.S. when they keep essential functions onshore, which might include research, development, and the manufacturing of their most complex products. And when companies do this, they often find that they are able to foster partnerships with others in the U.S. that will actually further their business goals.

Why is innovation still thriving in the U.S.? Much of this has to do with the way we conduct business. Compared with the rest of the world, the U.S. has a relatively transparent business system that is efficient and fair. Organizations are for the most part familiar with the laws here, and they know they can succeed even with the regulations that are in place. This isn’t necessarily so in other countries, where extreme regulations, questionable business practices, and an extremely different culture can have a stifling affect on innovation.

This certainly does not mean that U.S. companies should ignore emerging markets. Organizations will always have to think globally in order to compete, even if their target market

is close to home. But if companies continually go offshore without a strategic plan, they could be missing out on creating that solid home base that will continue to foster their growth. As competition from India and China intensifies, organizations that have continuously outsourced could find themselves at a disadvantage down the line.

Offshoring certainly still has its advantages in some cases. But for the reasons stated, it is clear today that companies must start to evaluate the decision more critically than in years past. For the right projects, onshoring could actually save an organization money by allowing it to communicate and collaborate more effectively, control business processes, work more efficiently, and maintain the proper amount of oversight.

References:

The Boston Consulting Group. Report, “U.S. Manufacturing Nears the Tipping Point: Which Industries, Why, and How Much?” March 22, 2012.

Holstein, William J., “The Case for Onshoring: Why CEOs Need to Rethink the Impulse to Go Offshore.” chiefexecutive.net. January 25, 2011.

“Is Reshoring Nearing the ‘Tipping Point?’” assemblymag.com. March 26, 2012.

“Buzzworthy Benefits of ‘Reshoring’ Companies,” Forbes. April 4, 2012.

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