Onshoring vs offshoring: the winds of change

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Was 2012 the year rising labour and transport costs made offshoring a costly and impracticable option?

A rise in labour and transport costs means that offshoring functions to China, and other nations in the Far East, does not always represent best value. In fact, a growing number of western companies have begun repatriating or ‘onshoring’ certain activities.

Surging Costs and Customer Complaints

Fuel prices are one of the main reasons offshoring is becoming less attractive. The U.S. Department of Transportation reported that this year fuel accounts for half of all shipping costs, up from 20 per cent in 2000. Continued political uncertainty in the Middle East has led the Centre for Economics and Business Research to predict that oil prices may continue to rise in the foreseeable future.

Labour costs have also gone up and earlier this year, iPad manufacturer, Foxconn revealed it had increased salaries by between 16 and 25 per cent. These wage hikes have prompted the Taiwanese manufacturing company to evaluate the possibility of opening a number of factories in the USA.

In addition, businesses such as BT and Santander have brought back offshore call centres, in response to mounting customer complaints. The Spanish bank, which previously outsourced to Indian call centres, has now employed staff in Glasgow, Leicester and Liverpool to handle customer calls.

Other difficulties which can arise due to offshoring, include unreliable supply chains, long product lead times, complications arising due to language or time zone differences and the need for local agents to interface with suppliers.

Coming Home

Mulberry and GlaxoSmithKline are two examples of British businesses which have chosen to manufacture products closer to home. The luxury fashion company recently expanded its manufacturing facilities in Somerset, whereas GlaxoSmithKline announced plans to invest £500m in a new, UK based, manufacturing facility. This is the first time in the past 40 years that GSK has built a factory on British soil.

Rising transportation and labour costs, unstable supply chains and customer complaints are contributing to make onshoring a high value proposition for businesses. Whereas western nations such as the UK and USA are looking to make localised production more attractive, offshoring to the Far East is becoming increasingly expensive. In the words of Sir Andrew Witty, CEO of GlaxoSmithKline; “Business has to make rational decisions based on competitive options and UK competitiveness has significantly improved”.

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