The changing balance between risk and reward will see a rise in onshoring over offshoring

k a Blog, Supply Chain

4C Associates‘ third debate of 2013, focused on the changing balance of risk and reward in relation to offshoring and onshoring. Topics discussed included the rise in labour costs in many emerging markets, the risks associated with outsourcing to another country and implementing best practice.

Ed Ainsworth, Managing Director at 4C Associates argued for the motion, whereas Rob Lees, Managing Partner at 4C Associates debated against. The event was hosted by Guy Allen.

What is onshoring?

Onshoring, also known as “reshoring”, refers to the process of moving a business operation from overseas to the local country.

The changing balance between risk and reward will see a rise in onshoring over offshoring

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The number of western companies considering bringing back certain functions is increasing in a number of sectors. GlaxoSmithKline (GSK), Powergen and Santander are all examples of successful businesses which have decided to reshore operations to Britain. The reasons for this shift are numerous but often linked to cost.

“I have first-hand experience of many companies reconsidering their options. A real change in thinking is starting to take place”

It is undeniable that the cost of labour is rising in Asia. Between 2011 and 2012, the average wage for a Chinese manufacturing employee rose by close to 10 per cent. This is not an isolated example and is consistent with salary increases over the past five years. In stark contrast, labour and production costs in western countries are falling.  In the UK salaries have declined by an average of 2.2 per cent since 2005.

Western governments are keen to bring jobs back and are implementing a number of regulations aimed at making onshoring more attractive. These include more flexible labour regulations and grants. In addition, technological advances are significantly reducing production costs and creating less labour intensive manufacturing processes.

Another consideration for western businesses is the dramatic increase in transport costs. The cost of shipping a standard, 40-foot container from Asia to the U.S East Coast has already tripled since 2000 and will double again as oil prices continue to head toward $200 a barrel.

“I’m working with a number of businesses who have started looking at options closer to home; Manchester and Liverpool for example are increasingly attractive locations to set up”

In summary, the changing balance between risk and reward is guaranteed to increase the number of businesses onshoring.

The changing balance between risk and reward will not see a rise in onshoring over offshoring

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In 2003, 40 per cent of American and European outsourcing contracts involved offshore workers. In 2013 this number rose to 67 per cent. A survey carried out by the Chartered Institute of Personnel and Development revealed that the number of employers intending to offshore UK jobs in 2013 has grown to 8 per cent, up from 6 per cent in 2012. These figures show that despite the media attention surrounding onshoring, companies are continuing to offshore certain functions.

“How many of us are wearing, using and buying products made on different shores?”

Wages in Asia are increasing yet they remain well below average salaries in more economically developed nations. In this context, there are still significant savings to be made by offshoring work. More importantly, western countries often lack the labour resources to fulfil their objectives. A flexible workforce is one of the main benefits of offshoring. It allows businesses to remain agile, a vital characteristic in a turbulent global market.

“I have worked with Chinese suppliers on a number of engagements and their capacity to add value can be tremendous”

Apple, one of the most valuable companies on the globe, has been working with Taiwanese manufacturer Foxconn since 2007. In that time the American company has grown its annual gross profit to just under $100m. By collaborating with Foxconn, the business has managed to keep up with ravenous demand for its products and take advantage of the supplier’s flexible workforce, supply chain and high quality production capability.

“Visit your suppliers, call centres and IT hubs. Treat them as an extension of your brand”

Offshoring is not a solution in itself. If a problem exists within a business sending it to another country will not resolve it. Cost is not the only consideration to take into account and effective risk analysis and cultural compatibility are essential. Offshoring is and will continue to be a powerful tool and this is reflected in the growing number of companies which successfully rely on foreign suppliers.

Q&A

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Although the majority of the floor agreed that offshoring could provide benefits to large companies, one attendee questioned the use of the process by smaller businesses. Lees answered that in this case best practice would require identifying a supplier of a similar size. An SME worth less than 5 per cent of a supplier’s business is likely to be pushed to one side if a larger client demands resources. Ainsworth agreed and suggested a parallel could be drawn with companies looking to onshore. GSK, for example, may have the scale and resources to build a factory in the UK, whereas a smaller company may be better off outsourcing production.

The issue of culture was also brought up and one participant underlined the ease of working with suppliers from a similar background. In this context the Philippines were singled out as a high value location, due to the nations’ close relationship with Anglophone countries. He added that French projects were often successfully outsourced to Mauritius.

Supplier risk was also discussed with many participants stressing the need carry out a full assessment of any supplier before going into business with them.  On location quality controls, frequent visits and a thorough understanding of the sourcing and production process were all deemed essential.

Results

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At the request of the floor, it was decided to separate the motion into two votes: one relating to offshoring services and the other for manufacturing.

In both cases, just under three quarters of attendees voted against the motion.

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Supply Management also produced a write up of the event.