RESHORING AND NEARSHORING: WHAT IS IT AND WHY DOES IT MATTER?
The people at Multifix get a lot of questions about reshoring and nearshoring, in the article below we try to answer them. Other questions can of course also be answered, click here if you want to contact our experts. For Multifix it doesn’t matter which ‘shore’ is being produced on, we can place production everywhere with our carefully selected suppliers.
Before we zoom in on reshoring and nearshoring, we first explain a bit about the backgrounds: outsourcing and offshoring. The following topics are discussed in the article below:
Offshoring, reshoring and nearshoring: what is it?
Motives for offshoring and reshoring
Sectors and target countries
Offshoring of production
Offshoring, reshoring and nearshoring by Multifix
Globalization, supported by rapid technological innovations, has changed the basis of competition in recent years. In today’s economy, the pressure on companies to improve efficiency and competitiveness therefore raises the question of whether certain activities of the company can and should be outsourced to achieve this goal.
Experts advocate specialization in core competencies and outsourcing other activities in order to increase competitiveness, so that by outsourcing parts of production to external parties, so-called outsourcing, the company can fully focus on their competitive core competencies.
The goal is to continuously invest in the core competencies of companies, to identify or maintain the sources of competitive advantage. Therefore, the issue of outsourcing is still topical and of great importance in order to compete in the market. In particular, established and integrated companies are decisive for that argument, because they succeed in outsourcing non-core activities in order to improve their profitability.
In other words, outsourcing is so important because not only will cost reductions be achieved, but an organization will also be able to develop a range of opportunities to gain competitive advantage and understand where it is appropriate to pursue efficiency improvements.
In the past, the main reason for outsourcing was to save costs, only a few managers paid attention to the actual impact on business value. Nowadays, outsourcing is one of the most important strategic issues in our current business environment, because the company can take advantage of various supplier advantages when outsourcing. In other words, outsourcing is an attractive and powerful strategy to reduce costs while improving performance.
Often the integrated companies attract more specialized and trained people because of their focus on core competencies. As a result, outsourced activities shift from peripheral activities, such as cleaning or security, to slightly more critical business activities.
Another factor why outsourcing cannot be excluded as an opportunity in managers’ strategic planning is that organizations are unable to update all their activities to current technologies and innovations. This is due to the rapid developments in information and communication technology and the increase in the number of demanding customers.
OFFSHORING, RESHORING AND NEARSHORING: WHAT IS IT?
The English term offshoring – or ‘delocalization’ – describes a form of relocation of business functions and processes abroad. The reason for an offshoring decision is usually the more favourable conditions abroad, especially in terms of labor costs or taxes.
The term offshoring can be defined differently from the terms outsourcing, nearshoring, onshoring and reshoring. These terms are explained below.
Offshoring or Outsourcing?
Offshoring refers to the geographic relocation of business functions, while outsourcing refers to the organizational relocation. The relocation of business functions abroad can take place within a company (so-called internal or ‘captive’ offshoring) or through outsourcing to an independent company abroad (so-called ‘offshore outsourcing’). In addition to these two pure offshore forms, there is a range of intermediate forms, such as joint ventures with domestic partners abroad.
Farshoring or nearshoring?
The term ‘offshore outsourcing’ often refers only to relocations to distant countries (‘farshoring’, from a European perspective mainly countries in America or Asia). Nearshoring, the transfer of tasks and functions to nearby countries, must be distinguished from this. Nearshoring is often considered in Europe as a ‘sensible’ alternative to farshoring. From the Dutch point of view, the countries of the eastern expansion of the EU are particularly suitable for this. Small cultural differences, geographical proximity and minimal time differences are just some of the advantages of these countries.
Like offshoring, nearshoring is primarily intended to reduce personnel costs. The monetary benefit of wage differences is less than with farshoring. However, the greater cultural and geographical proximity with almost the same time zone makes cooperation considerably easier.
Offshoring or onshoring?
Onshoring refers to the outsourcing of production or services within the customer’s country of origin, often as a counter-reaction to a failed offshoring project. For onshoring, however, foreign knowledge workers are often deployed, whether or not remotely.
Offshoring or reshoring?
Reshoring is the process of returning the production and manufacturing of goods to the original country of the company. Reshoring is also called onshoring, inshoring or backshoring. It is the opposite of offshoring.
However, Reshoring does not always have positive results for the companies involved. If the effort is poorly managed, or if conditions are not conducive to a smooth transition, reshoring efforts may fail. A company often underestimates the costs and associated logistics planning.
While reshoring is a way to stimulate the domestic economy, it is important for companies to remember that some products are best off-shore, especially those used in other countries. For example, food products grown locally in China are best produced there so that they stay close to the source.
MOTIVES FOR OFFSHORING AND RESHORING
The motives for offshore outsourcing can be roughly divided into business management, political-legal motives, technical-logistical motives and tax motives. Here, for example, the following can be considered in detail:
- Development of new markets
- Development of new procurement markets
- Development of local know-how
- Limited domestic growth potential
- Reduced labor costs
- Trade barriers abroad
- Local content clauses
- Higher export costs
- Lower environmental standards
- More restricted workers’ rights
- Lower occupational health and safety standards
- Shorter/Easier approval procedures
- Infrastructure support
- Shorter distribution channels
- Shorter tender channels
- Reduced transport costs
- More difficult transport
- Lower effective enterprise rate
- Less extensive tax base
- Special economic zones
- Tax relief for foreign companies/industories/legal forms
At the same time, offshoring also brings new costs and risks: more administration and communication, intercultural misunderstandings, infrastructure deficits and many other factors can -depending on the type of business function being relocated- reduce or even overcompensate the benefits of offshoring. Particular attention must be paid to the control of the supplier company.
The risks of offshoring reinforce the need for reshoring. The main argument for reshoring is the rising wage costs in low-wage countries, but also political tensions between, for example, China and the US. Recently, sustainability has also played a role.
Moreover, turnaround times and quality risks are playing an increasing role in buyers’ decisions. Many governments also gave companies subsidies for reshoring or introduced special import taxes, making products from China and India more expensive.
SECTORS AND TARGET COUNTRIES
In addition to multinationals and large companies, medium-sized companies are also increasingly involved in offshoring. The scope of outsourced activities varies from individual sub-functions to complete departments and operational locations. The locations are often located in emerging markets with relatively low wage levels, also known as low-wage countries. Dutch companies mainly outsource to Eastern Europe and Asia; however, outsourcing to other EU countries is not negligible.
In the field of software development, transport costs are extremely low and results can be sent over the Internet in a very short time. In this area, the activities of programming and maintenance as well as program and system design are often shifted abroad.
Compared to the US and the UK, offshoring from the Netherlands has so far been relatively weak, not least because of language and cultural barriers. Since English, for example, is one of the official languages in India, there are advantages here for acquiring orders from Anglo-American countries.
Reshoring is mainly done by industry and ICT, because a lot of offshoring took place in these sectors at the time due to the relatively high wage component in the costs. Over the years, the most popular offshore countries have also changed, as costs and living standards in China become higher. The gap is already a bit smaller.
OFFSHORING OF PRODUCTION
Offshoring of production means moving the production or assembly of goods to another country. Companies usually do this because the labor costs in the other country are low. Offshore production can also take place because the raw materials in the other country are cheap. Companies can also move supporting processes, such as accounting, abroad.
Offshore production means that the production process is moved abroad. For example, a U.S. car manufacturer may relocate the production or assembly of vehicles to Mexico. The term offshoring does not refer to the opening of a factory abroad for that local market. For example, it does not mean opening a BMW plant in the U.S. if the goal is to sell to Americans. In particular, offshoring means moving production abroad and then selling the goods in the company’s home country.
The Ford Motor Company has factories in Mexico. It exports a large part of its Mexican production to the United States. In other words, U.S. consumers buy many Mexican Ford cars. This is an example of offshore production. Labor costs in Mexico are a fraction of those in the United States. By moving to the south of the border, American companies can therefore save a lot of money. Lower production costs help a company become more competitive.
Many hi-tech companies are reluctant to produce their state-of-the-art products in China due to poor enforcement of Chinese intellectual property laws. In other words, there is a high risk of counterfeit products.
OFFSHORING, RESHORING AND NEARSHORING BY MULTIFIX
At our own facility in Shanghai, as well as at a number of stringently selected suppliers in China, we manufacture widely products that meet the strictest quality standards. These suppliers are audited by our own organization in order to establish and secure the quality system. The spectrum of these products is extremely diverse and consists of turning, milling, sheet metal and/or construction parts, extrusions and (injection) casting products made of metal or plastic and composite products.
In the start-up and sampling phase of a project, all predefined requirements and specifications are discussed directly with the supplier(s) by a project manager. Through daily video conferencing between our project teams in the Netherlands and China and personal visits to our suppliers, we ensure that communication is kept short and direct. Only after release of samples by the customer, production is started. After delivery of goods to our Chinese site, they are checked for size and functionality by our own quality department.
In our equipped measuring room/laboratory we can perform the following tests: salt spray test, strength test, chemical analysis and of course dimensional and functional control.
All these measurements and tests are clearly and conveniently reported in SIF documents (Sample Inspection Form), which are freely available at all times. In our facility in Bergeijk a very last quality check is carried out before the goods are delivered to our customers.
Multifix is also the bridge between offshoring and reshoring. If we help customers with reshoring, we can shorten their time-to-market. We close the supply gap with stocks and high quality standards. Products that can still be made well and cheaply in a low-wage country often stay there.
If we take over a customer’s supply chain, we outsource parts in China and parts in Eastern Europe. We have the flexibility to house production worldwide, which allows us to switch quickly in case of problems, and actually eliminates the need for reshoring. It’s all about a healthy night’s sleep for the customer, which we can offer with our experience.
Click here for more information about our offshoring, reshoring and nearshoring capabilities.