As an original equipment manufacturer (OEM), you will have heard the terms 'offshoring', 'onshoring', 'reshoring', 'nearshoring' and the like. If you are planning an outsourcing programme, it's important to understand each term and the implications of choosing between them.
Making the right decision about the location for your manufacturing supply chain could generate significant financial gains for your company - but get it wrong and you could be exposing your business to significant risk.
This blog will examine terms such as offshoring, onshoring, nearshoring, and the lesser-known 'bestshoring' and explain some of the opportunities, challenges, and limitations associated with each.
Offshoring manufacturing - what does it entail?
Offshoring involves relocating part or all of a business function from one country to another, usually to reduce costs and engage particular skills. For instance, a Western-based OEM may outsource the production of one or all of its products to a supplier in China to take advantage of lower wages and material costs and to gain access to a specialised labour market.
OEMs in the developed world began outsourcing production to lower-cost base countries in earnest in the 1970s and 1980s, and that practice accelerated into the new millennium. Between 1994 and 2004, offshoring in the manufacturing sector increased by 35%.
Yet offshoring doesn't come without its issues. The geographical distance between the two parties often means a lack of face-to-face contact, which can undermine trust.
It can also make the OEM vulnerable to threats such as intellectual property theft and fraud. There may also be cultural, linguistic and geographical hurdles to overcome, as well as the practical problems brought on by time differences and local employment laws and practices.
Offshoring can also entail a considerable carbon footprint as products and materials are transported across and between continents. With a new emphasis on sustainability and accountability in the manufacturing world - having a product suite that is better travelled than you - is not always a great look.
What does onshoring mean?
Recently, many companies have begun to reverse their offshoring ventures and bring their operations back to home soil. This phenomenon is known as 'onshoring', 'reshoring', 'inshoring' or 'backshoring'. These terms refer to OEMs continuing to work with contract manufacturing partners but only those that operate within their own countries.
Why is the offshoring model being challenged?
Following on from the race to offshore during the last twenty-five years, what is behind this reverse in trend?
Geopolitical uncertainty and natural disasters have certainly blunted the appeal of off-shoring for many. During the COVID-19 pandemic, supply chain disruption saw the costs of goods skyrocket, and production lines slowed down. The Suez Canal blockage, the war in Ukraine, and the perceived threat to cyber-security from China have all caused OEMs to think twice about their outsourcing arrangements - and wonder if they could be better managed locally.
A note about friend-shoring
Although the trend for onshoring seems a sensible reaction to security threats, many companies are simply looking for more secure and strategic locations overseas while keeping access to cheaper and more flexible labour models. Hence, the new trend in "friend shoring" where you keep your manufacturing abroad but move it to a country that has a more secure relationship with your own. Apple is said to be doing this as it moves much of its production from China to India.
But the costs of off-shoring are still rising
However, rising energy, labour, and transport costs, as well as sustainability considerations (such as the EU supply chain act), have all made the costs of offshoring to distant countries considerably higher.
To put some scale on this, hourly manufacturing wages in China have risen by an average of 12 per cent yearly since 2001. It's easy to see why the impressive profit savings initially associated with the offshoring of yesteryear are under threat.
According to PwC, the growing trend of reshoring jobs once outsourced overseas could boost the UK economy by between 0.4 per cent and 0.8 per cent. In today's values, that's roughly £6bn to £12bn over the next ten years.
Product complexity drives the need for proximity
Of course, cost control and sustainability considerations are not the only factors driving the trend to restore, as Prof Dennis Novy, an expert in trade economics at Warwick University, explains.
"Production runs are becoming much shorter, products are changing much more rapidly, and having access to the manufacturers and the suppliers in a local area makes you much more flexible."
Source: GM Business Growth Hub
With faster product iterations and more complex customisation requirements, having manufacturing facilities close to intended markets means OEMs can collaborate much more closely with their partners to bring products to market faster.
Many UK OEMS are seeing success in bringing home operations
Source: Censuswide, 2023
But these do tend to be highly technical and small volume operations.
For others, there may be countries nearer to home markets where labour is still skilled and cheaper - and where components and raw materials are more accessible - which will make more sense to operate from.
What is nearshoring?
When an OEM outsources part or all of its operation to a nearby country, it is known as 'nearshoring'. This scenario sees the OEM moving its operation to a lower-cost organisation while maintaining a geographic and cultural proximity. It's often seen as the happy middle ground.
Nearshoring may have some of the same cost-saving advantages as offshoring but focuses on reducing geographical and cultural distances between parties.
For example, many Western European OEMs have sought Electronic Manufacturing Services (EMS) partners with Central and Eastern European operations. These are deemed to offer lower cost bases but are within easier travelling distances and are culturally more aligned. As such, the arrangement facilitates closer working relationships between parties while often capitalising on a highly skilled and motivated labour pool. Both the Czech Republic and, latterly, Bulgaria have been eagerly adopted as strategic nearshoring locations for UK OEMs.
Although OEMs seek partners closer to home, there can still be risks associated with nearshoring. For instance, even small geographical distances may affect the standard of service and quality of an overseas production. Although delivery distance is reduced, there are still challenges involved in moving goods between locations. Furthermore, potential environmental and political risks in emerging countries can also jeopardise activities.
As a result many OEMs are working with EMS partners within their own country. This could see, for instance, a London-based OEM outsourcing to a Midlands-based contract manufacturer to escape London wages and unaffordable property prices.
Similarly, an OEM with customers in mainland Europe could gain considerably by partnering with an EMS company who can build, test, and ship on their behalf directly to the OEM’s customers.
What is bestshoring?
Finally, there is 'bestshoring'—or 'right shoring'—which involves taking an objective, highly analytical approach to identifying the best location for your operations and the links in your supply chain.
For global EMS companies, supporting this approach increasingly means acquiring and maintaining strategic, localised production facilities to fulfil regional needs.
In this scenario, an EMS company can retain its global perspective and power but ensure it can deliver for its customers locally, using local supply chains in the most accountable way.
Having a range of locations with regional specialisms, shared goals, and technical capabilities means businesses can 'best shore' as required.
It gives OEMs unparalleled flexibility to access expertise and capabilities in the locations that suit them best:
- Cost efficiency: balancing labour costs, transportation, and tariffs to reduce production expenses.
- Quality control: ensuring high standards by leveraging local expertise and maintaining stringent quality assurance processes.
- Supply chain resilience: minimising risks associated with extended supply chains, such as delays and disruptions.
- Market proximity: locating manufacturing close to key markets to reduce lead times and improve customer responsiveness.
- Aftercare and servicing: ensuring products can be serviced, maintained, and replaced in local facilities rather than being flown around the world will be a major plus in an age of greater sustainability.
- Sustainability: reducing the environmental impact by lowering transportation emissions and utilising local resources.
Like most things, the decision to offshore, onshore, or best shore requires extensive research and investigation. The suitability of any of these approaches depends on the OEM's products in terms of complexity, volumes, size and weight, and customer locations, to name but four aspects.
Choosing a supplier who can offer the full range of end-to-end services in a range of locations will give you confidence in the flexibility of your supply chain - and the scalability of your relationship as you consider your options for future growth.
Editor’s note: this post was originally published in April 2015, and republished in June 2024 for accuracy.
