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MM290 often both decisions (offshoring and reshoring)

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MM290 Individual Assignment                                          Student ID: 25016206

 

Introduction

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I have decided to choose reshoring as the topic of this review, more specifically, reshoring in the manufacturing business, in particular in the USA and the United Kingdom. I believe that it is an important and relevant topic which is influencing many companies and industries today more than ever.

In this review, I am going to discuss and analyse the reasons why some companies decided to manufacture in foreign countries as well as why the phenomenon of reshoring is becoming more popular among many industries that used to produce their goods in low-cost labour countries. I am going to discuss the relevance and importance of the topic to organisations today as well as doing a critical review of the key concepts, theories and frameworks used by academics active in the topic area with real-world examples, to highlight the importance of reshoring today.

First, it is important to give reshoring a definition: ‘Reshoring involves the relocation of previously offshored activities to domestic territory’ (Spinks, 2017, p.23). Wiesmann, Snoei, Hilletofth, and Eriksson claim that it is important to consider the fact that from an academic point of view there is not a commonly accepted definition of this term. Gray et al. (2013) introduced some generic assertions that helped to clarify and define the term. Three of them are relevant for this context: “reshoring is a location decision; reshoring can only occur if offshoring has occurred previously; often both decisions (offshoring and reshoring) are flawed”. In Fig.1 we can see the different synonyms used in academic reviews that discussed reshoring. 

Relevance and importance of the topic to organisations today

Why is reshoring relevant to organisations today? The answer to this question can be found if we first ask ourselves: why did offshoring happen in the first place? Offshoring is a practice that started when companies realised that labour in developing countries was much less expensive than in developed countries, which is the main reason why many organisations decided to move the production of their goods, or the offer of their services, to countries with low labour costs to increase profits. “Whether openly stated or not, lower labour costs were almost always the chief rationale” (The Economist, 2013 a). Countries like China not only had low-cost labour but also provided a business-friendly regulatory environment and access to raw materials which is why many companies decided to offshore some or all of their production to China or countries with similar economic characteristics.

Although offshoring has been a successful strategy for many companies over the past decades, the advancement in technology, as well as the increase of wages in low developed countries have proved that in many cases reshoring could be as cost-efficient as offshoring if not more. In fact, a survey conducted by the Boston Consulting Group shows that “until recently … American companies were busy building cross-border supply chains: in 2012, 30% said China was the most likely destination for US company investment. But in 2015, BCG found a shift had occurred: 31% of companies planned to boost production in the US, but only 20% said the same about China.” (Tett, 2017). From this data, we can see that many companies are switching back to production in their country and the advancement in technology will boost this trend, as robots are replacing humans in many jobs, especially in the manufacturing business.

 

Critical analysis and real-world examples

There are some important academic theories that can help us clarify and better understand the manufacturing location decisions that many companies undertake when choosing if they should make their goods in their country or in a foreign country as well as the reason why some companies have decided to reshore part or all of their production. In fact, Transaction Cost Theory (TCT), Resource-Based View (RBV), International Trade Theory and the Ownership-Location-Internalisation (OLI) model, can be used to explain the reasons behind this phenomenon.

TCT indicates that with offshoring, a company may face higher incentive and coordination costs (Williamson, 2008). Geographical distance and cultural differences also play an important role in increasing the risk of an opportunistic behaviour by proprietary offshore production sites (Martínez-Mora and Merino, 2014). This leads to an increase in costs to monitor these locations. The RBV can be used as an argument to explain why reshoring is an increasing trend in many companies because it claims that allocating the firm’s resources through internal sourcing strategies can improve the business performance as well as further develop potential at the operation level. In fact, service excellence, innovation and fast reaction to the market needs, are developed at this level, which is why companies should have full control of these resources (Coates & McDermott, 2002).

Some scholars (Gray et al., 2013; Kinkel and Maloca, 2009) also claim that the decision to offshore, made by some companies, was due to a lack of unbiased knowledge about manufacturing in a foreign country, with the inability to give the right importance to location-specific factors, which led to a wrong decision. It is also true that many factors that influence this type of decision are not easily quantifiable and they can also change over time. The experience obtained by these firms allowed them to have a better comprehension of factors that can influence location-based decisions and led these companies to reshore as it gave them a competitive advance in the long run.

The OLI model is an important tool that can help us explain reshoring. This model considers ownership, location and internalisation advantages and it shows that firms develop their international activities internally if there are internalisation advantages. Concerning the topic of this review, location advantages are the most important factor. Dunning (1998) recognises four analogous location advantages: resource seeking advantages, marketing seeking advantages, locational advantages and strategic asset seeking advantages. These advantages can be recognized by using the conclusions of TCE literature concerning resource specificity and the chance of leakage of intellectual property (Martínez-Mora and Merino, 2014).

The internalisation theory recognises coordinate control over rare, firm-specific, information-based assets as the most effective path for a company to internationalise its activities. This theory puts an emphasis on the importance of differences in production costs that explains worldwide specialisation of manufacturing and cross-border exchanges. Therefore reshoring ought to reflect changes in the accessibility and costs of factors between nations that alter their comparative advantages and re-establish the attractiveness of manufacturing in the original country of the organisation (Martínez-Mora and Merino, 2014).

There are also some other factors that can influence the decision to reshore. Changes in the global economy, political risks, eroding comparative advantages like tax rates and labour costs (which are decreasing over time), instability in exchange rates and increased competition on resource assets, are all factors that explain why reshoring is being taken into consideration by many firms. (Wiesmann et al, 2017).

A report from EY (2017) that invites companies to reshore their activities back to the UK, highlights some important issues that explain why reshoring is a phenomenon on the rise. In fact, transportation costs are driving up the costs of producing overseas, as well as labour cost in low-cost countries has tripled between 2000 and 2010. In these countries there also is a lack of skilled labour and also risks of IP theft because of weaker regulation and enforcement by the government. These factors are the reason why many companies are reshoring, and it is also important to consider the fact that the demand of quick delivery times from customers can be better satisfied if the company manufactures its goods in the country of origin.

There are many real-world examples that support the phenomenon of reshoring. As this topic is very broad, for this assignment I have decided to focus on reshoring in manufacturing in the US and in the UK.

In 2012 Apple’s CEO Tim Cook announced in an interview that the company would invest $100 million on manufacturing in the US in 2013 (Steve Denning, 2012). This was one of the many signals (even if a small one) that even companies that have massively invested in outsourcing and offshoring are realising that in many cases there are not cost-efficient advantages to this approach like before. It is also true that the reshoring movement has to be kept in proportion, as most of the multinational companies which are bringing their production back home are only moving part of their manufacturing in the country of origin. For example, Caterpillar is opening new factories in Texas for its excavators, but it is also still investing in new factories in China (The Economist, 2013 b).

A report from the Reshoring Initiative, which contains data collected from 2010 to the first quarter of 2017 shows that in 2016 the USA gained 27,000 manufacturing jobs. This is a big difference if compared to the number of jobs lost from 2000 to 2003. Indeed, the report shows that between those years, the United States of America lost 220,000 manufacturing jobs every year, for a total of 660,000 lost jobs in only three years.

Although companies are reshoring only part of their production, the fact that many companies of different sizes are embracing this phenomenon is a signal that this trend will increase over time. For instance, General Electric in 2013 moved its production of washing machines, fridges, and heaters from China to a factory in Kentucky which was previously supposed to close. Google decided to produce its Nexus Q in San Jose (The Economist, 2013 b). In 2013 Whirpool announced its plan to move some of its washing machine production from Monterrey, in Mexico, to Ohio, USA. In 2014 General Motors (GM) announced that it would move the production of its Cadillac SRX SUV from Mexico to Tennesse. In 2015 Ford announced it would produce its EcoBoost turbocharged engines in Cleveland. (Oldenski, 2015).

Nevertheless, the fact that some companies are reshoring some of their production does not prove that reshoring has outpaced offshoring. In fact, data suggests that although companies are reshoring some of their production, they are also keeping on investing in their offshoring activities, for example, even though GE reshored some of its production, the company also built new factories in China and India. Ford too advertised its reshoring plan but at the same time it invested $2.5 billion in Mexico (Oldenski, 2015).

Furthermore, the increase in employment in the USA is influenced by the fact that the country is emerging from the Great Recession and this influences the data analysed by many studies that treat reshoring (Oldenski, 2015).

Figure 2 shows that offshoring to China plunged marginally in 2011 and was the same in 2012 as it had been in 2010.In the meantime, offshoring to different nations, for example, Thailand, Brazil, and the Philippines increased.

 

“Despite the impressive corporate names bragging about bringing their manufacturing operations back to the US, the scale has in reality been too small to make a real difference. The number of companies who have actually reshored jobs to the US is well below one hundred” (Khan, 2013). Richard Freedman, from Harvard law school, claims that what some of these companies are doing is “essentially image-building … It might also be that they would like to have some leverage in local politics by setting up these plants.” (Khan, 2013).

Thus, it is very difficult to objectively quantify the phenomenon of reshoring because there are many factors that influence the data studied as well as the changes in the economic environment make it difficult to isolate reshoring from other dynamics that change the advantages and disadvantages of manufacturing abroad rather than in the country of origin.

Another factor that is fundamental to keep in mind is that firms are starting to get ready for the next industrial revolution which will use robots, 3D printing, artificial intelligence (AI) and machine learning that combined together will make human workers obsolete and less efficient as well as massively reducing the number of employees needed to get a job done. “Global manufacturing is at the cusp of a massive transformation as the new economics of energy and labour plays out and a set of new technologies—robotics, artificial intelligence, 3D printing, and nanotechnology—are advancing rapidly. Together these developments will spark a radical transformation of manufacturing around the world over the next decade. The winners in the rapidly changing world of manufacturing will be those firms that have mastered the agility needed to generate rapid and continuous customer-based innovation” (Denning, 2017). So why would a company produce in China rather than in the US if the work is mostly done by robots rather than humans? The advancement in technology will make many business decisions obsolete and only the companies that understand this will be capable of leading the manufacturing industry of the future.

 

Conclusions

As we have seen from this analysis of theory and practice, it is not easy to say whether reshoring is going to be the next trend for companies that invested in low-cost countries or not and there is also not enough data to say whether reshoring is more cost-efficient that offshoring because there are many factors that influence the analysed data.

Many companies in the last decade have started to reshore some or all of their production. Some realised that offshoring was mainly a biased decision that did not take into consideration other factors rather than low-cost labour and then decided to bring their production home; other companies bragged about reshoring while still investing in their factories in developing countries.

The data analysed by many academics that shows a change in trend in employment in the USA has also been influenced by many factors like the Great Recession and this does not clarify if the employment in this country has increased because of reshoring or only because the US has been recovering from the Great Recession.

Many academic tools like RBV, OLI model, TCT and Internalisation theory have helped us understand why for some companies it is more convenient to reshore but it is too soon to have an unbiased opinion about this topic. Furthermore, it is fundamental to keep in mind the fact that the changes in the economic environment make it even more difficult to say if reshoring is more efficient than offshoring.

It is also important to take into consideration the advancement in technology, as because of it, human labour will decrease over time. In fact, this will make offshoring and outsourcing obsolete as the main reason why companies manufacture abroad is because of low-cost labour, but when robots and Internet of Things, combined with 3D Printing will substitute humans there will be no reason to manufacture in other countries as the cost of labour will solely depend on the cost of electricity to power these machines and on maintenance costs. When this happens the main benefit of offshoring (low-cost labour) will vanish and it is believed that this phenomenon will increase and many companies will come back to producing in their own country as there are many advantages to it, such as lower shipping costs as well as less time to satisfy customer needs.

 

In conclusion, reshoring will almost certainly happen, but for the time being, until there is a more widespread advancement in technology, it will remain circumscribed only to a limited number of companies.

 

 

 

 

 

 

 

 

 

 

 

 

References

·       Coates, T. T., & McDermott, C. M. (2002). “An exploratory analysis of new competencies: A resource-based perspective.” Journal of Operations Management, 20, 435–450.

·       Denning S. (2012), Forbes “Why Apple And GE Are Bringing Back Manufacturing.” Online. Available at: https://www.forbes.com/sites/stevedenning/2012/12/07/why-apple-and-ge-are-bringing-manufacturing-back/ Accessed 24 December 2017.

·       Dunning, J.H. (1998), “Location and the multinational enterprise: a neglected factor?”, Journal of International Business Studies, Vol. 29 No. 1, pp. 45-66.

·       EY (2017). Reshoring manufacturing — time to seize the opportunity. PDF p.8. Available at: http://www.ey.com/Publication/vwLUAssets/Reshoring_manufacturing_%E2%80%94_time_to_seize_the_opportunity/$FILE/3451_EY%20Reshoring%20Report_V8%20Online.pdf  Accessed 21 Dec. 2017.

·       Fratocchi L., Ancarani A., Barbieri P, Di Mauro C, Nassimbeni G., Sartor M., Vignoli M., Zanoni A., (2016) “Motivations of manufacturing reshoring: an interpretative framework”, International Journal of Physical Distribution & Logistics Management, Vol.46 Issue: 2, pp.98-127

·       Gray, J., Skowronski, K., Esenduran, G. and Rungtusanatham, M.J. (2013), “The reshoring phenomenon: what supply chain academics ought to know and should do”, Journal of Supply Chain Management, Vol. 49 No. 2, pp. 27-33.

·       Khan, M. (2013). US manufacturing and the troubled promise of reshoring. Online the Guardian. Available at: https://www.theguardian.com/business/2013/jul/24/us-manufacturing-troubled-promise-reshoring  Accessed 26 Dec. 2017.

·       Kinkel, S. and Maloca, S. (2009), “Drivers and antecedents of manufacturing offshoring and backshoring – a German perspective”, Journal of Purchasing and Supply Management, Vol. 15 No. 3, pp. 154-165.

·       Martínez-Mora, C. and Merino, F. (2014), “Offshoring in the Spanish footwear industry: a return journey?”, Journal of Purchasing and Supply Management, Vol. 20 No. 4, pp. 225-237.

·       Oldenski L., Peterson Institute for International Economics (2015). “Policy Brief 15-14: Reshoring by US Firms: What Do the Data Say?”. Online Piie.com. Available at: https://piie.com/publications/pb/pb15-14.pdf  Accessed 26 Dec. 2017.

·       Spinks N. (2017). ‘Lecture 7 Designing and Managing Supply Chains’. PDF Module code: MM290, University of Reading, Available at URL: https://bb.reading.ac.uk/bbcswebdav/pid-3629499-dt-content-rid-8210832_2/xid-8210832_2

·       Tett, G. (2017). Executives take a quiet turn away from globalisation. online Financial Times. Available at: https://www.ft.com/content/2c90e60a-462d-11e7-8519-9f94ee97d996  Accessed 15 Dec. 2017.

·       The Economist (2013a). “The story so far”. Online Economist.com. Available at: https://www.economist.com/news/special-report/21569574-offshoring-has-brought-huge-economic-benefits-heavy-political-price-story-so  Accessed 15 Dec. 2017.

·       The Economist (2013b). “Coming home”. Online Economist.com. Available at: https://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united  Accessed 24 Dec. 2017.

·       Wiesmann, B., Snoei, J. R., Hilletofth, P. & Eriksson, D. (2017). Drivers and barriers to reshoring: a literature review on offshoring in reverse. European Business Review, 29(1): 15-42.

·       Williamson, O.E. (2008), “Outsourcing: transaction cost economics and supply chain management”, Journal of Supply Chain Management, Vol. 44 No. 2, pp. 5-16.

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