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Paavo Käkelä

Innovation

Offshoring, Reshoring, or Rightshoring?

Transform your manufacturing operations in three steps

Published: Tuesday, February 18, 2020 - 13:02

After two decades of offshore productions in low-cost countries, manufacturers are now struggling with the rapidly growing salaries and countereffects of cheap production. The question that industries are asking today is: Do we continue offshoring, or should we consider reshoring?

The right answer, according to Paavo Kakela, the CEO of EID Robotics, who provides modular microfactory systems, is that manufacturers should transform their operations to rightshoring.

During the 1990s, U.S. manufacturers were sold by the lower cost of Asian labor. This is how the global offshoring boom started in Asia. By the 2000 millennium, offshoring began to peak; it maintained this growth trend until 2010—the year when U.S. domestic-manufacturing employment rates reached all-time lows.

Offshoring troubles

How times have changed. Since then, manufacturing salaries in Asia have risen dramatically, and manufacturers have experienced the flip side of cheap overseas production: This includes low quality, high duties and taxes, expensive freight costs, bloated inventories, and long lead times. China’s 2017 National Intelligence Law, which requires Chinese companies to contribute to national intelligence, has made intellectual property thefts a nightmare. Environmental and social issues are causing substantial damage to manufacturers’ reputations. Lastly, the rise of protectionist policies and continuous global uncertainty has turned the tide for offshoring; it simply doesn’t guarantee profits anymore.

Since 2010 rapid advancements in automation technologies, robotics, and predictive analytics have propelled reshoring to become a more prominent alternative to offshoring.

According to the pro-reshoring industry coalition Reshoring Initiative, for the first time since 1970, reshoring in 2016 generated more manufacturing jobs in the United States than what was offshored overseas. In 2017, a record number of 170,000 manufacturing jobs were announced in the United States. A year later, a total of 145,000 jobs were announced by 1,389 companies.

Benefits of reshoring

The benefits of reshoring sound great. How can manufacturers resist tax incentives, higher quality, shorter lead times, and smaller inventories, while also meeting fluctuating customer demands quickly, collaborating more easily, finding skilled and innovative workers, and protecting intellectual property? Selling locally made, premium-priced products, eliminating import duties, and reducing transportation costs can increase profits substantially. So, the benefits of reshoring can eventually exceed the savings that firms get due to low overseas wages.

However, despite its lucrative benefits, reshoring is not as easy as you might think.

Reshoring challenges

Many companies have reshored at least a part of their production. However, most companies still continue their manufacturing in Asia, simply because it’s often more cost-efficient, due to the vast infrastructure that has been built up in the region during the past decades.

Some countries have lost skilled manufacturing engineers, technicians, and tooling specialists as a result of offshoring, and so recruitment could become a severe roadblock for large-scale reshoring. Further barriers include the high labor costs of the West, and in turn, the expensive energy costs found in Europe.

Interestingly, a survey by the Manufacturing Group of the University of Warwick, which was conducted for the industry body, Reshoring UK, found that only 13 percent of companies have directly reshored. However, 52 percent have reshored indirectly—this means that instead of bringing the bulk of production home, they built additional capacity there.

Reshoring in large volumes to Europe or the United States is difficult and costly. As a result, forerunner industries have stopped thinking of whether to offshore or reshore. Instead, they are seeking strategies for rightshoring.

A smart rightshoring strategy can generate positive economic net-value, deliver a competitive advantage in the long-term, and contribute to a more sustainable future.

How can I build a profitable rightshoring model?

There is no single rightshoring model that works for every manufacturer. We developed a three-step approach to planning rightshoring. It involves having a business case, a strategy, and technology. We suggest you start by calculating the return on investment (ROI) to see if there is a business case that will work for your company.

Business case

Rightshoring is just like any other investment. It must pay back initial costs; otherwise, it’s not worth pursuing. Calculate the ROI for local manufacturing to determine if reshoring makes economic sense for your company. Here are the three primary value contributors to consider.

Cost savings due to higher quality
One of the biggest offshoring disappointments has been inferior product quality, which increases the costs in multiple ways—through customer returns, rework, waste, and lost sales. For example, a LED tube manufacturer with an annual production capacity of one million units could reduce the share of faulty units from 3.5 percent to 0.5 percent by moving production from a Chinese factory to a fully automated microfactory in the United States.

Supply chain benefits
The simplified supply chain is a crucial benefit of rightshoring. It saves money because of the lower working capital. In the case of the LED tube manufacturer, the delivery time was reduced from five weeks to one week by radically streamlining the supply chain. You can stack up savings from reduced logistics costs, shorter lead times, more accurate forecasting, better flexibility, smaller inventories, and reduced waste and obsolescence.

Additional sales through higher brand value
As a local manufacturer, you can attach a “Made in USA” or “Made in Europe” label on your products. Depending on the sector, the selling price for domestic products can be as high as double compared to imported products. Even in the commoditized LED tube market, the price of a local product was estimated to be 12 percent higher compared to Chinese products. Additionally, domestic products can sometimes open a door to the public-procurement markets.

Rightshoring strategy

To create a rightshoring strategy in today’s complicated, competitive, and globally networked world is not easy. However, asking yourself the right questions can help you to approach an effective strategy. For example, answering “yes” to these questions might help you decide in favor of reshoring or rightshoring:
• Do you want to protect your nonmaterial property rights by manufacturing locally? Or do you want to develop a new manufacturing process in conjunction with your R&D?
• Are you making high-margin, short-run products designed for local markets? Or are you serving multiple seasons with regional variations?
• Do you need to reduce lead times because of customized products, frequent updates, or highly variable regional demands?
• Does your company have a global system for sourcing raw materials with regional manufacturing and local distribution?
• Do you have exceptionally high transport costs, or are you transporting a lot of individual parts? Could you optimize costs by manufacturing preassembly modules near the needed raw materials if there were cost-efficient, robotized microfactories?
• Do you have significant production volumes, bulky or heavy products, energy-intensive manufacturing, or special logistics requirements?

Automation technology

Let’s face it: Reshoring or rightshoring won’t work simply by moving your overseas production lines home. Cost-efficient and competitive manufacturing in the West requires a lean, centralized organization, one that is extensively robotized, with automated production, big data, and predictive maintenance algorithms.

By harnessing advanced manufacturing technologies, you can minimize the initial capital expenditure and risks, reduce operational costs in the long run, and gain maximum flexibility in your operations.

Agility and scalability are crucial for efficient rightshoring. To get this right, you will need a modular microfactory platform, which allows you to increase the investment gradually, in line with the actual demand. Microfactory lines can be installed in one workday. If you need to change your product design suddenly, they allow for easy modifications and updates. You can add additional modules later if, for instance, testing or packaging is needed. The setup time for installing new modules can be counted in hours.

If there are several distribution plants involved, a cloud-based control solution allows you to centralize the operational team and remotely support the onsite field engineers to guarantee minimum downtime in the process with lower operating expenditure.

When new, updated parts are needed, regardless of a different size or form factor, vision-guided general feeders can enable quick and easy changes to new parts.

For an uninterrupted operation, data are continuously collected from your product lines and analyzed in the cloud. In case of any deviations in the process, problems can be fixed remotely before they stop the production line.

In conclusion

Since the beginning of history, manufacturing has been in a continuous state of transformation. When the global offshoring boom came to its end, manufacturers quickly started to embrace the reshoring strategy. However, the world is an ever-changing and complicated business environment. In the future, successful manufacturers will be those that are quickest to harness the new technologies, including automation, robotics, and data analytics—and those that can carve out a smart, agile, and scalable rightshoring strategy.

Discuss

About The Author

Paavo Käkelä’s picture

Paavo Käkelä

With extended experience in international industrial automation, Paavo Käkelä is the CEO and Entrepreneur in EID Robotics. Käkelä has been developing the ANT Plant Microfactory Concept, a proven alternative to traditional mass-production methods.