To understand the concept of Reshoring, it is important to first understand the concept of Offshoring and why it began.
‘Offshoring – A firm’s decision to relocate production capacity from its home country to an overseas destination’
The relocation of manufacturing to overseas countries picked up momentum and started to become a trend with UK companies in the 1960s. The two main drivers for offshoring are to save on manufacturing/production cost, and to serve the foreign market by siting production locally.
In less developed countries production can cost significantly less than in the UK: lower costs of living permit lower wages and, in some cases, production materials are more readily available locally.
This is a seemingly perfect solution, allowing companies to pay less for production, so keeping prices competitive while ensuring healthy profit margins.
However, evolving markets and unforeseen complications are highlighting the potential downfalls of offshoring. As ‘low cost’ economies upskill, base costs rise and, along with increasing transport costs, eat into profits. Long and complex supply chains are inherently fragile and local or global problems have the potential to cause a sudden and catastrophic collapse of the supply chain.
The recent Coronavirus outbreak has put a spotlight on the fragility of relying on a global supply chain, with a halt on international travel and trade making operations extremely difficult for manufacturers running production abroad. In addition, the distance and lack of presence and oversight that company directors may have over offshore activity can also lead to difficulties in maintaining product quality and dealing with any issues in real time. Now more than ever, companies have the obligation to ensure fair wages and safe working conditions for staff, selecting suppliers that demonstrate corporate social responsibility.
In response to this, many companies are now either in the process of reshoring, or seriously considering this route. There are two types of reshoring:
‘Direct Reshoring – A relocation of offshore production capacity back to the home country’.
‘Indirect Reshoring – A firm’s explicit, strategic decision to increase production capacity at home instead of abroad’.
In many cases, reshoring production to the UK, either directly or indirectly, may cause costs to change and when considered as ‘Total Cost of Acquisition’ may actually reduce outgoings, however for many companies this investment is proving to be worthwhile and also has benefits for the UK economy in terms of increased employment and tax revenue.
Major benefits of reshoring include:
By having a head office and factory in the home country, engineers, quality and supply chain staff can easily access the production line, allowing them to change operations as problems arise and preempt future issues. The ability to swiftly implement new technology enhances responsiveness and increases flexibility to changes in demand and design.
UK law ensures companies are forced to comply with stringent health and safety regulations; minimum pay rates; reasonable working hours etc. and avoids potential problems with lower standards in overseas locations. Local production and, where possible, sourcing of raw materials and components, significantly reduces the carbon footprint of goods.
Risk is significantly reduced by shortening supply chains. It is impossible to predict the timing and impact of global pandemics or financial crashes but reshoring can mitigate the adverse effects on production even if trade is limited or borders are closed.
Brexit has renewed interest in UK employers and UK sourced goods. Keeping production in the UK can be a positive PR move in the current climate and gain not only new customers, but loyal ones who may also be attracted by the environmental and ethical benefits of local production.
When products are manufactured in the UK, any problems with quality can be addressed quickly and easily. Arranging repairs and replacements for displeased customers is a fragile time in the relationship and the manner and efficiency of how problems are dealt with can define the entire company.
Shoring activity in the UK
A recent study by Warwick University showed that since 2008, 70% of companies in the UK have participated in some shoring activity
The study indicated that this trend is likely to reverse going forward with 70% of respondents likely to consider direct reshoring by moving manufacturing bases from abroad into the UK and only 20% planning indirect activity by explicitly increasing capacity at home in order to reduce reliance on offshore production.
The most popular area for reshoring in recent years has been in finished products and assembly. UK manufacturers with offshored component and sub-assembly production were particularly hard hit during the recent lockdown: forced to furlough staff and close down UK facilities as supply chains collapsed.
As lockdown eases and UK industries adjust to the “new normal” there will likely be a great deal of interest in reshoring subcontract services like forging, machining and component manufacture to the UK in order to build resilience in shortened supply chains, reduce carbon footprints, improve operating cash positions and of course help to protect UK manufacturers from future supply chain problems.
Keep It Local: Why Choose Brockhouse?
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