A growing number of companies in the UK are considering on-shoring or re-shoring, according to figures from the Bank of England. Higher oil prices are pushing up transport costs, rising prices in the Far East are making products made there more expensive and more companies are concerned at the problems associated with managing an extended supply chain, which means more are looking to source locally rather than wait weeks for components to arrive from the other side of the world.
While CIE welcomes any decision to bring production back to the UK and the country does have some excellent manufacturing capabilities, companies do need to consider the risks before doing so.
According to Steven Healings, Group Supply Chain Director, eXception Group, there are five key questions that companies should ask themselves before deciding whether to re-shore.
As he explains, whilst there’s increasing pressure on outsourced or offshore business to return closer to home, rising labour costs are only part of the equation.
“There are a number of things to consider before making that decision, not least exchange rate fluctuations, logistics costs, support costs, tax, duties and importantly government policy – all key factors in the sourcing decision process. The fact remains that without proper due diligence the risks associated with a significant change in sourcing strategy can be enormous and costly.
The first step when considering re-shoring is to review the existing business model assumptions and the drivers that led you to reach the decision to off-shore in the first place, and the next, what is driving the need to consider re-shoring now. Was the original business model simply labour cost driven with logistics costs, inventory levels, cashflow, quality, responsiveness, exchange rates and travel costs not considered or considered to be marginal factors?
Secondly, are the factors or parameters that have changed since the original sourcing decision was made likely to reverse again in the next few years, or are the fundamentals that had driven the off-shore decision initially still true but a poor supplier was chosen? Will re-shoring bring production close to the markets of today but be moving further away from the end markets of tomorrow?
Due to the recent trend in off-shoring and outsourcing, left in its wake are the skills and knowledge gaps that many industries face as jobs have been lost to lower cost overseas suppliers. With this in mind, consideration needs to be given when bringing production back to the UK, that the supplier selected can meet the needs of your business, has the skill in its workforce and the processes that will allow it to fulfill demand. A robust assessment is needed to ensure the supplier will be able to manage any forthcoming product and knowledge transfer, particularly when the off-shore supplier may be less than co-operative. A clear transfer methodology must be deployed.
Agree the risks to a transfer programme with the new supplier and put in place contingency plans to ensure a successful transfer. In any process that involves the change of a key supplier, planning the cut-over and ensuring continuity of supply for end customers is an essential part of managing the risk. This can be achieved by building up inventories to cover the transfer period (key equipment may need to be re-located) or parallel production. Whichever methodology is adopted a risk register should be a key element of the transfer toolbox.
Finally consider the contractual and commercial aspects, including reactions of the incumbent supplier when notified of the change. You should consider if new approvals are required for a change in manufacturer, and if so how long will the process take, and how much will it cost?”
As Healings explains re-shoring needs strategic thought, it’s very easy to change tactic quickly in reaction to changing events, but the long term view needs to be considered if the move is to be successful, perhaps that is something that should have been considered more thoroughly when the original decision to outsource was taken.
Healings concludes, “The risks in re-shoring are often as great, if not greater than the risk associated with off-shoring. Businesses should not under-estimate the time, effort and resource that will be needed to successfully manage a major re-shoring operation.”