MHI Solutions Improving Supply Chain Performance
The offshoring and outsourcing trend that is based on low-cost manufacturing destinations contributed to changes in manufacturing and supply chain strategies.
By Md Sarder, Ph.D.
In the past few decades, numerous companies in the U.S., as well as other industrializedcountries, outsourced (aka offshored) manufacturing operations or other business processes to low labor-cost countries, mainly in Asia. This offshoring and outsourcing trend (i.e. handing a business process to an external service provider) that is based on low-cost manufacturing destinations—combined with enhanced ocean shipping and improved onshore and inland intermodal services—constituted one of the most significant changes in manufacturing and supply chain strategy around the world.
Offshoring has gradually transformed the global manufacturing environment, in which fixation on low cost labor was, and most probably still is, a dominant motive for the manufacturing location or relocation decision. This offshoring phenomenon did not only cause a decline in U.S. manufacturing and its share in the nations’ GDP, but also the loss of millions of jobs in this sector.
Reshoring is comparatively a newer phenomenon worldwide especially in the developed nations including the U.S. and European countries. Reshoring is opposite to offshoring. In the U.S. perspective, it is known as bringing operations back to the United States. It is expected to have a tremendous impact on the U.S. economy and on transportation and logistics. Various authors studied the driving factors that make reshoring of manufacturing and research and development (R&D) an attractive choice; also, there are other sets of factors that could be an obstacle for such decision.
Among those strong reshoring factors that make the U.S. highly attractive for reshoring include currency, energy and transportation costs. Factors that are considered relatively attractive for reshoring include big local market demand, labor cost (especially in southern right-to-work states, combined with precipitous labor cost growth of off-shore manufacturing), and relative strength/skills of U.S. labor and availability of capital (lower cost and/or easier credit for commercial/industrial lending demand—as compared to 2009 financial crisis and after). On the other hand, taxation and regulatory climates are the main factors making the U.S. unattractive for manufacturing.
The Reshorability Index for major U.S. manufacturing industries shows the industries with the higher index are most probably ready to bring their operations back to the U.S.