Executive Briefings

Reshoring: Reality or Hype?

Are companies really shifting their manufacturing operations out of China and back to the West? The answer isn't a simple one, says Akhil Oltikar, vice president of supply chain solutions at Riverwood Solutions. He looks at the many issues that global manufacturers take into account when deciding where to site their operations.

The outsourced manufacturing model of the late 1990s and early 2000s was all about where companies could build product most cheaply – not about forging a faster supply chain. The strategy made sense at a time when oil was less than $30 a barrel, labor in China was plentiful and exchange rates weren’t an issue.

All that changed around 2008, when oil peaked at $147 a barrel, China’s currency was no longer pegged to the dollar, and companies became more concerned about the long lead times associated with making product so far from end markets. At the same time, product lifecycles were shrinking, so speed was an issue. Companies needed to move their products to market more quickly.

Yet another trend to have materialized in recent years is the emergence of a middle class in China, driving up wages and creating new domestic markets for consumption within the country. As a result, China is becoming less of an ideal location for turning out goods exclusively for export. In certain cases, says Oltikar, “offshoring” is becoming “near-shoring.”

He cautions companies against using a “paintbrush” approach – assuming that a single solution is appropriate for all industries, companies and products. “Don’t just start moving the products back to the U.S., or to Mexico or Europe,” he says. “You have to look at it methodically.”

Speed is a common desirable factor. Companies today are striving to be agile and responsive, not necessarily the biggest producers in their field. The appropriate term, says Oltikar, is “right-shoring.”

Cost, of course, is still a key factor. Certain consumer electronics and other products are still being produced in China because of the wage advantage over the western hemisphere. In other cases, companies are making basic products in China, then carrying out final assembly or product configuration in locations closer to destination markets. Either way, says Oltikar, Asia in future will remain a manufacturing “powerhouse.”

To view the video in its entirety, click here

The outsourced manufacturing model of the late 1990s and early 2000s was all about where companies could build product most cheaply – not about forging a faster supply chain. The strategy made sense at a time when oil was less than $30 a barrel, labor in China was plentiful and exchange rates weren’t an issue.

All that changed around 2008, when oil peaked at $147 a barrel, China’s currency was no longer pegged to the dollar, and companies became more concerned about the long lead times associated with making product so far from end markets. At the same time, product lifecycles were shrinking, so speed was an issue. Companies needed to move their products to market more quickly.

Yet another trend to have materialized in recent years is the emergence of a middle class in China, driving up wages and creating new domestic markets for consumption within the country. As a result, China is becoming less of an ideal location for turning out goods exclusively for export. In certain cases, says Oltikar, “offshoring” is becoming “near-shoring.”

He cautions companies against using a “paintbrush” approach – assuming that a single solution is appropriate for all industries, companies and products. “Don’t just start moving the products back to the U.S., or to Mexico or Europe,” he says. “You have to look at it methodically.”

Speed is a common desirable factor. Companies today are striving to be agile and responsive, not necessarily the biggest producers in their field. The appropriate term, says Oltikar, is “right-shoring.”

Cost, of course, is still a key factor. Certain consumer electronics and other products are still being produced in China because of the wage advantage over the western hemisphere. In other cases, companies are making basic products in China, then carrying out final assembly or product configuration in locations closer to destination markets. Either way, says Oltikar, Asia in future will remain a manufacturing “powerhouse.”

To view the video in its entirety, click here