The first wave of offshoring by U.S. manufacturers was driven by one primary factor: low-cost labor. High tech companies flocked to Asia, especially China, in an attempt to slash production expense and protect market share.
The strategy proved effective for a while. Then, complications set in. Longer distances between plant and point of sale increased the chances for supply-chain disruptions. Companies were forced to rely on high-cost expedited transportation, as well as safety stocks closer to end markets, to make up for shipping delays. At the same time, factory wages in China began to rise. As a result, the gap between labor rates in Asia and the Western Hemisphere narrowed. In certain cases, it closed up completely.
What’s the optimal shoring strategy now? These days, high tech manufacturers must take into account a number of factors, including company size, product specifications and the intensity of customer demands. There’s no one-size-fits-all solution. The key to a successful strategy is flexibility.
To be sure, many manufacturers continue to offshore a significant portion of their production. In UPS’s Fifth Annual Change in the (Supply) Chain Survey, 47% of respondents were still making that choice. Another 35% were planning on near-shoring – the shift of manufacturing and/or assembly closer to the point of consumption. That number is up 25 percentage points from 2010.
But 45% of the companies surveyed in the latest UPS survey were pursuing a third option: right-shoring. The term describes the practice of optimizing one’s supply chain to make the most of existing costs, skills and infrastructure. The goal is to achieve the best overall margin performance and highest level of customer satisfaction.
The definition of “right,” of course, differs for each company. Yet 70% of the high tech executives surveyed by UPS said improved service levels were the top priority behind their decision to pursue a near-shoring strategy. Better control over product quality and intellectual property, as well as the need for manufacturing diversity, were additional factors.
There are pluses and minuses attached to every sourcing decision. Still, a carefully considered strategy that draws on multiple factors, with strong consideration of near-shoring and right-shoring options, can speed up time to market, boost the sustainability of supply chains and help high tech manufacturers to better serve growing global markets.
Learn more about shoring strategies by downloading the Change in the (Supply) Chain Survey.
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