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© lavitreiu-dreamstime.com General | August 13, 2013

Offshoring? Onshoring? Try Right-shoring

The growing trend to re-shore by a number of UK electronics companies has sparked renewed debate on the negatives of offshoring, but is offshoring really that bad? Paul Murphy, commercial director at Axiom Manufacturing Services weighs up some of the arguments concerning overseas production.
Offshoring has been a controversial issue spurring heated debates within the electronics manufacturing service (EMS) market, for a long time. While some reports suggests the trend is still growing; changing economic, political and legislative pressures both overseas and in the UK have seen the industry experience a period of return to onshoring.

For the last 10 years, electronics companies have at times been forced, often by shareholder pressure to capitalise on lower costs overseas. Regions such as Eastern Europe or China offered British original equipment manufacturers (OEMs) a low cost alternative to manufacturing at home. However, manufacturers soon realised that the cost of the unit is only one of many factors that should be taken into consideration. The total cost of acquisition (TCOA) provides a better measurement tool; as supplying from China or the Far East significantly increases the supply chain length, meaning companies were exposing themselves to longer lead times. Taking into consideration time at sea, buffering time to allow for error in the sea shipment, time to get parts; a clear long term forecast from customers (backed off with order coverage for materials) or buffer stock to allow for the flex in demand would be vital. All issues that don’t get enough air time.

The original attraction of outsourcing was that it allowed OEMs to concentrate on core competencies and develop new products, while day-to-day production was sub-contracted to a third party in an alternative location. Subsequent outsourcing to offshore manufacturers then added the promise of cuts in basic production costs thanks to lower labour costs and the relatively cheap overheads, though there are many case studies that indicate the quality of products suffered as a result. However, with the increasing costs of freight, energy and commodities these cost savings have often not been as significant as they were three years ago.

Not to mention wages have increased, China for example by 500% since 2000 and are expected to continue to rise at a rate of 18% per year. Oil prices have tripled since 2000, and that jump is reflected in higher shipping costs.

When Rasberry Pi brought its manufacturing back to the UK from China at the end of 2012, it again raised questions around the benefits and trend towards re-shoring across the industry. Recent figures from the manufacturing group EEF confirmed just this, and stipulated reasons behind the moves to include: concerns over quality, the high cost of freight and most importantly security of component and product supply.

There was a common assumption that outsourcing usually means offshoring but this is not always the case. The UK CEM sector has adapted its processes and procedures in order to serve the changing needs of OEMs and as a result is reaping the benefits of the current re-shoring trend. European funding is also encouraging a new wave of local manufacturing consideration in Western Europe for example.

Does this therefore indicate that “strategic outsourcing” is now in play, utilising all the on/off shoring techniques plus reviews of quality and TCOA etc. Perhaps on/offshoring has evolved into a more Enterprise level process rather than just procurement?

Unit production cost is no longer the only consideration for those seeking a manufacturing partner. Those looking to make such a move are now thinking more about the overall cost of production (control of design, IPR, time-to-market, R&D time and ease of communication). They are ideally looking for “globally local” suppliers that can offer the global benefits of low cost labour but a feeling of interaction with a local supplier and the benefits that it gives. This includes an analysis of both production cost and of the value a contractor can add to a product, for example through innovation, design input or other added in-house services such as prototyping or testing.

It’s arguable that the more sophisticated the product, (market, technology and development process), the greater the case for keeping production in the UK. Reflected by the manufacturing that has remained in the UK, which is generally higher technology and lower volume.

Products in the design and development stage are best kept close to home, as it helps ensure more-effective collaboration among engineering, manufacturing, and management. These are the areas where collaboration between OEM and CEM needs to be at its closest – areas where IP protection, close cultural match, common language and physical proximity are key to achieving customer satisfaction.

Of course, the internet has made it easier to communicate specifications and instructions to the other side of the world within seconds but it hasn’t necessarily improved trust between partners or enhanced the flexibility of contractors overseas. UK firms needing to change a product at relatively short notice will have first-hand experience of the shortcomings of a long-distance relationship. You can also take into consideration the adverse weather conditions over recent years, which has put pressure on a few supply chains around the world. The flooding of factories in Thailand for example had a huge impact on UK firms as they struggled to secure supply, and at times no real indication as to when that supply line would recover. At the time Western Digital for example, reported that its clean-up cost would be around $199m and manufacturing output would not return to pre flood levels until Q3 2012, some 6-9 months after the event. As a result the mood has changed a little in boardrooms as they look at mitigating risk – “what if” discussions are now being replaced with “remember when”.

In addition to simple cost motivations, we are in an era where corporate social responsibility is increasingly important to investors and offshoring can carry some ethnical risks. Many companies are re-examining the impact of offshoring on their corporate reputation, as it is now considered a significant factor in business success. For example employing workers in countries with poor human rights records, wage exploitation or overly lax labour standards may well be scrutinised by stakeholders. Offshore production methods don’t always match the green aspirations of the OEM. Other factors include: a big push on providing sustainable supply chains, companies providing economic support to local regions and also relationship management factors the ISO11000 for example is being pushed in many industries and makes good business sense.

The shift in the industry trend and economic pressures has also meant that products labelled, “Made in USA” for example, are even more important to US companies. As result it can influence decisions when bidding for contracts in other countries. Some countries demand that to participate in certain contracts X% of the cost of goods sold has to have a certain level of local content. This is the case in US and China for example, does that then mean Europe is at an unfair advantage? Should we consider implementing such demands?

This all said, what are the benefits off offshoring?

If we take the BRICS countries, China for example, remains a strong manufacturing location due to its favourable corporate taxes, manufacturing capabilities, engineering talent pool and logistics infrastructure. The nation’s tax policy encourages manufacturing and promotes the importance of developing skilled engineers. It also invests to improve its ports and roads creating good transport links, arguably better than the UK.

There are still good reasons for OEMs to offshore, yet careful cost-benefit analysis is required more so than ever before. The advantages for some still outweigh the risks, lower production and capital costs and greater manufacturing capacity with the ability to scale up and scale down. When choosing between building new facilities in the UK and offshoring to existing factories for example, offshoring may present a better return on investment capital (ROIC) for high volume, low mix and lower complexity products. Although it could be argued, with Pi as an example, there are now many UK manufacturers able to compete.

In a world of lean, automated manufacturing where global business is the norm and not the exception, the need to source and manufacture in the right place has never been more important. Offshoring and onshoring isn’t a one size fits all approach, it’s about finding the right place to manufacture that meets the business and product requirements.

Paul Murphy is commercial director at contract electronics manufacturer, Axiom Manufacturing Services, based in Newbridge, south Wales.

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