I’m sure by now you’ve heard the expression “reshoring.”
Initially it can be said that reshoring is the opposite of “offshoring.” It refers to the strategy of bringing manufacturing “back home,” i.e., returning it to the country of origin. In other words, if a company has transferred some or all operations offshore to reduce manufacturing costs, reshoring is the process of bringing some or all of these operations back to the country from which the company’s products are marketed. Reshoring can also be called “backshoring” or “inshoring.”
Historically, manufacturing plant location decisions have been determined by costs, including labor and logistics. The continual rise of these inputs in developing countries in recent years has led many companies to rethink the location of their factories around the world. This movement had begun before the COVID pandemic but was certainly accelerated by it.
Companies such as Decathlon (a chain of sporting goods stores spread throughout Europe and with stores in Brazil) and Accell Group (owner of among others the Diamondback, Raleigh and Redline brands and other heavy weights of the European bicycle industry) are reshoring, thereby significantly reducing delivery times.
Motivated by higher freight rates, inflexible suppliers, time zone inconveniences, and communication issues, companies’ return to their home territories has a major impact on global production chains.
Why are companies reshoring? Although offshoring often reduces a company’s costs, several factors can make reshoring interesting in particular situations. Among them:
- Global trade instability — the geopolitical situation has changed dramatically in recent years with China taking a leading global role, the UK’s exit from the European Union, and the Russian invasion of Ukraine. Overseas operations have become riskier and more complex.
- Supply chain management — reshoring means bringing most supply chain links to the same time zone, making the chain easier to manage.
- Rising costs in developing countries — as countries around the world, particularly in Asia, develop, labor costs increase, and distribution costs may even become prohibitive. For some companies the cost difference between operating onshore or offshore becomes insignificant.
- Greater protection of intellectual capital — intellectual assets, whose main component is knowledge, are fundamental to a company’s competitive performance.
- Regulatory factors — compliance with standards, quality control issues, and the risk of loss of intellectual rights when operating abroad can create additional problems for companies. Reshoring helps to place all operations under the same rule set.
- Risk mitigation — reshoring can help protect supply chains from crisis, an inevitability that can result in significant production delays.
- Reduction of production time and launch of new products — agility in meeting customer demands and in the development of new products are considered relevant competitive factors in many segments.
- Boosting the national economy — reshoring brings jobs, assets, and resources back to the original nation. This helps to increase GDP and strengthen the national economy.
One of the main disadvantages of reshoring is the high cost involved in moving manufacturing operations from one country to another. For medium and large companies, this is a task that requires careful planning and logistics management. If the transition is not performed carefully, the initial cost of reshoring can outweigh any possible benefits.
If the supplies and resources needed for production can be purchased locally, reshoring can stimulate the domestic economy. On the other hand, if materials and resources need to be purchased abroad, this can result in a negative net effect on both economies.
Therefore, it is necessary to conduct a detailed study before making the reshoring decision.