By Tim Lawrence and David Vasak, PA manufacturing experts
For decades, manufacturers have offshored manufacturing to take advantage of lower overseas labour costs. Now - in a trend known as reshoring - many are bringing production back to Europe to exploit new approaches in manufacturing.
The benefits of reshoring are pronounced. We calculate that:
- 30% of European companies that import from China would benefit from bringing manufacturing home
- The savings potential from reshoring would be around 25% for small-volume and 10% for high-volume production
- Potential logistics savings and opportunities could produce a further saving in process cost of up to 10%
As an additional benefit, reshoring helps companies reduce the kind of supply chain risk exemplified by the 2011 Japanese earthquake and its impact on automotive logistics.
Many manufacturing businesses are, however, uncertain about whether reshoring is the right decision for them. By relocating an established production facility, they risk losing knowledge and revenues. And they cannot assume that their offshore suppliers will be willing or able to support their new location and needs. But ignoring the short- and long-term risks of continuing to manufacture offshore is likely to lead to costly failures.
To understand whether reshoring makes sense for their business, we recommend manufacturers base their decision on relocating production facilities on three key criteria: market position, global asset base and future business development.
The impact of market position on reshoring decisions
When considering reshoring, manufacturers need to carry out a full quantitative review of their current position. They need to be clear about which markets they are serving and why customers are buying from them and not their competitors. They need to ask which products they should deliver from where, and what kind of service they need to provide.
We saw this recently in a German machinery manufacturer that had outsourced its machining processes. Identifying quality problems and assessing the outsourced production process showed that there was potential to make significant savings on the supplier price for processing a key housing. Due to changes in capacity needs in-house, this housing has been insourced and a saving of up to 25% is anticipated.
In 2003, Hornby was said to have benefitted from moving its manufacturing to China. Ten years later, the company announced a loss, partly as a result of disruption caused by a Chinese supplier. Recently, the company announced that it is reshoring production for its Humbrol modelling brand to the UK.
As the company’s product manager for Humbrol said: “More and more people are taking up craft-based activities and, as a brand, we are listening to that trend. We’ve developed a number of new products to meet demand and as most of our manufacturing is now based in the UK we can work faster at giving retailers and consumers what they want.”
Reshoring as part of a strategy to optimise the global asset base
When considering reshoring, manufacturers must understand where their weaknesses lie in utilisation, profitability, skill-availability and quality across their global asset base. They need to know how to either close the gaps or get rid of idling capacities, and how to become more flexible and efficient. They must also develop a strategy to increase in-house value creation and reduce costs in key market segments.
Planning the right manufacturing footprint to support future business development
In terms of future business development, manufacturers must be clear about where their growth markets and new competitors are, and what sales and revenues they can expect. They also need to know whether new technologies and disruptive innovations will affect the business and demand for current products. As a result, they will need to consider whether to develop new products and/or adjust the business model.
For example, we worked with Draka, an international wire and cable manufacturer, as it completed a large-scale restructuring of its European production network. As a result of our input capacity utilisation throughout the production network increased, personnel costs were saved at overseas locations and logistics and transport costs were reduced to deliver an EBIT return within three years.
Expert support for manufacturing reshoring
We have a strong track record in supporting manufacturing businesses, such as Siemens, as they consider adjusting their global manufacturing footprint. Our practical experience and methodology – as well as thorough analysis, planning, risk management and rapid execution support – have enabled clients to move more than 350 product lines across the globe without losing a single day of delivery.
To find out how we can support your manufacturing and reshoring activity, please contact us now.