The concept of offshoring is well-established in both manufacturing and in certain niche services sectors such as software development. An organisation, usually in a bid to improve its competitive advantage, looks to move elements of its business or business processes away from its core operating geography into another territory. In doing so the aim is to utilise the resources and economy of the new territory, perhaps gaining access to a larger pool of skilled workers, perhaps tax incentives, perhaps with a view to reducing its cost base. Countries such as China and India have become very popular for international companies due, in the main, to them gaining access to a large population of highly skilled workers.
However, in recent times there have been structural shifts in many of these traditionally low-cost regions coupled with the fact that many companies have experienced downsides associated with the offshore supply chain. As a result, right-shoring has emerged as a new option.
Right-shoring | A definition
Right-shoring involves the placement of a business’s components and processes in countries or localities which offer the optimal combination of output quality vs. cost. Ultimately, with right-shoring, a company only moves certain parts of its business processes abroad retaining the more value-adding, complex elements in the local geography.
Broadly speaking there are three definitions in common usage that describe potential location choices – near-shoring, off-shoring (or far-shoring) and right-shoring. Near-shoring means choosing an adjacent lower-cost country that is close to the actual target market; off-shoring means sending work from one country to another often in a more remote location and with significantly lower cost base; and right-shoring refers to attempting to optimize your location choice in order to take advantage of the market in terms of costs, resources and overall margin performance.
But why not just move your business processes back home?
If a business currently has an offshore location and it wishes to move it back to the United Kingdom, this process is known as re-shoring. However, there are many challenges associated with making such an action a reality.
Research conducted by PwC investigated the potential problems associated with reshoring and identified the following:
- Limited vertical ecosystem | According to the research, one of the chief concerns with reshoring was that some parts of the vertical stack, and in particular the tooling capabilities, might not be available locally. So, for example, if an electronics company attempts to move some surface line technology back to its home country, it may find that the rapid tooling it is used to in a country like China is not available at home. This may raise questions about the lack of investment in manufacturing infrastructure at home.
- Skill base | Certain manufacturing skills are needed to boost productivity – but the focus on these skills in many Western countries has waned in recent years. As such, right-shoring has become more popular to capitalise on local skills such as design, while still capitalising on manufacturing skills overseas.
- Internal incentives | Many companies are focused on achieving cost reductions that can be translated to the supply base and help achieve quarterly goals. The need to hit these targets makes it difficult to justify reshoring a supply base. In addition, there is a risk that costs would need to be passed on to consumers potentially making the product less price competitive.
- Tax and regulation | There are many policies – in the UK in particular – that could be seen as a roadblock to manufacturing at home. Until these issues are addressed at a Government level it could be seen as an incentive to keep many production efforts overseas. In addition, taxation is notably prohibitive in the UK which has some of the highest taxation costs in the whole of the Western world.
- Automation challenges | The survey notes that participants suggested that countries with higher costs look to leverage technology as a way to mitigate any cost disadvantage. However, such an approach could potentially require companies to redesign their processes and products in order to allow for this facilitation – which would be cost-prohibitive.
Is right-shoring the best of both worlds?
Some might reach the conclusion that right-shoring is effectively a more thorough approach to value creation than near-shoring or off-shoring.
Effectively, right-shoring means combining some of the elements of the other approaches in order to optimise the bottom line. As a result, many companies that carry off-shore businesses are considering right-shoring where re-shoring appears impractical.
So how do you decide where everything goes with right-shoring?
With reshoring filled with obstacles but a number of problems emerging with off-shoring, right-shoring has become a mature alternative. However, the question emerges as to what goes where – what do you keep in an off-shore location and what do you bring back home?
This, of course, is largely dependent on the individual company and the factors that affect its specific business products and processes. However, there are some essential factors that should be evaluated when forming a combination of reshoring, offshoring and near-shoring in order to optimise the supply chain.
The key is to take a deep and disciplined analysis of your business processes and to ensure that both hard and soft factors are taken into account. Think beyond the short-term and try to create a multi-year roadmap – one that defines clear break even points that will enable your business to process both internal and external changes. Make sure that you allocate tasks to the most appropriate workforce and consider the long-term benefits for your organisation as a whole so you can reap rewards.