Offshoring vs.Reshoring
Understanding the Risks Before Choosing a Manufacturing Partner
When selecting an original equipment manufacturer (OEM), there are many inherent risks, including in regard to the following factors: cost, scheduling, and compliance.Navigating through them is the key to a successful manufacturing project.
One of the key considerations to keep in mind when choosing an OEM partner is whether they favor offshoring or reshoring.
Offshoring
Offshoring refers to the relocation of a manufacturing operation to a country other than that of the company in charge of the operation.For example, many US-based companies maintain manufacturing facilities in Asia.
Reshoring
Reshoring refers to the relocation of a manufacturing operation from a foreign country back to the home country of the company.
Timeline of US Manufacturing Reshoring Trends
While offshoring has long been lauded as a means of saving on labor and production costs, it carries numerous opportunities for logistical inefficiencies and ineffectiveness.
Before expanding on these risk factors, let's take a closer look at how the United States' trends have progressed from domestic manufacturing operations to offshore manufacturing operations and from offshoring to reshoring.In 1979, the US manufacturing sector reached its highest employment level—19.5 million jobs.
However, among other factors during the late 1970s, the trade deficit, global competition, and dismantling of trade barriers led to these companies outsourcing—and later offshoring—their manufacturing operations to remain competitive.
Around the same time, China and other Asian countries were experiencing economic troubles, which allowed US manufacturers to outsource—and later relocate—operations to them while reducing overall production costs.
From August 2000 to February 2004, the US manufacturing sector experienced a progressive loss of jobs for 43 months.More and more companies moved their operations to China to benefit from lower labor costs, faster turnaround, and broader production capacities.
This negative trend was the longest in US history since the Great Depression.
In 2009, the US manufacturing sector was at its lowest job level in recent history—11.5 million jobs.
However, manufacturers were becoming increasingly aware of the inherent drawbacks of offshoring—e.g., lower product quality, higher process inconsistency, and greater operational inflexibility.
From 2010 onward, manufacturers in the US and other western countries began to move from offshoring their operations for lower production costs to reshoring their operations for a lower cost of ownership.
This shift in thinking led to significant improvements to employment numbers in the US manufacturing sector.
In 2016, the US manufacturing sector had a total of 12.3 million jobs.
The difference between 2009 to this point was a positive net of 800,000 jobs.
In 2019, US manufacturers experienced disruption in the face of an ongoing trade war between the US and China.
The US and China implemented extensive tariffs on goods traded between the countries, with each subsequent round of tariffs met by a set of retaliatory tariffs from the other party.
US manufacturers began to rethink offshoring strategies centralized around China as these tariffs substantially increased supply chain costs.
Choosing Between Offshoring and Reshoring
While many companies are reshoring their manufacturing operations, some continue to benefit from maintaining offshore manufacturing facilities.Knowing the advantages and disadvantages of each can help you determine which one is right for your needs.
Offshoring
By offshoring manufacturing operations, US businesses experience several advantages, such as:
- Lower Production Costs
One of the main reasons manufacturers offshore their operations is to decrease their labor costs (i.e., how many workers they employ and how much they pay workers) and, consequently, their facility costs (i.e., how much space they require for their operations and how much they pay for the real estate).As both factors affect the overall production costs, they influence the profitability of the business venture.
- Greater Tax Benefits
Offshoring can offer many opportunities for tax breaks for overseas companies, resulting in further reductions in production costs.
- Broader Market Options
Offshoring can open up avenues for product distribution that would otherwise be closed to manufacturers.Having a facility near the targeted market makes it easier for companies to supply the products to meet demand.
However, offshoring also comes withnumerous disadvantages, including with regard to the following factors:
Communication
One of the critical factors to smooth operations is communication.While English is commonly spoken in most overseas countries, the depth and degree of understanding of the language vary from facility to facility and worker to worker.Miscommunication with the partner facility and its workers can result in manufacturing problems.
Cultural Norms
Culture significantly influences what is considered acceptable in business interactions.For example, while some cultures view a straightforward approach positively, some may find it offensive.When working with a facility in a foreign country, it is essential to understand how to behave and speak with its employees.
Timelines
In offshore manufacturing operations, product turnaround includes the time it takes to design and manufacture a product and the time required to deliver the finished products to the final destination.The greater the distance between the manufacturing facility and the port and between the port and the final destination, the longer the product turnaround.Unexpected shipping delays—such as those caused by a global pandemic—can severely cripple a company's supply chain.
Production Costs
As indicated above, one of the main reasons manufacturers offshore their operations is to lower their production costs.However, as overseas countries raise their hourly rates (e.g., since 2000, the cost of labor in China has increased by 320% and is expected to climb at a rate of 18% per year), the savings achieved by offshoring manufacturing operations is diminishing.Lower cost savings, combined with increasing shipping and transportation rates, has led to offshoring losing its characterization as the most cost-effective manufacturing method.
Intellectual Property (IP)
Both small and large manufacturers strive to protect their proprietary designs from competitors.Sending these designs to a third-party facility increases the likelihood of unauthorized persons gaining access to them.
Product Quality
By moving manufacturing operations to a foreign country, companies inherently lose the ability to maintain careful oversight.As a result, substandard parts and products may slip through the cracks, necessitating additional production runs to fulfill an order.
Reshoring
In recent years, proponents of reshoring efforts have purported several advantages of reshoring over offshoring, such as:
Greater Number of Jobs for Americans
Relocating manufacturing operations to the US provides new job opportunities for Americans, stimulating local and national economies.
Lower Delivery Costs
Domestic manufacturing operations often come with a broader range of shipping options, allowing companies to choose the most cost-effectiveness for their needs.
Shorter Lead Times
In addition to lower delivery costs, domestic manufacturing operations offer shorter lead times, facilitating the sales and fulfillment processes.
Smaller Environmental Impact
As the distance between the manufacturing facility and the final destination is often much shorter in domestic manufacturing operations, the total amount of energy spent per product is much lower, resulting in a smaller carbon footprint.
Higher Product Quality
Closer proximity to the manufacturing facility enables companies to maintain tighter control over the production process.As such, they are better able to ensure products meet their specifications and standards.
Better Customer Perception
Recent surveys on consumer preferences found that a majority of Americans held a positive view of products manufactured in the US and companies that manufacture their products in the US.Additionally, most believe there should be a more significant push for US-based manufacturing.
While reshoring offers many clear benefits to manufacturers, some companies are not in the position to make the transition at this time.For these companies, the increase in labor costs, relocation costs, and the complex taxation requirements associated with moving operations back to the US significantly diminish their profitability.However, the effects of these and other factors may alter as the global economy changes.
Why Reshore Your Operations?
However, as the cost of labor in Asian countries increases, and the unit costs in the US decreases, relocating manufacturing operations to foreign countries is proving to be the least cost-effective option.
The benefit of reshoring manufacturing operations is further compounded by the positive effects on the following:
Partnering With Rodon
Some companies continue to offshore their manufacturing operations to remain competitive.At The Rodon Group, we employ the use of state-of-the-art automation technology in our US-based facility to achieve greater productivity rates and product quality acceptance rates (99.92%) at lower production costs (Cheaper than China® pricing).
As a result of keeping our operations onshore, we avoid many risks associated with offshoring.By partnering with us for your custom plastic injection molding needs, you benefit from our:
Commitment to Quality
Our products are manufactured in production operations that comply with all US laws and regulations.Our facility is certified to OSHA standards, our resin sources are certified to ISO, FDA, NSF, RoHS, and REACH standards, and our quality management system meets ISO 9001:2015 standards.
Responsive Customer Service Team
Our friendly and knowledgeable team readily accommodates same-day revisions and changes to customer orders
Fast Turnaround
Our domestic manufacturing facility allows us to offer Just-in-Time delivery services instead of making you wait up to and exceeding 45 days for product turnaround
