Reshoring is a new term that has been trending on Google and Twitter; What is it and what does it mean for manufacturers? If you currently have a manufacturing production running in China, and would like to move manufacturing out of China and come back home, then “Reshoring” may come as a welcome revelation to you and your company.
What Does Reshoring Mean?
According to Investopedia, “Reshoring is the process of returning the production and manufacturing of goods back to the company’s original country. Reshoring is also known as onshoring, inshoring, or backshoring. It is the opposite of offshoring, which is the process of manufacturing goods overseas to try to reduce manufacturing costs.”
The Covid-19 Pandemic, which greatly affected supply chains and the continuing rising costs of labor in China, have many US companies with manufacturing operations in that country considering moving their operations; more production operations are being relocated to Mexico.
According to Forbes:
“U.S. companies are always reassessing their manufacturing and supply-chain footprint in China. China is no longer a cheap place to manufacture and the politics of tariffs have introduced another wildcard. On top of that, the disruptions caused by Covid-19 have highlighted the importance of supply-chain redundancy and resilience.”
Reshoring advocates claim that bringing the operations for manufacturing back to North America will help strengthen the economy by creating new manufacturing jobs from these operations, while also reducing unemployment and helping to balance trade deficits.
According to FDI Intelligence:
“After moving in tandem for much of the past decade, reshored jobs were up nearly 45% in 2020, and FDI jobs were down 40%. The report, which is based on job announcements and annualised data from the first half of 2020, supports early predictions that the pandemic is accelerating the trend of companies bringing overseas operations and supply chains back home.”
Why Should You Reshore?
There are many sound business reasons for reshoring your manufacturing operations from China to North America. According to the Reshoring Institute, the top reasons that companies reshore to a contract manufacturing in Mexico operation include:
- Lead time
- Higher product quality and consistency
- Rising offshore wages
- Skilled workforce
- Lower inventory levels, better turns
- Better quality products
- Better responsiveness to changing customer demands
- Minimal intellectual property and regulatory compliance risks
- Improved innovation and product differentiation
- Intellectual Property Theft
All of these benefits can be found by having your contract manufacturing services close to home in North America & Mexico, rather than attempting to manage manufacturing across the Pacific ocean in China.
How Does Reshoring Work?
Although the concept of Reshoring is simple: move your manufacturing operations from China back to North America, in practice it is much more complex. Besides finding a manufacturing partner or facilities, you must find material sourcing, labor, establish new supply chains, secure equipment and then transition your operation out of the former country where it previously ran. This is not an easy nor quick feat: Even if you are able to solve all the problems listed previously, it may take as long as 2 years before your Mexico industrial manufacturing operation is moved and fully working again.
According to the Harvard Business Review:
“A manufacturer not only has to source all of the components of a product, it also has to scale up production. This task is often taken for granted, but it is part of the really hard work of taking a product to market. The process includes setting up the supply chain for all of the raw materials, designing an assembly process with the appropriate tooling and fixtures, building or securing test equipment, establishing testing and quality procedures, and working through materials handling, staffing, and countless other details.”
Robotics Business Review adds the following:
“So many companies make the mistake of simply comparing labor or tariff costs when determining their get-out-of-China pathway. But there is so much more to a decision to exit China. In particular, companies should consider all of the exit costs including employee payments, tooling and molds, IP protection, exit taxes, and fees when considering the restart-up costs in the U.S. or other countries.”
“New data produced by the Bank of America shows the reason for this: labor rates in Mexico can be lower than China by as much as 20%, quite a change from 10 years ago when Mexican labor rates were 188% higher than China.
Other reasons for this switch to Mexico contract manufacturing are lower transportation costs, faster delivery, higher productivity from automation, more reliable quality, and better payment terms than from China. As a resident of the border region of California and Mexico, I have seen this first hand. “Nearsourcing” to Mexico is occurring when reshoring to the US is not economically justifiable at the present time.
What are the factors for reshoring and this this a trend that is going to continue? Learn more from this video featuring Hal Sirkin, a senior partner at Boston Consulting Group.
Supported by over 30 years of experience, NovaLink has provided shelter or contract manufacturing services to a variety of industries.
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