Building Business Case for Reshoring vs Offshoring

In global supply chain, obtaining products or services from outside the country to achieve cost effectiveness is one of the most widely used strategy. In the past couple of years, there are the increasing interest to bring manufacturing back to home country. Then, this article will explain more about reshoring phenomenon and things you should consider.

Basic Concept
Reshoring has been the new buzzword in business for quite a while now. In order to understand this word, we should get to know its predecessor, namely, offshoring.

Offshoring encompasses two meaning,

- Moving your OWN factory out of the country (insourcing).
- Asking vendors in foreign countries to make products and services for you (outsourcing).

Then reshoring is the act to bring insourcing or outsourcing activities back to your own country.

Reasons for Offshoring
Why company choose to do offshoring in the first place? The biggest motivation to do offshoring is to cut cost. However, companies found that there are some certain problems associated with offshoring as below,

- Expected benefits of offshoring can't be reached
- Cost is higher than expected
- Quality problem
- Problem with trading partners abroad
- Infrastructure is not reliable
- Difficult to control
- Need to be near market/R&D

Reasons for Reshoring
Other than government policy in the U.S., rising labor cost, currency risk, quality issues and so on are factors that turning people away from offshoring.

How to Make Reshoring Decision?
Once you realize that reshoring makes sense for you, the first step is to do costing exercise to compare the cost between reshoring and offshoring. To help you with this, I've created one infographic as below,



As you can see, there are so many hidden costs of offshoring. Most hidden costs are available internally except shortage cost. Canceled orders can be used to determine level of shortage cost. Some companies may choose to assume 100% revenue loss if order is not filled on time. Anyway, the most convenient way to find shortage cost is to calculate imputed shortage cost (detailed calculation is available from many good operations management textbook).

Of course, reshoring also has some hidden costs but they may not be very significant so they're omitted.

Another thing to consider is to add transition cost back into cash flow. These costs are salvage value of existing assets (aboard), cost of bringing back machinery, cost of acquiring new facilities/machinery, cost of laying off workforce (aboard) and cost of training new workforce at home.

Is that it?
Comparing cost between reshoring and offshoring is just the first step. You may also need to conduct sensitivity analysis, for example, what if facility costs at home increase by 5% each year.

In case the quality of data you have is good and you do enough sensitivity analysis, spreadsheet model may suffice.

Some companies may want to know if optimization model would help. If this is the case, I highly encourage readers to visit Ops Rules Blog. Other than information about optimization/facility location consideration, you can also find information about supply chain segmentation that can help you conquer home market and supply chain risk index that can help you minimize new risks associated with reshoring.