As part of our ‘Understanding Shoring’ series, this blog will give a top-level overview of all the various types of shoring and which one will be best for you.
We published a blog a few months back that discussed nearshoring and what it means to your company. Let’s expand on it further and cover the details of nearshoring, offshoring, onshoring, and reshoring to better understand which type of shoring works best for you.
Each action presents advantages and disadvantages and should be considered before moving forward with any particular plan.
Offshoring
What is Offshoring?
Offshoring is a concept that is familiar to anyone observing the global economy over the past 30+ years. It is the moving of manufacturing operations to a cheaper low-cost company to produce for the home market. The explosive growth of the Chinese economy over the past 40 years can be attributed to offshoring. India has also been a large recipient of offshoring especially when it comes to IT and support services.
Offshoring is almost always attributable, at least partially, to lower costs. Products are produced for a much cheaper price in offshored countries. The labor rates are a large factor in the lower costs, however, lower safety and environmental regulation, cheap land, and government support also play a role.
Offshoring Risks
Cost is the major advantage of offshoring. However, there are a lot of challenges with it. Chinese factories were, and in some cases still are, notorious for low quality. Many factories our team works in have very high levels of rework and scrap. There are also considerable cultural and linguistic differences that can make proper communication difficult and frustrating. Furthermore, the supply chain is considerably longer and less reactive to ground changes. Waiting months for new products can be disastrous even if production is efficient.
Finally, the chance for great long-term returns on offshoring is diminishing. China is becoming more expensive each year and there is no similar-sized country to take its place. Vietnam and Taiwan can be excellent locations for manufacturing; however, those countries do not have the population or capacity to expand manufacturing to the same degree that China had in the past.
That said, offshoring still is a great option under the right circumstances.
Average income around the world. Worlddata.info, from https://www.worlddata.info/average-income.php
Advantages of Offshoring:
- Lower costs through:
- Lower labor rates
- Lower safety and environmental regulations
- Lower cost of land
Disadvantages of Offshoring:
- Low quality of output
- Communication difficulties due to language barrier
- Longer average lead time (a couple of months) due to a longer supply chain
- Higher transportation costs
- Currency fluctuations
- Further away from customers
Nearshoring
What is Nearshoring?
We covered this extensively in another blog so we do not need to cover it in as much detail here. Nearshoring is moving manufacturing to a country with lower cost than the home company but closer geographically and culturally. For the US and Canada, that means moving to Mexico or Central America. For Western Europe, it means moving to Eastern Europe.
Nearshoring is a way of splitting the difference between Offshoring and Reshoring. The costs are lower than in the home country yet typically higher than cheaper Asia options. Travel and communication are usually much easier due to the proximity and similar cultures of the two locations.
Average income around the world. Worlddata.info, from https://www.worlddata.info/average-income.php
Advantages of Nearshoring:
- Lower cost of labor
- The ability to operate in a similar timezone
- Maintains close proximity to customers
Disadvantages of Nearshoring:
- Higher transportation costs
- Political risks
- Currency fluctuations
Reshoring
What is Reshoring?
Reshoring is moving manufacturing operations back to the home country. There are a multitude of benefits to reshore, especially those that attract the attention of private equity firms. Simply put, reshoring is the act of bringing manufacturing back to its home country, and if possible, its original location. Reshoring is becoming more popular as supply chain challenges, tariffs, and rising costs in Asia eat much of the price advantage that offshoring provided.
Reshoring is best for products that require specialization and need to be adaptable to home markets. Automation also increases the availability of reshoring manufacturing. We have written two blogs on automation within reshoring; one focused on a failed attempt, and one focused on a successful reshoring example. Read our blog on the costs associated with reshoring.
Average income around the world. Worlddata.info, from https://www.worlddata.info/average-income.php
Advantages of Reshoring:
- Much shorter lead time
- Lower transportation costs
- Avoidance of high tariffs
- Greater agility in introducing new products and customizations of existing products
- Closer to customers
Disadvantages of Reshoring:
- Higher labor costs
- Stricter safety & regulations standards
- Higher cost of land
Onshoring
What is Onshoring?
Onshoring is a variation of reshoring rather than a wholly different possibility. Onshoring is manufacturing in the same country but moving to a cheaper location. Countries are not uniform, and the variability can produce surprising results.
This is particularly popular in the United States since there is a considerable difference between states in terms of wages, environmental regulations, and labor laws. According to ZipRecruiter, the highest manufacturing wages are in New York state at $15.37 per hour and the lowest is in North Carolina at $9.87. Similarly, labor regulations and protections can make certain states more attractive to manufacturers than other states.
Onshoring presents many of the advantages over reshoring with a lower cost risk. However, it is important to consider the strength of the workforce when making decisions. While rural Alabama may be a cheap location, finding the right people in management and operations will likely be challenging.
Average income around the world. Worlddata.info, from https://www.worlddata.info/average-income.php
Advantages of Onshoring:
- Shorter lead time
- Lower transportation costs
- Avoidance of high tariffs
- Greater agility in introducing new products and customisations of existing products
- Maintains proximity to customers
Disadvantages of Onshoring:
- Challenging to find high-quality labor
The Bottom Line
Which of these options are you considering for your company? What are your concerns? It is important to weigh every option before moving forward and understand what is best for you and your company.
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