An emerging trend toward re-shoring production is driven by energy costs, customer demands for shorter runs and more flexibility, and the way high-value knowledge is created.
A few years ago I wrote a set of scenarios – with Joe Ballantyne and Andy Sumner – on the prospects for the world economy to the early 2020s. In one of the scenarios we saw the “West” regenerate itself by a combination of public investment and by bringing home its high value manufacturing. After I’d drafted this post, David Cameron popped up at Davos to promote the idea of “re-shoring”, even if he seems less keen on the notion of public investment. And according to a recent report in The Conversation by some Birmingham University researchers, there are signs that re-shoring is starting to happen, that British businesses are bringing it back home.
They list seven reasons for this, which I’ve edited slightly from their article:
- The savings from offshore manufacturing costs were not as great as anticipated. Because labour accounts for a small proportion of a product’s manufacturing costs, wage inflation and escalating shipping erode the savings gained from outsourcing.
- Offshoring increases the length of product-delivery cycles; speed and closeness to market are becoming significant drivers of success.
- There have been concerns with the quality of products made in low-cost locations.
- There have been problems related to the loss of intellectual property.
- Firms are reluctant to tie up capital in large overseas shipments. Instead they look for local suppliers who are able to supply small batches.
- Companies are starting to understand the benefits of co-locating design and development with production managers and assembly workers, which enables a close dialogue between design, development and manufacturing.
- In the 21st century, energy costs will play a much more important role than labour costs in supply chain calculations. Energy costs are involved in the shipping of products from low-cost locations to the UK, and in fabrication.
Energy and shipping
The researchers focus on energy costs as the critical driver for reshoring, and this was the element that we focussed on in our scenario. Although shipping appears to be a low-energy, lower carbon transport mode, it is not, and although containerisation is a neglected subject, we are becoming more aware of its other costs. And while energy efficiency is improving in Asia’s emerging production centres, it is still a long way behind the levels achieved in Europe, north America, and Japan. In the US, it’s also reported that cheaper domestic energy has led to the creation of 80,000 jobs.
But what’s more intersting about this list is the story that it tells about the future of high-value manufacturing and the sources of value in the 21st century economy.
Sources of value
There are three important elements. The first is obvious. As businesses get a better handle on their costs, and start to understand them in a systemic way, they understand the lesson that the Japanese learnt three decades ago – that the costs of poor quality are always under-estimated. The cost of fixing a customer’s problems caused by poor quality is always disproportionately high, and also has knock-on in terms of reputation and so on.
The second is the increasing importance of flexibility, a marker that the age of mass production is coming to an end; it’s being replaced by tailored batch production. In the world, proximity to customers becomes much more important, indeed as it used to be before the age of cheap energy. It’s likely that we’ll look back and see the age of mass production as an exception, as a blip. Of course, you don’t need to re-shore to respond to this: you can also “near-shore”, as Japanese businesses are doing in Mexico, moving production from China to be closer to the American market.
High value knowledge
The third is the role of knowledge on creating high value products, and often knowledge that is contingent, that arises through interaction while solving difficult problems, knowledge that is almost impossible to codify. One of the laziest of futures assumptions is that all future businesses will be uniformly more distributed because ICT makes it easier for people to work at a distance. This will be true of certain functions and certain tasks, but not all, and not all of the time.
But there is a reason why a company such as Google creates high value workplaces that are designed to encourage people to come in to work, to talk to each other, to interact. In the same vein there’s a reason why the economics of clustering – first identifed by Alfred Marshall in a famous passage (“It’s in the air“) still apply in the 21st century.
High value production needs high value knowledge, and high value knowledge needs high value interaction, between people who understand products, processes and markets in multiple overlapping ways.
The image at the top of this post is taken from Levantar’s post on the same subject, and is used with thanks.
McKinsey has just released a report on what they call “next-shoring” – neither offshoring or reshoring, apparently. Their summary: “A next-shoring perspective emphasizes proximity to demand and proximity to innovation. Both are crucial in a world where evolving demand from new markets places a premium on the ability to adapt products to different regions and where emerging technologies that could disrupt costs and processes are making new supply ecosystems a differentiator.”
McKinsey has seriously diminished credibility.
I liked what you said, very much! This made me glad in my heart, something that is not so common lately,
I hope others have the same good sense as you. (We don’t need technology to create poor quality products and services, although it can, and is, used to facilitate such.)
Postscript: I am your new follower on Delicious bookmarks 😉