A recent post from Booz & Company’s “Strategy + Business” introduced a new term: “backshoring” – an emerging trend of returning manufacturing from an offshore location to the home country (”The Case For Backshoring“). This is especially important for US business, which has been a very aggressive proponent of offshoring for the past decade. Why is this reversal happening? In short, the conditions that made outsourcing look so attractive have changed utterly:
…The logic behind backshoring is compelling enough that it cannot be easily dismissed as a mere short-term aberration. Higher transportation costs as well as rising wages and raw materials prices in China, inevitable by-products of the huge gains that the developing country’s GDP has made despite the global recession, have frightened some U.S. companies away from Asia.
Another factor is the impact of distance from core customers on products with heavy user contribution:
NCR’s decision to backshore goes well beyond dollars and cents — and, in fact, may provide the most convincing rationale for the gains that backshoring can produce. The ATMs being made in Columbus now are NCR’s most sophisticated, capable of scanning checks and cash and eliminating the need for the customer to fill out a deposit slip. This feature has provided a welcome revenue lift for NCR — bringing in as much as US$50 million a year, significant for a company with $5 billion in annual sales. But these machines likely never would have been developed had large customers like JPMorgan Chase and Bank of America not persistently prodded NCR to move in that direction. That type of potentially profitable interaction between NCR and its customers is difficult, and launching desirable new products is slowed considerably, NCR’s Dorsman says, when the manufacturing facilities are offshore. “We take our cue from our customers,” says Dorsman. “They are heavily involved in the development process. And with this new approach we’re taking, we can get innovative products to the market faster, no question.”
NCR also found that having Flextronics manufacture high-end ATMs in Brazil — and relying on the vendor’s third-party suppliers, many of which NCR was unfamiliar with — left important internal constituencies in the dark, further slowing and complicating new product launches. Hardware and software engineers, sourcing executives, manufacturing and operations staff, and customer service managers all had trouble applying their expertise throughout the many remote handoffs between separate organizations.
The post does not take up whether outsourced business processes, such as customer service, are also being “backshored”–though I’ve heard of companies pulling some sales processes back from locations such as India and the Philippines due to ineffectiveness. And the same economic factors (increased costs at offshore locations) are at play. It’s good to realize, at any rate, that the trend of sending processes far away is not inexorable and there may be, in fact, good reasons for companies to keep them at home.