For the last 15-20 years, companies have been moving their operations to countries such as China, Vietnam and India in order to take advantage of lower labour rates and source goods more cheaply. Such low-cost sourcing models have worked well for many years, with many businesses succeeding in striking the right balance - gleaning sufficient value to help offset the longer lead times and higher inventory costs that come with sourcing goods from further afield.
However, more recently, increased market volatility and ongoing supply chain disruption have revealed just how challenging it can be to achieve the right balance. Many of the benefits that businesses might have expected to achieve by offshoring production have been eroded. For example, wage inflation has impacted many traditionally low-cost regions of the world and global shipping costs have increased exponentially since the onset of the pandemic. Greater demand variability is also making it more difficult for businesses to rely on a supply base that is structured around long lead times and consumers increasingly expect goods and services to be delivered ‘on demand’. As a result of these changes, businesses are exploring ways to adapt their supply chains in order to deal with greater demand unpredictability, while still delivering excellent customer service, using a more localised supply chain model.
While the onshoring trend is evident, businesses are taking a planned and cautious approach. For example, instead of reacting to supply chain shocks and other market changes by simply pulling all production back to the UK, some are opting for a hybrid operating structure, with a mix of offshore, nearshore and onshore facilities. This is because onshoring is not always feasible or economically viable.
Many UK-based businesses rely on semiconductors to make products such as consumer electronics and home appliances. However, most of the world’s semiconductors are made in Asia and shortages of some of the key raw materials used to make them have led to global supply shortages of these small, but critical, components. While onshoring production could seem attractive as a means of de-risking sources of supply, it could only really be achieved with a long-term investment strategy spanning a five- or ten-year period, and a substantial injection of capital. With no sign of the semiconductor shortage ending anytime soon, Intel has recently announced plans to invest $20bn in two new chip manufacturing plants in Ohio, with production due to start in 2025.
To identify the right sourcing strategy, businesses should start by analysing their end-to-end supply chain performance, based on pre-pandemic KPIs, over the last three years. For example, they should consider the lead time, from order through to customer delivery, has it changed and if so how? Other metrics to consider include logistics costs, on time and in full (OTIF), wage inflation and changes affecting import/export tariffs. It is also important to listen to customers to find out more about how their demand and ordering patterns are changing and what they expect in terms of lead times.
Depending on the findings, businesses may need to reconfigure their supply chain model to take account of what the data is telling them. Onshoring, or at least nearshoring production, could give businesses more localised control of their supply chains in the event of disruption and help them to manage their cost base by reducing the need for stored inventory. A shorter supply chain model could also allow businesses to react more quickly to shifting dynamics such as demand spikes, trends or changes affecting customer preferences.
When considering ways to de-risk and optimise their supply chains, businesses should avoid onshoring everything and consider their next move carefully. Rather than opting for a model that is focused on either onshoring or offshoring, they should aim to ‘right shore’, by structuring their supply chains to deliver improvements in areas such as demand, cost, efficiency and margin.
Some businesses may feel that they lack sufficient knowledge about how their current supply chains operate, in which case they should conduct a detailed data-driven review to assess their risk exposure, performance and capability. This whole supply chain perspective, based on accurate and trustworthy data, is essential to guide decisions about how to improve business resilience and drive enterprise value.
Paul Cooper is a director and industrial manufacturing sector specialist at Vendigital.
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