In today's dynamic landscape of manufacturing and sourcing, where sustainability and flexibility are paramount, companies find themselves at a crossroads. The difficulties associated with sourcing from Asia have spurred a reevaluation of strategies, leading many to contemplate reshoring as a viable solution. In this article, we will delve into the challenges and opportunities driving this transformative shift.
In the 1980s, European and American companies shifted their sourcing and manufacturing operations to Asia while maintaining sales in their home countries. This marked the beginning of a significant transformation in global supply chains, driven by factors like lower labor costs, improved transportation, and market openings in countries such as China. However, the tide is now turning. The business landscape is in the midst of a profound transformation, with companies reassessing their strategies, seeking innovative ways to stay competitive, and considering the impact of this shift on their supply chains, workforce, and global footprint. This is compelling them to conduct a comprehensive reassessment of their operations.
Let’s delve deeper into the challenges prompting this fundamental rethink:
-
Supply chain turmoil and inventory challenges: The COVID-19 pandemic exposed the vulnerability of global supply chains, especially those heavily reliant on Asia. Despite experiencing increased sales during this period, companies encountered difficulties due to lockdowns, surging shipping rates, disruptions in shipping, and factory closures. Now, as supply chains have stabilized, a decrease in demand has left companies grappling with the excess inventory they purchased to mitigate long lead times and inflexible supply chains. This surplus ties up capital at a time when capital is becoming more expensive. A recent study by BearingPoint highlighted this issue. Our analysis of major retailers in Sweden revealed that, though inventory turnover declined in both 2021 and 2022, the decline was even more significant for retailers with a higher dependency on sourcing from Asia, as seen in Figure 1 below.
-
Emphasis on agility and flexibility: In today's fast-paced business environment, the ability to quickly adapt to changing demands and develop products rapidly is essential. Managing cultural differences and dealing with slow logistics when sourcing from Asian suppliers can be challenging, especially for companies that prioritize swift product development and keeping inventory to a minimum. This demand for agility is prompting some firms to explore options closer to home.
-
Geopolitical uncertainty and reliability concerns: Ongoing geopolitical tensions, such as the Ukraine conflict and Taiwan disputes, have caused companies to reassess the long-term supply risks of being overly dependent on certain countries, calling into question the reliability of these suppliers in the medium to long term. Lastly, companies are keenly aware of risks associated with import restrictions, especially concerning China and potential conflicts related to Taiwan. General supply chain disruptions, whether caused by pandemics or other unforeseen events, are viewed as significant risks to their operations. These challenges have had a substantial impact, continuing into 2023/2024.
-
Shift in consumer preferences towards sustainability: Increasing environmental awareness among consumers has led to a preference for sustainable and ethically produced products. Companies are looking for manufacturing locations in countries that support their sustainability goals and target markets. Notably, there's a shift away from using air transport due to sustainability concerns. While this aligns with sustainability goals, it reduces flexibility in responding to delays, which is a drawback compared to the historically rapid air transport solutions.
-
Financial factors and working capital: Rising interest rates make overseas capital commitments costlier. Reshoring is seen as a strategic move to reduce overseas capital and address working capital concerns, allowing for more efficient financial management.
-
Industry 4.0: Automation and smart manufacturing have leveled the cost playing field across regions. Highly automated production processes have made machinery costs consistent, regardless of location.
Navigating the reshoring journey: Where to start
Reshoring brings long-term benefits such as sustainability, risk diversification, and improved flexibility in sourcing and production. However, it also comes with short-term challenges. After all, the reshoring trend is akin to a large ship gradually changing course. Companies have become deeply reliant on China and East Asia, and for many, their entire business models revolve around these regions.
Yes, no, maybe: Making the right decision for your business
First and foremost, companies must decide whether reshoring aligns with their strategic objectives and meticulously weigh the impact on resilience, cost, and flexibility. This assessment, conducted at product category level, will lead to one of three possible outcomes for reshoring decisions:
Stay (high resilience outlook): For product categories with a high resilience outlook, i.e. low risk of future disruption and low need of flexibility, reshoring may not be suitable, as the potential gains in resilience are minimal and unlikely to offset the cost increase.
Reshore (low resilience outlook or acceptable cost increase): In contrast, product categories with low resilience outlook are excellent reshoring candidates since the resilience gains significantly outweigh the cost increase. For categories with a medium resilience outlook, the cost increase should be small enough to not outweigh the resilience gains to be suitable for reshoring.
Detailed analysis (high-cost increase with moderate resilience outlook): Certain situations may fall within the middle ground, requiring a more detailed analysis. This includes cases where reshoring entails a medium to high cost increase and offers only moderate resilience benefits, a thorough examination is essential to determine the best course of action (see Figure 2 below).
For instance, discount manufacturers and retailers, who prioritize cost efficiency, have based their entire business models on direct importing. Therefore, finding product categories where reshoring aligns with their cost-focused strategies can be challenging. But as resilience outlook continues to change, even parts of discounters’ product categories might benefit from reshoring. Ultimately, companies must thoroughly evaluate their unique circumstances and strategic goals to make the most informed reshoring decisions.
Setting course for home
For those looking to move back, a critical question arises: how should a company initiate this intricate process? Unfortunately, there isn't a one-size-fits-all approach. This is because the reasons for reshoring vary. Instead, the answer lies in a tailored solution that encompasses the unique circumstances of each company, based on their product nature, location, and long-term goals. For example, while some companies aim to boost innovation, others seek to reposition themselves higher up the value chain through local manufacturing, enabling them to justify higher price points for their products to meet consumers' growing appetite for locally made goods.
Transitioning to reshoring also involves its own set of hurdles. The supplier market in Europe is notably smaller than in Asia, necessitating efforts to find or develop suitable suppliers. Furthermore, for companies that have direct control over their manufacturing processes, the task of establishing European production facilities represents a significant undertaking.
One tip for everyone is to approach reshoring gradually. This might involve diversifying suppliers or exploring alternative Asian markets to reduce dependence on China or specific countries.
Other considerations
Reshoring is a multifaceted process that extends beyond cost considerations. It encompasses branding, risk management, and several other factors. The landscape has evolved from simple cost-driven decisions to complex strategic choices.
How we can help
If reshoring is seen as the right approach, we can guide companies through a structured process. This journey typically commences with a diagnostic and strategy phase, which is then followed by the establishment of a sourcing office setup tailored to the unique circumstances of the company. Navigating the European supply market is a critical step in this phase. Additionally, we extend our support to help companies optimize their working capital. Traditional levers, such as shortening lead times, improving buying terms, tracking inventory, and reducing order quantities, can all contribute to reducing working capital.
About us
With decades of experience in working capital management, supply chain optimization, and low-cost country sourcing, BearingPoint offers valuable insights to help navigate the reshoring process. Having observed the evolution of global sourcing and understanding the intricacies of the current reshoring trend, we are well-prepared to assist with your reshoring initiatives.
Discover more!
Read our other articles to explore:
- Supply chain strategies create competitive advantages for operations in a digital world
- How to build a nearshoring center
