Manufacturing and services that were once outsourced have turned full circle, as Rebecca Brace reports
In the world of outsourcing, terms like “backshoring”, “inshoring” and “reshoring” are attracting significant attention. While the words themselves might be linguistically awkward, they all mean more or less the same thing: bringing processes or services back from an offshore location.
In the past, many companies looking to outsource business processes have aimed to take advantage of lower costs in locations like China and India. But, with wage expectations steadily increasing in these locations, they no longer look as attractive as they once did. The cost benefits companies may have enjoyed in the early days of offshoring have been steadily eroded, in some cases to the point where the advantages are now negligible.
While costs may be rising in the best-known offshoring destinations, there are plenty of other low-cost locations to choose from. Amanda Flynn, senior manager at Baringa Partners, says that in some cases companies are moving processes within India from bigger cities to cheaper rural areas. In others, they are moving into less widely known countries, such as Malaysia and the Philippines.
But hopping from country to country in order to keep ahead of growing wages is arguably never going to be a long-term solution. “At some point you are chasing around the world looking for wage arbitrage and that is what has driven people to think about doing it better,” says Matthew Bennett, a partner at law firm Olswang.
UK-based food manufacturer Symington’s has decided to move noodle manufacturing from Guangzhou to Leeds, stating that the cost of producing noodles is no longer cheaper in China
Mr Bennett says this realisation has led some companies to move away from focusing on cost alone and that companies are increasingly looking at where functions can be carried out most effectively. “In some industries, such as automotive, people are learning that, if you have better educated people and better processes, the overall cost actually means that you can have them in a location that is closer to your customers or closer to your head office,” he says.
While companies have historically based call centres in India, some are now reconsidering this approach. In 2011, for example, Santander moved its Indian call centres back to the UK. Having outsourced its call centre operations in 2003, the bank was prompted by customer feedback to reverse the move and handle the calls in centres in Glasgow, Leicester and Liverpool.
“Since the ‘in-source project’ was completed in July 2011, we have seen an increase in ‘overall satisfaction’ in our call centres, from 58 per cent to 73 per cent or 26 per cent uplift as of Q1 [first quarter] this year,” says Colin Webb, Santander’s UK director of retail contact centres. “The ‘in-source project’ has played a key part in this increase in satisfaction.”
More recently, UK-based food manufacturer Symington’s has decided to move noodle manufacturing from Guangzhou to Leeds, stating that the cost of producing noodles is no longer cheaper in China.
Caldeira, a cushion manufacturer headquartered in the UK, is also in the process of bringing production back home. In 2003, Caldeira closed its UK factory and set up a Chinese joint venture in order to manufacture its goods. While the model worked well to start with, rising labour costs began to take their toll and salaries for production staff have tripled in local currency terms.
As a result, in 2011 the company began to move some of its labour back to the UK. “We now produce some cushions more cheaply in the UK than in China,” says Tony Caldeira, the company’s founder and managing director.
The UK is not the only country in which backshoring is becoming more common. Caterpillar is moving production of construction equipment from Japan to the United States, while GE moved some of its manufacturing from China to Kentucky in 2010. But what has been driving this shift?
Olswang’s Mr Bennett observes that the backshoring of call centres is being driven by a combination of cost considerations and the emergence of more sophisticated technology, such as the ability to use robotic automation to process emails. The expectation is that with more customers communicating via email, it will be possible to process more customer contact automatically and therefore without the need for human intervention.
“That means you need to have a smaller call centre and can start to have a really high value contact centre that can be placed anywhere in the world,” he says. “We are seeing that people are changing the way they run the process and are then deciding where best to locate it. And it might be best to locate it in the UK because that’s where other business functions are and it makes sense to have everybody a lot closer to the core of the business.”
While rising labour costs are a major factor, other drivers are also coming into play. One of these is the issue of quality, says Lee Hopley, chief economist at manufacturers’ association EEF. “If you are a manufacturer and you are doing something that is quality dependent, you can’t risk having shipments of goods that are not up to spec,” she says.
Ms Hopley adds that natural disasters, such as the 2011 Japanese tsunami, have started to raise question marks about the resilience of value chain infrastructure stretching thousands of miles. “If you are relying on a sole supplier and something goes wrong, it has significant implications on your ability to get orders out of the door.”
According to Mr Caldeira, there are many other reasons why companies prefer to manufacture goods in their home country, including shorter lead times, greater flexibility, better credit terms, and the ability to communicate in the same language and time zone.
While companies may stand to benefit from backshoring, this is not a decision that should be entered into lightly. Where manufacturing is concerned, Mr Caldeira observes that some skills have been lost in the UK since offshoring first became popular. As a result, recruiting staff for tasks, such as fabric cutting and operating industrial sewing machines, have proved difficult.
“Reshoring is challenging,” warns Glenn Hickling, communications manager of the National Outsourcing Association. “The cost and effort of finding the perfect onshore or nearshore supplier is often underestimated, and can pull resources away from other essential projects and activities.”
Mr Hickling adds that companies should “be sure the resource that replaces the offshore activity is going to compete, in terms of efficiency and effectiveness, and that you are ready to deliver stronger results on home shores”.
PACKING UP TO COME BACK HOME
Magmatic, manufacturers of the Trunki ride-on children’s suitcase, initially made its product in China, but in 2012 took the decision to move manufacturing to the UK.
Rob Law, the company’s managing director, says that factors contributing to the decision included the devaluation of sterling against the US dollar. “The cost of shipping was up and down all the time. A couple of years ago, we tried to understand what our actual margin was for our products in China and it was almost impossible to pin it down because it kept changing,” he says.
At the same time, the decision was taken to re-engineer the product in order to make it cost-effective for Western production as well as fully recyclable – a process that involved removing all metal components from the design. “This has allowed us to make it very competitively compared to China,” Mr Law explains.
The backshoring process has not been without its hiccups. A factory that the company used in the UK did not produce the goods at the expected speed. “We discovered in late-November that the factory had had such financial difficulties trying to scale up its organisation that they were days away from going into administration,” he says. “So we ended up buying them out of administration.”
As a result, the company now manufactures plastic goods for other UK companies through the factory. Mr Law says these companies are also looking to onshore more of their product range. “If you want to be in control of your margins and know how much you are paying for goods for a decent period of time, then I would highly recommend it,” he concludes.