Spiralling transport costs have prompted procurement chiefs to backtrack on their offshoring policies. But, while it promises several benefits, finding affordable suppliers nearer to home is no easy task
The widespread reversal of offshoring as a result of Covid-related disruptions to global supply chains is testing the skills of many procurement professionals to their limits and beyond. Yet, if they can manage the onshoring process successfully, they have a golden opportunity to make their chains more sustainable and resilient.
In the decades leading up to the Covid crisis, western retail brands had routinely outsourced elements of production to suppliers in lower-cost economies around the world. But research by McKinsey in November 2021 found that, with pandemic-related problems continuing to disrupt global supply chains, 90% of firms were planning to pull at least some of these processes back closer to where the resulting goods were being sold.
The chief cause of this trend is clear: freight costs are more than four times higher than they were before Covid – and analysts expect them to remain elevated for some time. Onshoring can cut the costs of transporting the items in question while also drastically reducing their carbon footprints.
Malcolm Harrison, group CEO at the Chartered Institute of Procurement and Supply, believes that onshoring can offer even more benefits.
“People tend to think that this is all about transit costs, which are important. But onshoring probably won’t give you the lowest overall cost, because it will often entail a large investment to shift your production base, plus higher labour costs,” he says. “Instead, a balance that involves more localised production gives the best value by adding proximity and local skills, which increase flexibility. If your supplier is closer to where you sell your products, you can respond much more quickly to changes in your markets.”
French multinational Schneider Electric has shortened its supply chain as part of its sustainability strategy. This has involved localising production in a multi-hub system across Europe, the US, China and India. Each hub is responsible for its R&D operations, product specifications and suppliers. The result is that about two-thirds of the goods that the company sells in India are designed in India and 90% of them are produced there.
“You can’t have a small carbon footprint with a long supply chain,” says Schneider Electric’s chief procurement officer, Dan Bartel. “Climate change is an existential crisis. Most of the damage comes from supply chains – and supply chain leaders have a responsibility to act.”
It’s a common misconception that large companies such as Schneider Electric can lose economies of scale by making a global to local shift, according to Bartel. But, while economies of scale can be important in some markets, “economies of skill” are more valuable, he says, as localised supply chains can contribute to a central pool of ideas and best practices.
Adopting a localised supply model isn’t feasible for everyone, of course. Take semiconductor chips, for instance. These vital computer components, most of which are made in Asia, are too difficult for most western firms to onshore. The pressure on supplies, resulting largely from the trade war between Washington and Beijing, has become so severe that US chip giant Intel is planning to spend up to $100bn on building what could become the world’s largest microchip factory in Ohio, but few other companies could match that level of investment.
Josh Brazil, vice-president of supply chain insights at the project44 consultancy, believes that only a small number of industries can make a compelling economic case for onshoring to higher-wage territories. The manufacture of many goods is already highly automated and relies on low-cost labour, he argues.
Onshoring per se isn’t necessarily the most effective way to mitigate risk, either. While it will reduce a firm’s exposure to supply shocks overseas, the business could be left without alternative suppliers if serious disruption should strike at home.
With these factors in mind, procurement chiefs would be well advised to strike an appropriate balance, Bartel notes. Schneider Electric, for instance, maintains global standards for quality to ensure that, if supplies are disrupted in one locale, the company has enough flexibility to use other sources with confidence that what they supply will match its specifications.
Swiss healthcare multinational Novartis serves 155 countries from more than 50 production sites. Its global head of strategy, operations and local markets manufacturing is Amit Nastik. He says that both onshoring and nearshoring (relocating production to a territory near the home market) have been vital for his company. They have ensured continuity in its supply of medicines by reducing the impact of unexpected problems such as border closures.
Despite this, the strategy has its limitations in the pharmaceuticals sector.
Nastik explains: “Nearshoring is impossible for some products, because customers stipulate the use of one supplier for intellectual property reasons. And, for some materials, only one supplier can meet the required quality specifications. Some government policies also discriminate against foreign-made products.”
Another disadvantage of onshoring is that it can divert resources from offshore suppliers you may still need, threatening their survival, he says. For all these reasons, Novartis will continue balancing offshoring, nearshoring and onshoring to diversify its supply chain.
Harrison contends that not enough procurement professionals are skilled enough to perform such a task effectively.
“Before the pandemic, were accustomed to stable supply and demand,” he says. “Now, we need more flexible supply chains to manage greater demand variability – and more people with the skills to judge how to structure a resilient supply chain. They need to work out how many suppliers to use, which of them should be onshore and how long the commitment to these should be. Setting up production is usually more intensive than operating an established site. It often involves a long-term investment decision, but what will happen in five years? You must therefore build in agility, which requires strong skills in areas such as scenario planning and strategic analysis.”
This may entail moving to a bigger supply base featuring a mix of onshore, nearshore and offshore sites. So procurement chiefs may need extra resources and the skills to manage a more complex structure too.
But, as Bartel says: “Sure, redesigning your supply chain can be difficult, but it’s worth doing for the long-term benefits. While the current situation won’t last forever, suppliers will continue to face crises. Supply leaders therefore need to design their chains to be more agile and resilient.”
Despite the benefits, onshoring presents so many tough challenges that the process could be likened to turning around an oil tanker. Indeed, it might actually involve turning around a tanker. The question is: does your procurement team have the skills to do it quickly enough?