Inside Extreme Scale Tech|Friday, December 26, 2014
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What Drives the Offshoring Tide? 

As the tug of war continues between offshoring and reshoring, the goal of lawmakers has primarily been to identify incentives with which we can lure manufacturers back onto U.S. soil. With big name manufacturers like Apple deciding to bring work to factories back home, there’s certainly hope for a brighter domestic manufacturing economy, but most in the industry are aware that for many businesses, there just aren’t enough incentives to abstain from offshoring.

Now, much of the spotlight has been put on lawmakers, whose policy decisions could either fan the growing inshoring flames, or snuff them out altogether. But as researchers from Miami University and the University of Tennessee have pointed out, we must first understand what factors ultimately play the largest role in drawing a manufacturer to one location versus another before putting the pressure on Capitol Hill. So they set out to answer just that question.

The team, which includes Lisa Ellram, Wendy Tate and Kenneth Petersen, surveyed manufacturing professionals involved in offshoring, hoping to better understand what factors played into their offshoring decision making. What they found was a collection of risks unique to major manufacturing regions, which could arm manufacturers and policymakers with the knowledge they need to turn the U.S. back into a global production hotspot.

Of the potential driving factors, Ellram and her team anticipated responses to vary among: the rising cost of fuel and transportation, rising labor costs, concern for environmental issues, improving U.S. labor output per dollar, volatile currency valuations, and faster response times associated with moving manufacturing closer to the customer.

Naturally, the survey showed that certain regions were more attractive to manufacturers—otherwise there wouldn’t be a national call to bring manufacturing jobs back home. But fluctuations in each region over time suggest just what we’re beginning to see: that attractiveness isn’t static, and is possibly subject to manipulation.

Not surprisingly, policy weighed in as one of the largest influences of whether a region is attractive for manufacturers. Those policies included trade, tax incentives, subsidies, and countertrade requirements.

But that wasn’t their only policy-related discovery. The team also found that the role of policy has been growing to stake a more dominant claim among the myriad of factors affecting decisions to offshore.

Previously, with cheap labor and materials available in many of these regions, the question of whether or not to offshore was relatively black and white. The low labor costs outshined all other considerations so brightly that a holistic approach was not necessary. But as these costs begin to level out across the globe, Ellram noted that risk assessment should increasingly consider a greater array of factors when considering offshoring.

An additional factor to top the list was the threat of supply chain interruption, which is a prominent concern in East and South Asia, Africa, South America and the Middle East. Given the supply chain’s role as the backbone of the manufacturing business model, this shouldn’t come as a surprise.

When coupled with the cost benefits associated with keeping the supply chain close to the end user or customer, the security of steady sales thanks to the minimal risk of an interrupted supply chain helps would discourage offshoring to these regions.

But in the end (and least surprisingly) cost was still the greatest factor influencing manufacturing location decisions, particularly when you consider the entire cost equation. Whereas companies once focused on labor costs, with wages in countries such as China rising, manufacturers are starting to take a look back to get a holistic view of total cost and profitability, and how more than just labor costs are having in impact.

In the end, these factors could help to bring manufacturing closer to home, but a number of these drivers are simply out of our hands.

Still, the growing influence of policy that this research has pointed to looks promising. And when this is coupled with factors beyond our control, such as supply chain reliability and total costs of manufacturing in various regions, it’s possible that changes in tax incentives and subsidies could be a tipping point for businesses considering reshoring.

An additional survey has recently suggested that this may be a possibility. With the U.S. now matching Mexico in “manufacturing attractiveness,” according to their findings, the nation is poised to match China by 2015 if the current rates hold. Among the factors in question were China’s rising labor costs, and the allure of having manufacturing operations held closer to end markets.

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