Chasing low cost production abroad is increasingly not delivering negligible benefits, and many companies that once offshored processes or services in China and India, for example, are now looking closer to home. Emma Scott, Representation Manager at The Chartered Institute of Purchasing & Supply, explores.
Offshoring activities are under heavy political risk, economic – flows of money, labour market, and social, culture and language pressures, which are raising concerns and impacting on the cost and effectiveness of having suppliers and/or business functions thousands of miles away. Multiple sectors are beginning to show signs that the hunt for the next low cost sourcing country is lessening, and some manufacturers and services are bringing production back to the UK.
Many businesses looking to outsource processes to offshore locations took advantage of lower labour costs in locations like China and India, particularly known for providing cheap IT and call centre services. But, the cost benefits that 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. Indeed, the return on investment is being impaired as the pace of growth in emerging market economies and wage expectations are rising steadily. In China rising up to ten percent increases again this year. Locationssuch as this no longer look as attractive as they once did.As a result, companies such as Symmingtons are moving production of their food products back from China to Leeds for ‘roughly the same’ costs. Aston Martin has moved the production of their Rapide S to Coventry from Japan. CIPS’ members are confirming this trend and that chasing the next new low cost area is often outweighed by the cost of moving production.
Events such as the tsunami in Japan and the floods in Thailand have also raised questions around the risk of large geographical distances and the ability to manage those risks. CIPS has always advocated closer relationships with suppliers, as critical to success, but they are particularly important for risk mitigation and addressing issues quickly when they strike. Closer co-operation between buyer and supplier will help increase understanding and provide safeguards that will limit the risk of fraud and corruption, as well as reduce the impact of natural disasters, but when long distances are involved relationship building can prove difficult, as the ability to communicate is hindered.
A different language and culture can also be a barrier to a strong relationship. Too many companies have had their fingers burnt by offshoring work out to suppliers with unacceptable working conditions without the purchasers being aware. Primark was found to be using child labour from three suppliers in India and the collapse of the Rana Plaza factory in Bangladesh which resulted in over a thousand deaths, being just some recent examples. Having a geographically close working relationship as well as a close board oversight of your suppliers can be critical to help develop trust, transparency and help monitor working. Regular visits to suppliers can highlight any instances of foul play. One company has overcome this challenge in a unique way: a buyer from a well-known pharmaceutical company actually spent time overseas living with one of the factory workers to get a true understanding of their working day and at the same time sending out a clear message to the supplier that any wrongdoing will be spotted.
The reputational impact of situations and events, such as the horsemeat scandal, have made consumers far more aware of where their products are made and under what conditions. Buying British is becoming a major selling opportunity for some niche UK companies as provenance and transparency of a product‘s source becomes more important to consumers. There does appear to be an increased consumer appetite for a ‘Made in UK’ brand in the mid to high end of the market. One such example is Brompton bikes which are sold all over the world. Established UK manufacturers, particularly clothing and bespoke tailors, are also seeing increased demand and there are even some instances of startups, for example The Cambridge Satchel Company, which by keeping their business ‘Made in Britain’, have continued to hit annual sales of around £5m.
Today, companies have also been moving away from focusing on cost alone and firms are looking at where functions can be carried out most effectively. In some cases, there is the need for more skilled professionals. A more efficient process will only deliver results if the professionals responsible for implementing them have the experience and specialist knowledge required. In order to maximize this potential, companies have come to prioritise the skill base of their workforce and realising that offshoring may not be the right thing to do.
Companies increasingly prefer to manufacture goods nearer to home, the reasons being that near shoring can offer significant advantages including shorter supply chains, greater flexibility, less distance to travel and shorter lead times, critical in a fast-paced industry. Faster response to sales trends and reduced minimum order quantities appears to be what has driven more retailers to source from closer destinations. In a consistently competitive market a retailer needs to be able to quickly exit from and replace poor selling lines. How this trend continues will depend on the reliability and quality of supply from near/local sources; businesses must look at their needs and expected outcomes, do a thorough risk-analysis and assess costs, to ascertain if offshoring is the right way.
