Innovation is a reason to Re-shore

A recent special report in the Economist highlights a growing trend among American and European companies; they are bringing back work which was previously offshored or outsourced to cheaper locations.   Offshoring means moving work and jobs outside of the country in which the company is based; outsourcing means giving work to outside companies.  The process of bringing the work back is known as re-shoring.  There are several reasons for this.  The most obvious is that the difference in unit labour costs between developed and developing economies has diminished significantly.  Wages in India and China have been rising at 10 to 20% per year over the last ten years while manufacturing pay has been mostly flat in USA and Europe.  But there are other major reasons.  General Electric (GE) is moving production of boilers and fridges from China to Kentucky so that manufacturing, design and development are closer together enabling the company to be more responsive to customers.   Otis Elevator is moving a factory from Mexico to South Carolina to keep R&D closer to manufacturing and to reduce logistics costs.

When it comes to jobs in services such as IT many are coming back from India.  Charlene Begley, CIO at GE, found that the company was losing key skills by outsourcing IT skills and it is now hiring 1100 IT engineers for a centre in Michigan.  Randy Mott, CIO at General Motors (GM), believes that by outsourcing IT activities the firm was focusing on keeping things the way they were rather than trying new ways of working.  He is bringing IT work back in-house to increase flexibility, speed and innovation.

It seems as though the big wave of outsourcing and off-shoring is coming to an end.  There are fashions in business strategy just as in other walks of life and the outsourcing fashion is one that has had its day.  If manufacturing pay is less than say 20% of the total cost of a product then moving production overseas to save costs is a dubious exercise – especially if it increases lead-times and reduces flexibility.   Today’s watchword is agility.  For that you need IT as a key core competence in-house and you need manufacturing to be close to design and development functions so that new products can be brought to market quickly.   A good exponent of this approach is Zara, the Spanish fashion leader, which has spurned the opportunity to manufacture in the Far East in favour of fast, flexible local production in Spain, Portugal and Morocco.

Paul Sloane

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