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The Benefits & Pitfalls of Reshoring

Feb. 28, 2022
For reshoring to work, companies have to increase visibility and transparency across the entire supply chain.

Disruptions caused by the COVID-19 pandemic have forced many companies to reconsider how they approach their supply chains. Diversification and relocation, specifically, have gained momentum as both strategies aim to reduce dependency on a small number of overseas suppliers. Some companies have even brought supply chain operations back stateside, i.e., reshoring, in hopes of regaining control over critical activities.

However, reshoring successfully requires more than replacing international partners and suppliers with domestic partners. It demands broader transformation regarding how organizations and external groups work together. It also depends on companies having better visibility, richer insights, and faster access to information in order to make better real-time decisions.

Without this reimagining of the supply chain, reshoring doesn’t necessarily guarantee better outcomes. There are advantages and disadvantages to reshoring, which means there’s no one-size-fits-all answer for companies today. In this article, we’ll address both sides of the reshoring debate and offer clarity to those considering revamping their global supply chains going forward.

Why Reshoring is Gaining Momentum

Working with non-domestic suppliers makes sense in a lot of ways. Outsourcing parts of the supply chain can keep costs down, shorten lead times for certain components, and increase access to raw materials. Outsourcing also enables companies to leverage the expertise and productivity of specialized facilities that have honed their capabilities over several decades.

While these benefits still exist, the pandemic brought to light some of the risks associated with outsourcing. Our global supply chains are so interconnected now that disruption in one part of the world can ripple out and affect customers in an entirely different region. When a worldwide crisis emerges, like the COVID-19 pandemic, or an essential trade artery gets blocked, like the Suez Canal, problems compound and extend far into the future. In fact, the Financial Times says that what we’ve experienced recently will leave a “permanent scar” on modern globalization.

Given this reality, it’s no surprise that executives are redesigning their supply chains with a new level of urgency. Leaders are evaluating every aspect of their supply chain operations and searching for ways to improve internal capacity constraints, order handling, and on-hand materials and inventory. Additionally, they are thinking through how to empower external partners and collaborate more effectively with people outside of the internal supply chain.

Reshoring has surfaced as a possible solution and continues to gain momentum as an alternative to outsourcing.

The Upsides of Reshoring

Proponents of reshoring cite several advantages. First, reshoring restores some control back to supply chain managers. Rather than relying entirely on foreign suppliers to determine how and when products are manufactured, companies that reshore operations can use the opportunity to be more selective when choosing suppliers. They can engage more closely with outside partners and break down the walls that have long existed between internal and external supply chain groups. This is compelling, particularly in volatile and uncertain times.

Reshoring can also reduce lead times when the right stakeholders are involved. Products don’t spend months in transit crossing vast oceans or get stuck in ports as the result of massive shipping container shortages. Reshoring enables companies to work with suppliers in nearby time zones and problem-solve with people who are onsite during normal business hours. Whereas outsourcing often involves asynchronous communication, reshoring makes it easier for all supply chain personnel to collaborate in real-time.

Furthermore, reshoring can produce a smaller environmental footprint compared to outsourcing. By cutting down lead times and long transits, companies reduce how much energy they are responsible for consuming to move products between suppliers and distributors. Reshoring is one way companies can prove their commitment to sustainable environmental, social and governance (ESG) practices, which are becoming more important every day in the modern economy.

The Downsides of Reshoring

There are also downsides to reshoring that supply chain executives have to keep in mind. Bringing supply chain operations back from abroad and reclaiming control over production comes with increased complexity and increased costs. Companies typically have to invest in new capabilities and infrastructure. They also have more assets and people to manage, and new professional relationships to cultivate. In other words, reshoring tends to replace specialization and efficiency with more responsibility.

On a related note, companies that reshore often forego important comparative advantages. They break ties with specialty partners who are better equipped to handle certain types of orders. Though there are high-performing North American suppliers, it’s possible that companies end up with partners less suited for their unique manufacturing needs.

Finally, reshoring can distract supply chain executives from their underlying goals. In responding to recent supply chain challenges, it’s not uncommon for leaders to prioritize proximity rather than identify the best possible partners who fit into their broader enterprise strategy.

So how can companies implement reshoring successfully? What do executives need to do to avoid these disadvantages? The answer lies in using technology to simplify the flow of information, enhance collaboration between all stakeholders, and improve real-time decision-making at every level.

The Elements of a Successful Reshoring Strategy

For reshoring to work, companies have to increase visibility across the entire supply chain, which includes having more access to external partners. It’s higher visibility and transparency that enable decision-makers in all organizations to identify potential disruptors quickly. Though this seems like an obvious solution, it represents a major departure from how many companies and suppliers have approached their relationship in the past.

Previously, it made sense for external suppliers to operate completely independently, exercising their skills and capabilities in whatever way necessary to fulfill orders. Companies could focus on other matters, leaving external suppliers to figure out how to meet their service obligations. Today, however, this siloed way of doing business prevents organizations from handling disruption well. By nature, disruption is unpredictable and chaotic. Those who aren’t already working in lockstep are unlikely to partner effectively when it matters most.

By increasing the flow of information between companies and suppliers, leaders can make better decisions faster. They can work with partners over the short term to pivot, adjust, or stay the course, depending on what’s happening in the marketplace. They can also scenario plan with greater precision and make better forecasts about what to expect in the future.

For example, should a co-packer learn of a component shortage early on, individuals in that facility could pass on the intel to a customer, giving the supply chain team the opportunity to implement a tailored mitigation strategy. Or, should a company and external partner share a common inventory platform, both parties could evaluate inventory levels at various facilities and take steps to minimize risk. They could also work together to come up with creative packaging solutions or make sure that all teams are aligned on complex orders.

For this degree of collaboration to work, companies and suppliers have to be willing to adopt new tools and ways of working. More specifically, they have to embrace digital transformation, open up new lines of communication, and accelerate data-sharing across organizational lines.

When more people have access to more information in real-time, companies are empowered to make better decisions. It’s hard to achieve this fluidity over static spreadsheets and phone calls. Modern supply chain teams need cloud-based software that makes it easy for people to sync up over a single source of truth and work from the same information. For reshoring to improve upon the traditional outsourcing model and mitigate inevitable disruption, this is essential.

Companies can’t simply maintain the status quo. It’s not enough to replace overseas suppliers with regional partners. The nearer proximity has to be coupled with a more open way of operating. In a world that’s only growing increasingly interconnected, companies that have the ability to evaluate and optimize their entire supply chains will prevail. And this is possible through digitization that is extended via collaborative partnerships.

Allen Jacques is an industry thought leader with Kinaxis, a provider of cloud-based supply chain management solutions. His executive background in supply chain management includes vice president roles with LEO Pharma, Aera Technology and Pfizer.

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