Balancing the lower cost of manufacturing in offshore locations against the higher cost and time taken to ship goods is a challenge that manufacturers have faced for years.
Now, with labour costs in offshoring locations such as China starting to increase, demand for fast fashion and the quick turnaround of product lines has made offshoring even more testing for SMEs.
Many are using Eastern manufacturers, but looking to focus on Western export destinations, and in doing so, are considering near-shoring, bringing it closer to point-of sale, or re-shoring, bringing their manufacturing processes home.
Such a move brings manufacturing closer to the point of sale, with the possibility of support in the form of government subsidies.
Many types of manufacturing have reached a tipping point, in terms of whether they should be located overseas or in the country where the goods are consumed, says Dave Atkinson, head of manufacturing and key markets, SME Banking at Lloyds Bank.
“We are seeing re-shoring in the UK in a number of industries, particularly making a virtue of bringing home production of higher quality production goods or value added such as the aerospace or automotive industry,” he says.
For its Fuelling Growth report, Lloyds Bank surveyed manufacturers in the automotive supply chain and found that nearly three-quarters (70%) of respondents were looking to ‘on-shore’ some of their operations by the end of 2016. Almost half (45%) said they had already repatriated, on average, a fifth (20%) of their production.
Production close to the target market makes most sense where the cost of transporting the finished product is relatively high, because of a desire to keep product delivery delays to a minimum or because the long supply chains are now seen as undesirable.
“This is an important factor in the UK as much of our manufacturing output is exported and there could be a strong argument for moving production closer to a target market such as the US,” says Atkinson.
In deciding on the benefits of re-shoring and near-shoring, companies need to consider a number of factors relevant to their sector, from the skills of the workforce and labour costs, to transport costs and the location of its final market.
Paul Marks, director of sales at UPS, says: “When making the decision of where to base production, companies need to have a close look at their supply chain. It can be useful for companies to collaborate with an experienced logistics partner when making this decision because they can help create value and competitive advantage through solutions that lower costs, improve service and provide highly customisable supply chain control and visibility.
“UPS’ logistics and distribution capabilities range from warehousing and inventory management to returns and brokerage services. This gives small companies the power to expand to new markets and compete with larger corporations.”
In order to accelerate the creation of manufacturing jobs and other components of commerce, many governments now offer a range of incentives to stimulate near-shoring and re-shoring efforts and encourage corporate investment.
Gelston Howell is senior vice president, strategy and marketing at electronics manufacturing services (EMS) company Sanmina, which re-shores and near-shores manufacturing in Ireland, Sweden, Germany and Hungary for its European market.
He says: “In some countries, governments offer incentives if a product is designed and manufactured within the country, and these can make it more economically attractive to manufacture there. Sometimes the end customers of the OEM may also have requirements on the location of manufacture, which need to be taken into account. One example of this might be the need to locate manufacture close to an end customer’s facility.”
Supply chain costs also need to be factored into the decision.
“If a product is already designed using Asian manufactured components, it may add significant cost and risk to consider re-shoring manufacture to a US or European market,” adds Howell.
One UK manufacturer that has successfully re-shored is Cumbria-based Wax Lyrical, which makes home fragrance products such as candles and reed diffusers.
When owner Mike Armstead bought the business for a nominal sum in 2007 it was failing – despite a turnover of over £18m, it was losing £5m a year. Apart from being overstaffed, 70% of the manufacturing was done in China and India, creating long supply chains and leaving lack of control over quality.
“Containers would arrive from overseas but often weren’t what had been ordered. There were also issues with quality,” said Armstead.
In 2008, when most businesses were still outsourcing, the firm decided to re-shore to regain control of product and quality control, and now manufactures 95% of its product.
“Had we not made that decision, the company would have gone under,” says Armstead. “We were fortunate to have the buildings and some capital equipment with which to manufacture products, but we have had to invest heavily in the factory.”
However, he adds, they also did it without the assistance of UK government support.
“We did it by ourselves. The turnaround has been significant, and we are now a profitable business,” adds Armstead.
Harvey Water Softeners, which manufacturers and sells domestic water softeners, re-shored 100% of its production process back to the UK from the Far East in 2008.
By establishing ownership and oversight of every stage of the supply chain, quality and efficiencies improved while failure rates fell, resulting in an increase in turnover from £6m to £19m.
The improved financial position, along with a £2.5million, two-year R&D investment, aided by the Government’s Annual Investment Allowance, enabled the company to upskill, and it retains dozens of experienced engineering staff at its Surrey headquarters.
New methods of production, increased regulation and rising costs could eventually make the global manufacture of goods unattractive for many sectors. This will translate into more goods being made at home with a greater focus on controlling factories in target markets abroad in place of exports.
An example of this futuristic manufacturing model can already be seen at the Advanced Manufacturing Research Centre in Sheffield, where over 100 companies share manufacturing research in a state-of-the-art industrial setting.
When companies come together to share research which goes all the way from concept through to design, prototyping and production, they make the step changes in productivity which transform time, quality and cost, says University of Sheffield Vice-Chancellor Sir Keith Burnett.
He adds: “If we are to re-shore jobs, or even entire supply chains for the manufacture of high-speed trains or the infrastructure of low-carbon energy, we need to reverse the effects of decades of privatisation on R&D and skills.”
Atkinson, from Lloyds Bank, adds: “Manufacturers will have to find the balance that works for them, their suppliers and ultimately their customers.”
Content on this page is paid for and provided by UPS, sponsor of the Exporting to New Markets Hub on the Small Business Network.
