By: Dr Ravindra Ojha
The COVID-19 pandemic shocks, the ongoing trade war between the US and China, the food distribution crisis emanating from the Ukraine–Russia war, the humanitarian crisis of the Israel-Hamas conflict, extreme weather events, workforce scarcity, economic uncertainties, acute shortage of semi-conductors, and many other international tensions are compelling the supply chain leaders to revisit their sourcing strategies. The earlier normal trend in sourcing was picking up the L1 (lowest price) supplier which often led to offshoring. This normal is being questioned by today’s business world.
There are often three sourcing approaches adopted by procurement leaders in manufacturing companies– Offshoring, Nearshoring, and Reshoring. Offshoring is all about sourcing from outside the country, across the world, that provides the best possible price due to its vicinity to raw materials, low labor cost, and superior quality. In nearshoring, the company sources its products from a nearby or a neighbouring country where the cost-affordability is attractive, the supply chain is short and responsive, communication is effective, and visibility is better due to the vicinity. Reshoring is all about bringing back product sourcing to the country or the region of business due to the growing fragility in the worldwide supply chain or unfavorable trade policies. The key objective of reshoring, also known as inshoring or onshoring, is to have strong control of the end-to-end supply chain.
The world’s current geopolitical situation and supply chain challenges are making business leaders transition from offshoring to nearshoring or reshoring. Manufacturing companies are experiencing business discomforts in terms of different time zones, linguistic issues, lack of transparency/visibility, and long lead times. The five key drivers for reshoring and nearshoring in the manufacturing business world are;
- Resilience: The capability for resistance to disruptions and recovery back to normalcy is a measure of resilience in the supply chain. This comes in the suppliers from their financial robustness and strength, technological depth, and human resource capability. Japanese industries display this resilience under severe conditions like natural disasters (earthquakes, tsunamis, etc). The Indian suppliers today with appropriate policies and incentives have gone a long way forward and possess the requisite resilience.
- Agility: Agility in sourcing is all about the speed at which the suppliers respond to the customer’s fluctuation in terms of volume, variety, and velocity in the current VUCA business world. Faster and more effective procurement processes deliver agility. Offshoring from far-located countries is bound to have its limitations in terms of supply response and other business performance factors. This was witnessed during the pandemic for pharmaceutical supplies. Such situations lead to a transition from single to dual sourcing with geographically part locations, however, within the region (nearshoring).
- Reliability: Reliability in terms of delivery and quality are critical players in sourcing. Intuitively, reshoring and nearshoring with shorter and less complex supply chains is expected to provide higher reliability. Just in time (JIT) system works effectively when suppliers are reasonably close. This was witnessed when JIT as a system was questioned during the pandemic without understanding that the key contributor to its failure was the long lead times of the logistics. Manufacturing within the country does matter in such situations.
- Sustainability: The pressures of environmental sustainability are mounting, as witnessed during the recent G20 summit in Delhi. Each country is expected to achieve the targets of the 17 Sustainable development goals. Supply chains are a significant contributor to greenhouse emissions to the environment. A green supply chain can be a saviour to sustainable businesses in the future. Reshoring and nearshoring with a green supply chain are expected to become the best bet for sustainability.
- Visibility and transparency: Knowing the suppliers is becoming more and more relevant today to understand the major risks that exist in the supply chain from raw material to system compliance to the manufacturing process adherence and finally to on-time delivery. Nearshoring and reshoring coupled with technology are best suited to provide the requisite visibility and transparency.
The transition from offshoring to reshoring or even nearshoring is becoming a necessity under the current business scenario. The six challenges likely in this process of transitioning to reshoring or nearshoring are;
- ‘Ease-of-doing-business’ environment: The supplier’s movement to a new destination is largely governed by various factors defined by the ‘ease of doing business’, such as cost, ease in clearance gates, transparency, duration, and normal operational aspects. The healthier and less complex the system is, the more movement will take place towards reshoring and nearshoring.
- Making economic business sense: Vicinity to raw material, labour cost and productivity levels, manpower quality, power cost and availability, and infrastructure quality are a few economic decision-making drivers for the suppliers to make the transition.
- Environmental regulations: Environmental sustainability issues will continue to dominate the manufacturing business world of tomorrow. Therefore, the regulations concerning it will be a critical factor that the supplier will focus on.
- Management of existing suppliers: The customer’s disengagement from the existing suppliers in this transition process will be a major challenge.
- Intellectual property laws: The handling of patents and protection of intellectual property will find a place in the transition to reshoring/nearshoring.
- Capability to assess the technical levers: The customer’s competence to deep dive into evaluating the manufacturing processes, aligning to design requirements, quality assurance systems, and reliability is a key challenge in this transition process. It would need additional resources, cost, time, and technical capability.
If China can become a manufacturing hub in Asia why can’t India, which has the right market, appropriate demography, good technical capability, and right appetite for manufacturing excellence? There are challenges faced by the Indian suppliers that need attention to overcome: higher cost of production, affordable technology, Investment, low labour productivity, and quality resource availability. The six countermeasures recommended to mitigate these challenges in the Indian manufacturing environment are
- financial and technical support to MSME,
- reform of the archaic labour laws,
- better infrastructure,
- quality of training in ITI and apprenticeship for workmen,
- stronger value-adding R & D culture, and
- effective natural resource management for circular production and consumption.
Reshoring and nearshoring are expected to benefit all stakeholders. The country is going to gain in the job market, the shortened supply chain is expected to delight the business fraternity and the customers, the MSME is expected to grow in terms of scalability and profitability, the infrastructure will be compelled to improve thereby improving quality of life, the manufacturing share in the nation’s GDP will meet the target of 25%, and finally prosperity is bound to happen.
The learnings from the supply chain disruptions in the last few years have been immense for the nation at large and industry in particular. Shortage of life-saving drugs and scarcity of daily needs during the COVID-19 pandemic crisis, the growing defense-related requirement due to the war and geopolitical unrest, and exponentially growing demand for electronics in today’s IT-driven society have all led some industrial sectors to accelerate their act on reshoring. The following industrial sectors, across the world, are expected to lead the initiative of reshoring – pharmaceutical, medical, chemical, aerospace, textile, military/defense, and electronic.
In summary, the current VUCA business world has many challenges to counter to prevent disruptions in the global supply chains. The geopolitical scenario is constantly changing the business dynamics leading to a high degree of complexity. This is prompting procurement leaders to start looking inwards rather than outwards, in terms of sourcing. Therefore, a major manthan around sourcing has already begun. Offshoring has been challenged. Business leaders are going back to the basics by embracing reshoring and nearshoring. The key question lies in comprehensively analyzing the Return on investment (ROI) due to this transition.
The author is Professor of Operations at Great lakes Institute of Management Gurgaon