Mid-Market Firms to Re-shore Business Supply Management - Essay Example

Assignment 3 Number: Lecturer: Mid-Market Firms to Re-shore Business Supply Management Introduction Over the last two decades orso, businesses and companies in the West have been off-shoring business processes and manufacturing to the east. The trend was caused by increasing pressures of globalization of business functions and the need for find low-cost means to deliver services and goods to the market. Companies were trying to find ways to remain competitive in the face of stiff competition. The practice has seen companies putting up factories to manufacture their designed goods in a low-cost environment. Others outsource any business process to a third party who can do the same amount of work at a lower cost compared to hiring and maintaining employees with huge salaries and benefits back home country. These goods are then re-exported back at competitive prices as compared to those manufacturing locally. Apart from the already mentioned reasons, there are other varied reasons for off-shoring. They include outsourcing non-core function for the company to focus on core function and freeing internal resources to be put in more effecient use (Shah, & Moushon, 2014). Off-shoring also enables companies to be nearer markets they want to serve by gaining more access that hitherto would be hard to penetrate. These are not the only reasons though. The pressure for off-shoring and out-sourcing is increasingly becoming small by the day and companies are no longer pursuing it as a business strategy while those out there are re-shoring. Re-shoring is gaining currency in corporate board rooms. Companies are have started re-shoring the previously out-sourced services and personnel back to the west especially here in the UK. The well-paying manufacturing jobs are coming back, and a collective thinking is shifting from cheaper off-shoring to more benefits to everyone at home including government. With a more careful cost-benefit analysis, many companies hear in the UK have realized that in off-shoring there are more risks involved than manufacturing here. They include extended supply chain, quality issues, duties, shipping costs, delays to market, and currency revaluations. The savings that were available sometimes back have become less attractive in today’s business environment (Shah, & Moushon, 2014). This paper will delve into one of the reasons re-shoring is an option and, or becoming a must for these companies in the UK to come back home, supply chain issues. We are going to explore this topic to see what the dynamics are that are forcing a company to take this unprecedented direction. Motivation behind re-shoring As mentioned in the introduction, re-shoring is of interest from the point of view of macroeconomics and the extent in which it will have significance in the UK output and employment. Re-shoring has been gaining momentum in the last two years though this does not mean that it has had a significant impact already. Other companies are still considering off-shoring or some that are there in the foreseeable future not considering re-shoring as a strategy. Such like issues like unreliable communication and extended lead times, customer satisfaction has been waning. The earlier anticipated cost advantages were caused by preventable mistakes. These are some of the problems making re-shoring more likely coupled with a general lack of accountability that showed little signs of changing. It is noteworthy to mention that this is not yet a trend but from the bigger picture, it might be a strong trend in the near future. There is no doubt that the potential for lower parts and lower costs dictate that some parts manufacturing will always be done off-shore (Pricewater House Coopers, 2013). In her article, Savage (2014) said that the push for re-shoring has caught the eye of the political leadership in the UK with Prime Minister David Cameron urged companies to move jobs back to Britain. Some CEOs have agreed that the time in delivery of products has shortened from the product design to being delivered to the shelf. Companies benefit from sales of new products sooner and citizens of this country are now identifying more with products manufactured here. Some call the re-shoring initiative a common sense as it has benefits that exceed those of off-shoring. They include logistics costs, time loss, potential Intellectual Property (IP) loss, language barriers, and the missed opportunities for collaboration between design and manufacturing, point at which innovation takes place (Denning, 2013). Several surveys by various institutions here in the UK, United States, and other advanced economies have been done for the case for re-shoring in either supply chain or the entire business spectrum. In a study conducted by GE Capital and Warwick Business School, procurement made about a fifth of the operations firms intends to re-shore back to the UK. The activities include internal business services making up 23 percent, procurement (21 percent), customer services (19 percent), manufacturing and production (19 percent) and product development at 19 percent (Green, 2014). These activities as mentioned are predominantly in the Euro Zone and USA. Across the Atlantic, Massachusetts Institute of Technology conducted a survey of 340 respondents and found out that 33.6% were considering bringing manufacturing into the US. 15.3% said they were planning re-shoring with some having already implemented their plans to benefit from government subsidies and tax breaks. Pricewater House Coopers (PwC) UK estimates that the trend could create a hundred to two hundred thousand jobs over the next decade. This would boost the annual output by between £6-12 billion at the current values which are about 0.4-0.8% of GDP by mid-2020s. Factors leading to re-shoring Some companies are recognizing the importance of producing products and services closer to where majority customers are, hence re-shoring or near-shoring. This led to many companies considering slowing down the need for off-shoring, instead increasing production capacity at home. When companies source in the UK, they take advantage of the local market and leaner supply chain (Teague). Re-shoring affords them the flexibility to respond quickly to the customers’ ever changing demands which are a component of this country’s competitiveness. Some of these factors include; i) Declining wage gaps ii) Technological changes iii) Security of supply chains iv) Rising or volatile transport costs v) Quality of products and services vi) Need to respond quickly to changing consumer preferences in a digital world vii) Cost of managing overseas operations Declining wage gaps The key factor that is causing the re-shoring is the declining wage gap between the developing and the developed economies. This was a key cost-benefit factor the influenced off-shoring to low-wage economies in the East lead by India, China and the Philippines. Wide wage gap will continue to shrink over the next decade and half partly due to projected real exchange rate movements. It is estimated that real wage levels in emerging economies like Poland, China, India, Turkey, and Mexico will likely be significantly closer to the UK and the US, though might not equal. The table below will demonstrate this, still is subject to many uncertainties especially real exchange rates that are sometimes volatile and hard to forecast. The broad, long-term trend towards greater wage convergence is likely to be robust (Pricewater House Coopers, 2013). Figure 1a; US and UK, and other emerging economies average wage growth (index with US=100) Country 2011 2020 2030 US 100 100 100 UK 99 99 102 Spain 74 83 92 Turkey 43 63 86 South Africa 42 57 77 Poland 33 51 69 China 15 29 45 Mexico 13 19 26 India 4 8 13 Philippines 5 8 13 Source: ILO, IMF, PwC Analysis From the table, it can be observed or inferred that some labour-intensive functions or business will respond to the trend of moving business places out of China to even cheaper locations like the Philippines. However, if there are other motivating factors, this trend may not be appropriate, hence moving back to the UK when lower-cost locations shrink to less dramatic levels. Technological changes The world is now characterized by rapidly changing technological innovation and automation. They may erode the benefits of relocating to low-wage economies. Cheaper robotics is being introduced to the industry able to work with human beings. They are being deployed successfully in some warehouses. They have a capacity to attain much higher productivity than a normal human being (Pricewater House Coopers, 2014). Security of supply chains Extensive geographical locations mean business supply chain processes are subjected to extreme climatic conditions, political unrest and theft of IP especially in countries where protection is difficult. In light of this, management in the UK companies might have a greater desire to their supply chain secure by bringing more of them onshore. There are sectors, for example, where reliance on offshore supply chains has led to problems. Electrical production of components in the Philippines dropped by as much as 17.5% in the two months of May 2011, when the supply chain of raw materials from Japan stopped as a result of the tsunami. This had a knock-on impact on customers in the UK, US, and Europe. Auto parts, too had disruptive supply chains effects from severe floods in the same year in Thailand. Res-shoring isn’t an answer to supply chain risks as within UK, severe weather conditions can still have the same effects. It is an option with greater weight in decisions as more experience accumulates on the globally potential fragility of dispersed supply chains. Rising or volatile transport costs Transporting freight over long distances increasing over time now especially 2007 to 2008 and have remained volatile since then. Shipping bulky products over thousands of miles are particularly susceptible to such volatility as transport costs make up a significant component of the overall production chain costs. For lighter or intangible supplies, however, this may be a non-hindrance (Pricewater House Coopers, 2013). Quality of products and services Is another reason UK firms cite as a consideration for re-shore part of their overseas operations back home. This finding suggests that businesses have more often found it difficult to monitor and guarantee the goods and services quality produced by offshore operations. Suppliers can be vetted to overcome this problem but, information on this is often limited especially in China. The vetting process can be costly also bearing in mind that there is a variety of choices where many suppliers are in the marketplace. Need to respond quickly to changing consumer preferences in a digital world Off-shoring can be less agile to changing customer preferences that may sometimes shift rapidly in a world where online shopping is more prevalent. Management teams may quickly recognize changing trends in shopping, but the distances involved have made communication and production run more difficult. It may lead to higher inventory costs, lower profit margins and loss of very crucial customers. In the textile industry, for example, fashions now change rapidly due to increased online shopping and the desire to have more customized products (Pricewater House Coopers, 2014). Cost of managing overseas operations It might be cheap communicating with off-shore offices, but deploying management and purchasing teams means a significant amount of money is spent abroad to monitor performance and improve processes. Costs gained from off-shoring parts of the business are eroded by the increased costs of travel and accommodation (Pricewater House Coopers, 2013). Conclusion All other sectors are set to respond and benefit re-shoring trend that is starting to pick some steam. Supply chain management cuts across all sectors and its operations affect 100 percent of businesses be it service, heavy industry or commerce. Multi-channelled, technology-based sourcing will have a transformative impact on procurement in the UK. By capitalizing on a high-tech platform in e-sourcing, UK businesses will be able to source more effectively, be competitive globally and revitalize the UK economy supply chain. A typical supply chain network can rely on the skills and equipment capacity of many suppliers. Selection, efficient supplier discovery and network maintenance are essential, and an online platform is crucial for real-time negotiation with one or many contracted manufacturers. On the other hand, buyers need the ability to build strategic long-term relationships and in real-time locate and access and access UK supply chain partners. It is done with the necessary capabilities to meet production requirements and timely and market-oriented guidelines (Russo, 2014). The road to re-shoring is plagued with problems. There are bound to be failures if not thought about carefully. There needs to be addressed issues that resulted to off-shoring in the first place like projects that went sour or teams that failed in their mandate. Re-shoring is not a simple task of comparing costs at home versus those foreign locations. It might require a lot of investment in the renewal and updating of aging factories in the UK. It has many moving parts and requires careful planning and execution and very skilful project management. It cannot take a narrow view alone like engineering and management. It will take more than a team to get it right as its success involves re-engineering production lines, rethinking products, and developing products that will sell competitively in the local market. This trend is still in its early stages making quantification very difficult. As mentioned earlier, its effects on the macroeconomic point of view are not sufficient to have a game-changing on the overall economic performance. It could be significant though when looked at micro-level, particularly supply chain management sector. The onus is on the policymakers to support the re-shoring process in the industry by providing tax breaks and subsidy programmes. More investments in public programmes like infrastructure are needed to make businesses more efficient, hence competitive in productivity. It will result in employing more citizens and make their fair share of nation building (KPMG). References Coates, R, 2015, “Skillfully managing a manufacturing re-shoring Project,” Area Development, retrieved on 20 April 2015 from http://www.areadevelopment.com/BusinessGlobalization/December-2014/managing-manufacturing-operations-reshoring-projects-2727261.shtml Denning, S, 2 November 2013, “Decoding Jeff Immelt and GEs new Act: U.S. manufacturer,” Forbes, retrieved on 20 April 2015 from http://www.forbes.com/sites/stevedenning/2013/02/11/decoding-jeff-immelt-ges-new-act-us-manufacturer/ Green, W, 9 October, 2014, “Quarter of mid-market firms intending to re-shore some or all business activities,” Supply Management, retrieved on 20 April 2015 from http://www.supplymanagement.com/news/2014/quarter-of-mid-market-firms-intending-to-re-shore-some-or-all-business-activities KPMG, No Date, “Production’s coming home: what companies need to know about re-shoring,” KPMG, retrieved on 20 April 2015 from https://www.kpmgenterprise.co.uk/knowledge-centre/articles/production-s-coming-home-what-companies-need-to-know-about-reshoring/ Pricewater House Coopers, 2013, Global wage projections to 2030, retrieved on 20 April 2015 from https://www.pwc.com/hu/en/humaneroforras_tanacsadas/assets/Global_wage_project_Sept2013.pdf_%28web_version%29.pdf Pricewater House Coopers, March 2014, Re-shoring - a new direction for the UK economy, retrieved on 20 April 2015 from http://www.pwc.co.uk/the-economy/publications/uk-economic-outlook/reshoring-a-new-direction-for-the-uk-economy-ukeo-march14.jhtml Russo, F, 4 March 2014, “Re-shoring and Revitalizing the American Supply Chain Network,” Manufacturing.Net, retrieved on 20 April 2015 from http://www.manufacturing.net/articles/2014/04/reshoring-and-revitalizing-the-american-supply-chain-network Savage, R, 5 December 2014, Companies may be re-shoring - but more jobs are probably still leaving,” Management Today, retrieved on 20 April 2015 from http://www.managementtoday.co.uk/news/1325343/companies-may-reshoring-jobs-probably-leaving/ Shah, A, & Moushon, D, 14 October 2014, “Offshore Manufacturing Trends for Mid-Market Companies,” Industry Week, retrieved on 20 April 2015 from http://www.industryweek.com/global-economy/offshore-manufacturing-trends-mid-market-companies Teague, P, No Date, “Re-Shoring’s no trend, but it’s real, for good reasons,” Procurement Leaders Global Intelligence Network, retrieved on 20 April 2015 from http://www.procurementleaders.com/blog/my-blog--paul-teague/2015/03/02/re-shorings-no-trend-but-its-real-for-good-reasons Read More