Mid-Market Firms to Reshore Business and Supply Chain Management - Literature review Example

Mid-Market Firms to Reshore Business and Supply Chain Management The paper will define reshoring, discuss the processof reshoring, its advantages and disadvantages, as well as, its application to the middle-market United Kingdom firms. It will also highlight the effect of reshoring on the country’s revenues and job creation in the subsequent three years, impact on supply chain management and studies conducted on the process, and the potentiality for growth that it presents to firms. Key words: reshore, inflation. Mid-Market Firms to Reshore Business and Supply Chain Management Introduction The idea and process of reshoring has had its share of media coverage in the recent past. Reshoring is defined as the process of bringing back the outsourced activities and personnel back to their place of origin. Many organisations will root for outsourcing arrangements at first in overseas countries mainly to capitalise on cheap labour, reduced taxes, the possibility of hiring skilled employees in their own country, as well as, a 24 hour readily available workforce. Despite these obvious advantages, the recent trend of reshoring has perhaps stemmed from the corporate concerns on operational mishaps that have obviously precipitated a decline in both productivity and quality. According to a recent research conducted by Warwick Business School and GE Capital UK, a quarter of the mid-market firms are seriously considering re-shoring all or some of their business activities in the next three years. According to the research, the reasons for the trend in reshoring comprise of productivity, rise in the overseas costs, rising control or management issues or access to skilled labour. The research further reveals that, with the reshoring, companies are expected to witness a greater than average rise in revenues to the tune of 14.8 % leading to an overall 12.1 % uplift in the profits. In terms of the activities, which would be reshored, internal business services comprised of 23 percent, procurement and customer-facing services at 21% and 19% respectively. Other activities earmarked are product development, manufacturing and production. According to the study, which was conducted on 100 companies, reshoring will most likely create over 378 500 jobs and add £27.6 billion to the national mid-market revenues annually. The research also found London to be the favourable re-shore destination. South-East follows closely and is then followed by West Midlands, North West, Yorkshire, and Humber (Green, 2014). Therefore, how does a company draw the conclusion on whether reshoring is right for its business activities? Well, time is an important and a changing factor in business. Consider Toyota as an example. The brand chooses to manufacture engines at its plant in Burnaston, Deeside, UK and ship them back to Japan (Asefeso, 2014). Therefore, the drive to move businesses back to the UK is not all about costs with companies such as BT and Santander returning their call centres to the UK simply because their customers demanded so. While most of the business were outsourcing, the offshore conditions were great maybe in terms of cost of wages. For example, with the Chinese wages having risen to 18 percent a year from 15, a company that had outsourced its productions there will need to scrutinise its math. The issue of quality and image is at the heart of the reshoring practice. It is because most customers will trust a product with the “made in Great Britain” caption on it more than they will another from the same company but has a different country of origin. In terms of the supply chain management, it is recommended that the suppliers to small and midmarket companies reshore immediately after their customers reshore. For instance, in the event that a large company brings back the assembly of a large piece of machinery, then this would grant them the opportunity to acquire more of the manufacturers’ products in the mother country than they were doing while activities were outsourced. According to Deodatis, Ellingwood, and Frangopol (2014), when reshoring, there are certain things that the management ought to consider in order to reap maximum benefits. Most importantly, analyse the product’s pressure points regarding issues of delivery, quality, intellectual property, midnight phone calls, and perhaps the travel expenses. Also, the total cost of ownership for the respective products. For example, in evaluating the cost of a product and thus, the pros and cons of reshoring, it is not just its nominal price that ought to be considered. Other factors include the freight, duty, the packaging or the intellectual property risk, possible impacts on separating engineering from manufacturing. Whether reshoring is, a short-term or long-term goal is dependent on the scrutiny of its competitive advantage. Deodatis, Ellingwood and Frangopol (2014) further asserts that when one takes a keen look at the hidden costs and shadow pricing necessitated by longer supply chains, materials and shipping, legal demands in the emerging countries and the innovation costs and systems, then an industry will differ from another in branding reshoring either a short-term or long-term solution. On the British companies’ scenario, a research from the Forum of Private business revealed that the Consumer Price Index (CPI) rates of inflation had fallen to 1.2% in September 2014 from 2.7% in September 2013 (Asefeso, 2014). To further fuel, the debate on the permanence of the reshoring move is the fluctuations in prices of energy, wages, and the marketing costs. With a great number of firms predicting an upward trajectory in the trend, the inflationary pressures in the economy can only ease in the following years for the re-shoring activities to make economic sense (Asefeso, 2014). However, with the speculation that food and oil prices will fall, the CPI inflation is most likely to fall below 1% before the close of this fiscal year. The reshoring discussion is still centred on the argument that, at its core, it is the desire to improve quality than curbing overseas rising costs that accelerates the process (Asefeso, 2014). In fact, according to the survey, at least one in every six British companies had reshored their productions in the past three years with over 6 percent planning to do so in the next three years. Most termed the rise as highly encouraging with the benefits being felt across the supply chain. In the United States, the recent reshoring cases include transportation equipment manufacturing, computer and electronic product manufacturing, fabricated metal products, electrical equipment, appliance and component and other manufacturing activities. So, what drove the companies to reshore? (Roos, 2014). As seen in French and British instances, the companies cited quite similar yet different reasons. Nevertheless, it is important to remember that the location of your supplies or raw materials is a very crucial factor to realising optimum benefits. Based on research from the American companies, the reshoring move does not have as instantaneous benefits as it be would wished. For example, because most domestic supplier networks had followed their clients overseas, there is, in most cases, a typical delay of a few years between the companies moving and their supply base following them. Hutzel and Lippert (2014) explain that this would mean that since reshoring will not guarantee the availability of raw materials in the mother country, the manufacturing companies would still be very much dependent on suppliers from overseas. Using the United States as our case study again, according to The Economic Intelligence Unit wages time series, the labour costs in the US are also going a bit higher. While this can be directly attributed to the higher retirement than graduation rates, it can also be tied to certain macroeconomic factors such as inflation (Roos, 2014). Factors that also exhibit cyclical inflationary effects in the end. As some companies in the US found out, the impact of the “Made in America,” designation might be achieving a serious comeback. However, what remains obscure is the price premium, which consumers are both able and willing to pay. Hutzel and Lippert (2014) explain that companies in the United States dealing in sensitive goods such as baby foods might claim that in their operations being exclusively US based and not outsourced, their products are way safer with better regulations. A fact that the manufacturers feel justifies a higher price. Of importance in this American set-up, or the UK setup, is how much premium is justifiable and why? As many American companies discovered, there is only so much that the consumers were willing to spend on goods that matched their worldviews and values. With more commoditised industries, the companies would decipher that the “Made in America” pronunciation did not always have the desired uplifting effect on the prices. With highly competitive industries, the price premium was similarly seen to diminish (Crandall, Crandall, & Chen, 2014). Thus, with the examples discussed above, it is clear that creation of an objective view of the companies capabilities, acknowledging any systemic mishaps and planning ahead to fix or manoeuvre them is what makes the difference between a botched and a successful reshoring attempt (Crandall, Crandall, & Chen, 2014). The readiness factors must also be weighed and evaluated deeply to determine if reshoring is even the right business decision for the mid-size firms. Reshoring readiness factors In addition to the factors mentioned above, other factors such as asset health and performance play a great role. The description of these materials includes the health and the age of the machinery, as well as, their OEE performance. When they are not in good health or performance, it is important to include capability enhancement on them or acquisition of others. Another important factor is project management. It can be described as the internal capability of running the high stakes effectively (Roos, 2014). When reshoring and the capability are not up to task, it is essential to include capability enhancement or external support in the business cases. Knowledge transfer ranks in third. In a country like the UK, this is extremely important. More so because the country has stringent immigration rules, which might shut out the prospective workers for a company. The essence of getting workers from other countries is purely based on the fact that there might not immediately exist qualified personnel in the country of reshoring (Marthinsen, 2014). In some instances; however, not being able to find the skilled resources that could be plugged in immediately may not be a great cause of worry when solid training programs are in place. As the older and more experienced workforce retires, the standard operating procedures (SOPs), which are in place need to be followed. However, they mostly tend to be outdated proving unreliable and inefficient in graduate training. Recreating SOPs, keeping them relevant, or use of apprenticeship models in orienting new hires can all be viewed as potential ways to curb the skill shortage (The Economist, 2014). Monczka, Handfield, Giunipero and Petterson (2015) assert that having new employees work alongside others on the job can all be reliable ways of addressing the skills shortages. Though this comes with a cost that must be factored into the reshoring business case. Which are the factors that determine the best reshoring destination? With reshoring, a thorough location selection must be conducted inclusive of an evaluation of the quantitative cost measures and the qualitative capability assessments. This evaluation of the selection factors is thus inclusive of defining the right factors while assigning a specific weight to each factor while rating the performance of each factor in each of the selected cities (Asefeso, 2015). As previously mentioned, the labour availability is an operating risk with research showing that 26 percent of the companies that had reshored basically chose their new locations on merit of skilled labour availability, supply chain ecosystem synergies, and the proximity to consumers. These economies of scale and network failures are sometimes difficult to be directly tied to the reshoring idea or success (The Economist, 2014). For example, what is the value, which established supply chains in different industry sectors would provide to your company? What is the value of the established universities and institutions of higher learning that enhance research and new talent to the reshoring idea? (Marthinsen, 2014). What are the short-term or long-term economic implications of the reshoring? Empirically, reshoring can be represented as R=f (suppliers, customers, unions, distribution centres, third party providers, and academia). Furthermore, breaking down the macro environment, industry environment and the company interrelations, macro environment examples will constitute of population, resources, economy, technology, security, and geopolitics. The industry factors comprises of customers, competitors, suppliers, partners, employees, and regulators for the mid-market firms (Roos 2014; Deodatis, Ellingwood, & Frangopol, 2014). These firms are interdependent. Where these factors are not apparent or the firm ought to forecast on possible changes in the business environment, it would be advisable for them to run simultaneous regression tests drawn from the various factors. For example, a UK mid-market firm would exhibit one as such: R=α+β1 +β2+β3+…βI. The model can be inclusive of the gas prices, labour costs among other macroeconomic factors. Ideally, every industry has its own inherent conditions that will affect its reshoring decision and success. Conclusion As discussed above, reshoring, which is the return of businesses to their places of origin, seems to be the future of mid-market firms in Britain and possibly other countries like Italy, France, United States, Germany, and Belgium. Factors affecting each industry are as unique as the country of operation. In the UK, reshoring presents a promising returns making it more of a long-term operation as opposed to short-term with sustainable returns and sustainable job creation, ceteris paribus. References Asefeso, A., 2014. Reshoring: Manufacturing is Coming Home. AA Global sourcing Ltd. Business & Economics. Crandall, R. E., Crandall, W. R., & Chen, C. C., 2014 Principles of Supply Chain Management, second edition. CRC Press Deodatis, G., Ellingwood, B. R., & Frangopol, D. M., 2014. Safety, Reliability, Risk and Life-Cycle Performance of Structures and Infrastructures. London: Oxford University Press. Green, W., 2014. Quarter of mid-market firms intending to re-shore some or all business activities. [Online] Available at: http://www.supplymanagement.com/news/2014/quarter-of-mid-market-firms-intending-to-re-shore-some-or-all-business-activities [Accessed 12 April 2015]. Hutzel, T., & Lippert, D., 2014. Bringing jobs back to the USA: Rebuilding America’s Manufacturing through Reshoring. CRC Press. Marthinsen, J., 2014. Managing in a Global Economy: Demystifying International Macroeconomics. Boston, Massachusetts: Cengage Learning Monczoka R., Handfield R., Giunipero L., & Patterson J., 2015. Purchasing and Supply Chain Management. Boston, Massachusetts: Cengage Learning. Roos G., 2014. Global Perspectives on Achieving Success in High and Low Cost Operating Environments. IGI Global. The Economist, 2014. Reshoring: Hardly reassuring. [Online] Available at: http://www.economist.com/news/britain/21635615-david-cameron-tries-bring-back-manufacturing-jobs-britain-hardly-reassuring [Accessed 12 April 2015]. Read More