Future of Sourcing - Backshoring https://futureofsourcing.com/tags/backshoring en The other shoe just dropped https://futureofsourcing.com/the-other-shoe-just-dropped <div class="field field-name-field-image field-type-image field-label-hidden"><div class="field-items"><div class="field-item even" rel="og:image rdfs:seeAlso" resource="https://futureofsourcing.com/sites/default/files/articles/Adrian-Guttridge-May-2015-2-624x325%20%281%29.jpg"><a href="https://futureofsourcing.com/sites/default/files/articles/Adrian-Guttridge-May-2015-2-624x325%20%281%29.jpg" title="The other shoe just dropped" class="colorbox" rel="gallery-node-816-DDh2ujiXI-8"><img typeof="foaf:Image" src="https://futureofsourcing.com/sites/default/files/styles/juicebox_medium/public/articles/Adrian-Guttridge-May-2015-2-624x325%20%281%29.jpg?itok=d9XM82Dr" width="624" height="325" alt="" title="" /></a></div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"> <p>For years, the outsourcing world has been buzzing about reshoring (or &quot;backshoring&quot;), taking the jobs we sent offshore years ago and bringing them back to the US and Europe. Low wages, cheap property, and favourable taxes made offshore manufacturing very attractive. But in recent years property values rose, staff turnover increased, and wages just keep heading up. Despite weakening economics, offshore still made sense. Until today!</p> <p>By far, the greatest financial advantage to offshore manufacturing was derived from labour arbitrage - from lower wages from &quot;replacement&quot; workers. Low wages plus workers who can do the work are a winning combination. To access low-cost labour, manufacturers will happily build the factories, roads, and infrastructure needed for manufacturing. China has been the gold standard for outsourcing, but western manufacturers are being lured by still lower wages in Vietnam or Thailand. Now, technology has taken a big leap forward, and suddenly... wages don&rsquo;t matter!</p> <p>Today&#39;s robots are intelligent machines that can perform almost every function a human being can. The latest intelligent machines don&rsquo;t just help workers to be more productive, they completely replace workers. Robots eliminate the need to build factories where low-cost workers live. You can just build the factory where you want and install robots instead of workers. When wages no longer matter, onshore factories make a lot of sense.</p> <p>Onshore factories certainly make sense to Adidas. Last year Adidas built their first SpeedFactory in Germany. A SpeedFactory is their name for&nbsp;<a data-mce-="" href="https://niccollsanddimes.com/2016/09/30/adidas-speedfactory-a-big-step-towards-onshoring-work/" target="_blank">a new generation of onshore factories</a>&nbsp;that provide three benefits. First, it is highly automated, delivering a lower cost of operation than an offshore factory. Second, by building the factory in major consumer markets, transportation costs are greatly reduced. Lastly, because SpeedFactories are built near consumers, Adidas can quickly restock sold-out products and reduce customer frustration.</p> <p>Not surprisingly, Adidas is building a second SpeedFactory in Atlanta, scheduled to open in 2017. Reebok, a subsidiary of Adidas, has announced the construction of a similar factory in Rhode Island. Nike has been talking about building a new factory in Oregon for the last year. (Come on Nike&hellip; Just do it!) What looks like a pretty good idea today, will be an irresistible financial proposal in a year or two.</p> <p>One of the biggest difference between a human worker and a robot is the way costs change over time. Workers want raises and promotions. Over time, the same factory producing the same number of goods has higher labour costs. When the factory is offshore, this happens even faster due to higher offshore inflation and increasing competition for workers. Robots, however, cost less every year. Next year&rsquo;s model will work faster, have more capabilities, and still cost less. As time goes on automation looks better and better.</p> <p>If this is the beginning of a new era, where onshore can be more efficient than offshore, what will happen to all of the work that is already offshore? If a location only offers lower wages, we can expect that work to be reshored in a few years. Offshore factories need more compelling advantages to resist reshoring? Since China has the most to lose from reshoring, let&#39;s see if their plans tell us anything about the future of offshoring.</p> <ul> <li><em>Domestic Market.</em>&nbsp;When offshoring took off at the turn of the century, products were manufactured almost exclusively for the West. Today, China is the largest consumer of Chinese manufactured products. For example, while America has peaked at 100 million iPhone users, China has 135 million users and plenty of room for expansion. China is able to be a &quot;local&quot; supplier for east Asia and India&hellip; if they maintain their manufacturing edge.</li> <li><em>Energy</em>. Manufacturing requires electricity, and next to labour, energy is often the highest cost for manufacturing. America has a significant cost advantage for electricity compared to most of Europe. Underdeveloped countries have high-cost power and unreliable power grids. In many offshore locations, manufacturers must invest in generators and other infrastructure. The cost of electricity in China is comparable to America. However, in the past decade, China built hundreds of new coal plants, is building 20 nuclear plants, and has more solar and wind power in production than any other nation on earth. Old and inefficient plants are being closing. By the 2020&#39;s, China may set a record for inexpensive power generation.</li> <li><em>Technology</em>. China&rsquo;s population has almost plateaued, and by 2100 will decline by 500 million. China already has problems hiring for manufacturing jobs, which has led to runaway wage increases. China has very ambitious plans to add between 1 and 4 million robots by 2020. If China succeeds, China will need to build and install enough robots to become the world&#39;s undisputed #1 manufacturer and consumer of industrial robots. Furthermore, because of this robotic work, by 2020 China&nbsp;<em>must</em>&nbsp;develop the ability to build the most efficient factories in the world.</li> <li><em>Financing.</em>&nbsp;If hundreds (if not thousands) of robotic factories are going to be built in America and Europe, that will require capital financing. Four of the top 10 banks in the world are Chinese, two of which have &ldquo;Industrial&rdquo; or &ldquo;Construction&rdquo; in their names. China also happens to be home to six of the world&rsquo;s largest construction firms.&nbsp;<a data-mce-="" href="http://outsourcemag.com/writing-competition-2nd-place/" target="_blank">With leading positions in banking, construction and robotics China is going to build most of the world&#39;s new factories.</a></li> </ul> <p>Adidas pointed out the value of reshoring, and other big-brand athletic gear companies are hot on their heels to find new onshore manufacturing efficiencies. If China dominates in robotics, energy production, financing, and construction, they will move beyond the title of &ldquo;The World&rsquo;s Manufacturer&rdquo;. China is positioned to also dominate in building the next generation of factories throughout the world, or at the very least to be the default option for every factory that is built in the 2020s.</p> <p>The latest generation of technology will level the playing field for manufacturing, making a factory built onshore as financially attractive as locations halfway around the world. After a very long time, the tide has turned and new factories will be built in America and Europe. The trend has just begun, but every week we&rsquo;re going to see new models of industrial robots at ever lower price points.</p> <p>Everyone who manufactures offshore will soon start thinking, &ldquo;Does it make sense to stay offshore?&rdquo; If you are an outsourcing provider, you need to ask yourself, &ldquo;If low wages no longer matter, what is my new value proposition?&rdquo;</p> <p>When it comes to robotic factories, onshore and local has big advantages over offshore and distant. As&nbsp;<em>all</em>&nbsp;factories become robot factories, the change in locations is just the beginning of changes that factory owners, outsourcers, consumers and experience as technology replaces workers, and the world&#39;s factories are made in China!</p> </div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-inline clearfix"><div class="field-label">Tags:&nbsp;</div><div class="field-items"><div class="field-item even" rel="dc:subject"><a href="/tags/technology" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Technology</a></div><div class="field-item odd" rel="dc:subject"><a href="/tags/strategy" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Strategy</a></div><div class="field-item even" rel="dc:subject"><a href="/tags/robotic-process-automation-rpa" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Robotic Process Automation (RPA)</a></div><div class="field-item odd" rel="dc:subject"><a href="/tags/offshoring" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Offshoring</a></div><div class="field-item even" rel="dc:subject"><a href="/tags/outsourcing" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Outsourcing</a></div><div class="field-item odd" rel="dc:subject"><a href="/tags/backshoring" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Backshoring</a></div><div class="field-item even" rel="dc:subject"><a href="/tags/reshoring" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Reshoring</a></div></div></div><div class="field field-name-field-addthis field-type-addthis field-label-hidden"><div class="field-items"><div class="field-item even"><div class="addthis_toolbox addthis_default_style " addthis:title="The other shoe just dropped - Future of Sourcing" addthis:url="https://futureofsourcing.com/the-other-shoe-just-dropped"><a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_linkedin"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_facebook"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_twitter"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_googleplus"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_pinterest_share"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_reddit"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_email"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_print"></a> </div> </div></div></div><div class="field field-name-field-region field-type-taxonomy-term-reference field-label-inline clearfix"><div class="field-label">Region:&nbsp;</div><div class="field-items"><div class="field-item even"><a href="/regions/asiapacific" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Asia/Pacific</a></div></div></div> Wed, 02 Nov 2016 00:47:53 +0000 Chris Niccolls 816 at https://futureofsourcing.com https://futureofsourcing.com/the-other-shoe-just-dropped#comments The boomerang outsource https://futureofsourcing.com/node/949 <div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"> <p>Offshore outsourcing is controversial. No news there. For over 15 years customers have been moving services offshore as part of their global souring strategy. In the early &rsquo;00s businesses couldn&rsquo;t offshore quick enough. Opponents of offshoring frequently quote the loss of domestic jobs, damage to economies, poor communication and quality, while proponents insist it facilitates competition and actually makes economies more efficient. But amid the furore, there is a rise in organisations returning from offshore.</p> <p>The main driver behind this trend is likely to be the decrease in the cost differential in labour between the domestic and offshore markets. The economic maturation of offshore locations over the past five to ten years (partly fueled by demand for skilled labour for the global outsourcing industry), has facilitated the establishment of global businesses. As a result salaries and other overheads are rising. Other drivers may include customer (dis)satisfaction, advances in technology and the importance of skills and talent retention to customer organisations. Together with a tangible shift toward value rather than simple cost reduction, these factors are causing many organisations to pursue the challenge of the &ldquo;boomerang outsource&rdquo;: bringing services back in-house.</p> <p>An initial step for customers considering this challenge would be to review its live contracts. Some early adopters of the offshore strategy signed up to arrangements of 10 to 15 years, meaning that their contracts are likely near expiry &ndash; another factor which might be driving the current volume of customers seeking to return onshore. However, if the contract has years left to run, exiting may be difficult and expensive. Customers should first review the termination provisions and explore the associated costs. Early termination may include break fees and payment of unspent minimum revenue guarantees.</p> <p>From an operational perspective, customers should consider how comprehensively they understand the current environment &ndash; including both the direct cost of the provider, but also the indirect costs of managing and inter-facing with the provider). Does the current contract provide for the provision of frequent management information and reporting? Or will this be made available on exit? A customer will need to consider what effort it can expect from its current provider. Is there a robust exit plan in place? At the start of an outsourcing relationship few minds immediately spring to exit, reverse transition or the potentially colossal work effort and expertise involved. A provider may be obligated to assist at no cost, or it may charge through the nose.</p> <p>Another factor to consider is the current workforce. This is potentially a sizeable cost associated with bringing services back in-house. What is the customer responsible for? Does the current contract envisage a transfer of supplier employees to the customer on exit? Is the customer liable for redundancy costs?</p> <p>Businesses will also need to consider service run costs and whether it has the specialist knowledge required to run an efficient and integrated service. Automation and digitalisation are two of the current prominent (and disruptive) trends in sourcing right now. They offer customers the opportunity to streamline key services, reduce run costs while increasing productivity. The question then of whether that automated service is provided offshore or in-house is almost redundant &ndash; almost because if the function is brought back in-house the organisation will need to consider investing in its workforce. Most minds leap to redundancies when discussing the streamlining-effect of automation, but while some immediate low-skilled job losses are perhaps inevitable, one of the key challenges facing organisations in 2016 is the shortage of technology skills and retention of talent. Therefore, organisations should consider re-investing in its workforce to up-skill and re-train it so that they can fully understand and run the new environment, maintain low attrition rates and future-proof its services, governance and communications structure.</p> <p>A return to in-house can pose significant legal, operational and financial challenges. Like with any sourcing initiative, it must first start with a comprehensive review of the financial and non-financial benefits together with the direct and indirect costs. Understanding the current environment and what IT and investment may be required will take time and effort &ndash; both from the customer and the current provider. If a successful return is what you want, make sure you know what&rsquo;s coming back, and how to catch it.</p> </div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-inline clearfix"><div class="field-label">Tags:&nbsp;</div><div class="field-items"><div class="field-item even" rel="dc:subject"><a href="/tags/automation" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Automation</a></div><div class="field-item odd" rel="dc:subject"><a href="/tags/backshoring" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Backshoring</a></div><div class="field-item even" rel="dc:subject"><a href="/tags/communication" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Communication</a></div><div class="field-item odd" rel="dc:subject"><a href="/tags/contract" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Contract</a></div><div class="field-item even" rel="dc:subject"><a href="/tags/customer-satisfaction" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Customer Satisfaction</a></div><div class="field-item odd" rel="dc:subject"><a href="/tags/legal" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Legal</a></div><div class="field-item even" rel="dc:subject"><a href="/tags/offshoring" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Offshoring</a></div></div></div><div class="field field-name-field-addthis field-type-addthis field-label-hidden"><div class="field-items"><div class="field-item even"><div class="addthis_toolbox addthis_default_style " addthis:title="The boomerang outsource - Future of Sourcing" addthis:url="https://futureofsourcing.com/node/949"><a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_linkedin"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_facebook"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_twitter"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_googleplus"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_pinterest_share"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_reddit"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_email"></a> <a href="https://www.addthis.com/bookmark.php?v=300" class="addthis_button_print"></a> </div> </div></div></div><div class="field field-name-field-region field-type-taxonomy-term-reference field-label-inline clearfix"><div class="field-label">Region:&nbsp;</div><div class="field-items"><div class="field-item even"><a href="/regions/global" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Global</a></div></div></div> Wed, 25 May 2016 17:49:48 +0000 Megan Paul 949 at https://futureofsourcing.com