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Much has been written recently about the phenomenon of reshoring, the practice of bringing offshored manufacturing and sourcing work back to the U.S from abroad. In fact, an entirely new and often confusing vocabulary has developed around this subject. Terms such as outsourcing, offshoring, reshoring, nearshoring, and even resourcing are freely tossed about in articles and press reports. The purpose of this paper is to bring some clarity to the topic and discuss some real-world factors that businesses should consider when weighing decisions about where to make or buy products, components, and materials.

Outsourcing is generally defined as the practice of moving work from inside one’s own factory or operation to an outside supplier. An outsourced supplier could be located just down the road or halfway around the globe. Insourcing is just the opposite: when work is moved from an outside supplier into one’s own facility. Offshoring was coined to indicate outsourced work that goes to a foreign supplier. Reshoring is the term given to recent decisions by some companies to bring work back to U.S.-based facilities. Nearshoring is a related term that usually refers to relocating work in nearby countries. The U.S. government has recently started using the term ‘onshoring’ as part of a proposed program of tax incentives and other financial benefits to encourage U.S. companies to bring work back to the USA.^[1]

With the vocabulary lesson behind us, let’s look at the business drivers and considerations that go into a decision about where work should be done. Although offshore sourcing and manufacturing by U.S. companies has grown at a significant rate since the late 1980’s (driven largely by the strong U.S. dollar and access to low-cost labor in developing nations overseas), a June 2011 survey of North American manufacturers by MFG.com indicated that 21% of responding companies reported bringing production into or closer to North America in the past three months – up from 12% in the first quarter of 2011.^[2]

So why are companies starting to bring production closer to home? As with any make or buy decision, a balanced approach is often the best approach. During the 1990’s, many companies that moved production to Asia in hasty pursuit of low price labor, later saw their initial savings degraded by a variety of non-price factors.^[3] To avoid a similar fate, companies need to take a total cost of ownership approach to sourcing analysis. Costs for domestically sourced and foreign sourced parts and materials must be compared on a full landed-cost basis. Of course, this means that you must first understand all of your current cost elements.

TABLE 1: Supply Chain Management Activities

When sourcing from international suppliers, buyers can expect to pay additional costs for transportation, insurance, documentation, and possibly duties and safety stock. Foreign exchange rates can also have a significant impact on savings. Table 1 gives a basic comparison of cost elements for sourcing from a domestic supplier and from an international supplier. It’s clear from these lists that international sourcing involves a great many more cost elements that must be factored into the total cost of ownership equation. This means that procurement professionals will do well to establish clear guidelines and quantitative models for comparing sourcing options. And because these cost factors can change over time, initial savings estimates can easily be eroded. Therefore, a good practice is to require new international sources to meet “hurdle rates” of at least 25-30% initial savings on a landed cost basis.

So, the supply management professional may reasonably ask: What’s best for my business in the current environment? First and foremost, any decisions about outsourcing, offshoring, or reshoring should be made based on a holistic, customer-focused supply chain model. There needs to be a balance between supply chain flexibility and best-cost sourcing that will best serve the needs of the customer. Using total cost of ownership models, consider questions such as:

• How much safety stock will be required to ensure that we meet order fulfillment targets?
• What level of supplier management resources (e.g. on-site support, overseas travel, special technical support) will be required to manage new suppliers during supplier qualification, start-up, and on-going operations?
• What are the most appropriate strategies for managing foreign exchange and transportation costs and risks?

For overseas supply networks, procurement managers should be able to rely on the expertise of their freight forwarder or Customs broker for information needed to optimize the cost and risk of import/export logistics, particularly as it relates to classification, transportation, and trade compliance. Understanding the various supply chain risk factors and cost elements is the first step on the path to having a viable risk mitigation plan—whether suppliers are domestic or international.

In the current economic environment, reshoring is getting a lot of press, but the decision to offshore or reshore remains highly dependent on individual business needs. Industry data indicates that while some manufacturing organizations have been moving work back to the USA or Mexico from Asian sources, offshoring information technology, finance, and business services to places like India and other low-cost countries continues at a strong pace.^[4] And there are some industries, such as footwear and apparel that will likely continue to rely on low-cost labor sources for the foreseeable future.

The key factors in making sound sourcing decisions remain the same. These include understanding the customer’s needs, thoroughly analyzing the supplier markets, using a total cost approach to evaluating sourcing alternatives, and understanding supply chain risks.

Chuck is a Certified Professional in Supply Management (CPSM).

1. Get your ISF Progress Report from your filer.

2. Review your Progress Report to understand where you stand.

3. Work with your filer to understand why errors are occurring or filings are not timely.

4. Communicate with your overseas sellers and let them know that they need to provide ISF worksheets and other documentation at least two days prior to vessel departure.

5. Educate your staff, especially buyers, on the importance of the ISF filing.

6. Include penalty clauses in sales contracts and PO’s that stipulate that the seller must provide ISF information at least 48 hours prior to vessel departure or be liable for monetary penalties.

7. Update your import compliance manual to include all ISF procedures.

8. Ask a compliance expert, such as Mohawk Global Trade Advisors, to review your ISF process and provide recommendations to bolster compliance.

Consumer Product Safety Improvement