>10 reasons Reshoring is set to continue in 2017Monday, 9th January 2017 posted by Kim Munro
If you are unfamiliar with the term, Reshoring is the word used to describe the process by which organisations bring the manufacturing of their products back to the UK following a period of having them manufactured offshore. A trend that first started to gain global momentum in 2011 has continued at a pace and all the anecdotal evidence points to the fact that reshoring is set to continue into 2017 as the attraction of low cost geographies are now not what they once were.
Dave Bailey, Operations Director at Kingfield Electronics states, “Over the past 2-3 years we have seen a significant increase in enquiries from companies actively engaged in reshoring their products. In some instances, work that left the UK only a few years ago has now made its way back to the UK for a variety of reasons.
- Total Cost of Acquisition
- Effective Communication
- Working Capital and Lead time
- Obsolescence Materials Management
- Free Issue
- Cost of Quality
- Intellectual Property Rights (IPR)
- Weakening of Sterling
Total Cost of Acquisition (TCA)
When an OEM Buyer has to decide which contractor to select to manufacture a product, unit price is always going to be high on the agenda. Several years ago it was true that using contract electronic manufacturers in certain geographies gave the OEM buyer the opportunity for potential cost reduction. However, over the years lower purchase prices have gradually been eroded and the reality now for some companies is that these same low cost geographies no longer represent value for money. Once additional factors such as higher wages, duty, freight, the financing of letters of credit and the cost of managing an offshore relationship in terms of both time and travel are taken into consideration, then UK manufacture once more represents a viable alternative. This proves the old adage that ‘Price paid is not the same as Cost’.
In our experience one of the activities that is often under-estimated at the start of any offshore relationship is the amount of effort that will be required to manage communications. This is an intangible area and can often be overlooked at the outset of an offshoring exercise as the lure of a cheaper unit price can sometimes cloud the decision making process. Customers are now demanding added functionality and regular software upgrades as standard. As a result, keeping control of the communication of engineering changes of a constantly changing product which is sometimes being manufactured thousands of miles away and in a different time zone can sometimes prove more costly and time consuming than had first been thought.
Working Capital and Lead time
In order to make the commercial terms for both parties more attractive, OEMs are often required to place larger orders with offshore manufacturers than they would if they had been working with a UK based Electronic Manufacturing Service provider. This can result in tying up of large amounts of working capital for the OEM as well as having large amounts of inventory on the sea or in the air at any one time thus reducing the company’s stock turn. Local sources of supply can respond more flexibly and also service lower quantities on an ‘as needs’ basis.
Obsolescence and Materials Management
Keeping a tight control over the materials supply chain can be difficult for the OEM when it is being controlled hundreds if not thousands of miles away. Engineering change, product end of life and poor materials management can all generate both component and assembly obsolescence which can quickly erode profit margins and be a nasty shock if unexpected. By relocating manufacturing back to the UK, materials can be audited on site as part of regular business reviews.
I think all would agree that managing some level of free issue materials is not without its idiosyncrasies. Some OEMS choose to continue to manage the supply chain and send component parts out to their offshore manufacturer in kit form. What on the face of it looks like a smart thing to do can at times result in the OEM micro-managing shortages or managing disputes about how many components were sent or the condition of what was received. Add to this the complication of export/import documentation and the decision to free issue in the first place becomes less clear cut.
At Kingfield we get involved in several new product introductions each month. This involves engineering personnel from both parties meeting up to discuss the NPI project plan. In our experience we have found these types of discussions are best held on site where any issues relating to supply chain, production and test can be discussed. Whilst these activities can be carried out via webinars or platforms such as Skype, they simply do not offer the ‘insight’ into the real world required at this crucial stage of product development.
Cost of Quality
The cost of quality is one of the major reasons we have been given for reshoring. When products bought from offshore contract manufacturers do not meet expectations the cost of any rework can be high. Effective configuration management is also critical in our industry. In addition, we have been involved in a number of situations where clients have asked us to upgrade products which have been manufactured offshore because an engineering change had been missed and the product had been manufactured to the wrong issue level. It was cheaper to have the products modified in the UK than send them back to source. This also brings into question the additional concern of what happens to the product warranty.
Where problems do occur with intellectual property infringement, it can be significantly harder to defend offshore as the laws of individual countries tend to be different. This can therefore take up a lot of time and also incur hefty legal fees to defend such breaches.
Technology advancement in the electronics sector can move at a frighteningly fast pace. As a result some products which once had a very high labour content as a result of the types of components and technology used have now evolved to use a smaller number of automated devices and hence require less direct labour content. As SMT machines in particular cost the same to buy and run in every geography this rather negates the reason to have these type of products manufactured offshore.
Weakening of Sterling
The weakening of sterling since the decision of the UK to leave the EU has made exporting a lot cheaper for UK manufacturers and therefore perhaps more attractive for some OEMs to have their products manufactured back in the UK. Whilst in reality this is probably too early to quantify we are aware of several organisations who have delayed investment decisions until the financial implications are better understood in the wake of Brexit”.
If you would like to ask Kingfield Electronics to take part in a reshoring initiative then please get in touch via email@example.com or contact us via telephone on +44 (0) 1246 451701.