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By Lydia Bals, Professor of Supply Chain & Operations Management & Anika Daum, University of Applied Sciences Mainz, Germany – Offshoring and outsourcing are established business strategies to focus on core competencies and simultaneously reduce costs. For the last 50 years these practices changed the organizational structures and production and service landscapes worldwide by transforming geographical areas into global manufacturers or service providers (Imberman, 2013). In the recent past the opposite movement gained momentum. Companies based in industrialized countries started to relocate business activities to their home countries or to produce in-house again. The reasons are manifold: While some companies discovered that benefits have not been realized as planned or that outsourcing or offshoring impose a misfit to the overall strategy, others make backshoring and insourcing decisions based on changes in macroeconomic factors (Tate, 2014; Tate et. al., 2014a).
The phenomena of backshoring and insourcing are not completely new but experience a rise in frequency and attention through media and politicians. Documentation of backshoring is dating back to the 1980s. Nevertheless, there is a gap in research, resulting in a lack of a commonly accepted definition and an incomplete understanding of reasons and impacts (Fratocchi et. al., 2014, p. 55). To be clear what is meant with the terms in this article: Backshoring comprises the relocation of activities, which were moved to another country, back to the same country like the company’s headquarters, while insourcing brings activities previously supplied by a third party supplier back in-house (Holz, 2009; Gylling et. al., 2015; Förstl et. al., 2015, Fratocchi et. al., 2014).
Yearly, about 400-700 German companies perform backshoring activities while at the same time the offshoring activities decreased to a record low. Every 4th to 6th company backshores its activities two to five years after offshoring (Kinkel, 2014). In the US about 100 companies with more than one billion dollar of sales have been backshoring. Recently a study in North America suggests that 40 percent of firm managers perceived a trend toward reshoring in their industries (Tate et al., 2014b) and by the end of 2020 BCG expects about 2.5 to 5 million jobs to be created from this trend (Tate, 2014).
Driving factors
The motives themselves have to be differentiated as well. Supposedly 80% of German backshoring activities can be understood as short-term corrections to managerial decisions, while the other 20% are mid-term to long-term strategic corrections to environmental changes of macroeconomic factors. The trend moves from short-term correction to strategic adaption (Kinkel, 2014, pp.63-64; Förstl et. al., 2015).
Operational adaptions result from wrong decisions which are caused by imperfect information and unpredictability of events. Operational issues due to cultural differences or inadequate infrastructure fall into this category (Abbasi et. al., 2014, p. 23; Förstl et. al., 2015, p. 2). For example, Berndes Küche GmbH (a premium kitchenware producer) had moved 70 percent of its production to China and then decided to move it back to Germany as having two production sites generated too high fixed costs. In that they considered having had the 30 percent in Germany a lucky situation, as they were enabled to transfer back with relative ease (Christ, 2012).
Strategic adaptions are caused by changes in the environment, like macroeconomic factors or consumer behavior, which impact the favorability of an outsourcing or offshoring decision negatively. Especially the conditions in classical offshore countries like China have been changing in the last years. The Chinese currency appreciates, shortages in semi-skilled labor occur, wage rates rise at a high rate and the oil prices increase. These factors, besides others, increased the cost of production in offshore countries as well as the transportation cost to consumer markets (Martinez-Mora et. al., 2014; Abbasi et. al., 2014). Labor cost in advanced countries decreased during the economic crisis, new technologies increased the productivity and automation degree and governments reduced barriers to backshore. Here an example illustrating how even rather well established technological infrastructure such as ERP systems can facilitate such a move: In the case of STOPA Anlagenbau GmbH a reorganization and introduction of a new ERP system led to significant decrease of costs in Germany, which led to bring back production largely back to Germany from Slovakia and the Czech Republic (Harzer, 2013).
Furthermore, transportation risks do not only increase cost but might also damage the customer relationship (Martinez-Mora et. al., 2014; Tate, 2014; Tate et. al., 2014a; Van den Bossche et. al., 2014; Gylling et. al., 2015; Arlbjørn et. al., 2014). Additionally, consumer patterns have changed. Customers demand for quick deliveries, customized products and high quality which are often incompatible with the production and delivery policies of offshore countries. One example for at least reshoring its production (albeit not back to its headquarter country) is ROCO Modelleisenbahn GmbH headquartered in Austria, who transferred its production of toy model railroads completely from China to Romania, which offered even lower wages than China, good education levels enabling ISO certification and improved proximity to markets (Reidl, 2014).
Moreover, a general misfit between the overall strategy and outsourcing or offshoring decision, which might have been present from the beginning or developed through a new strategic orientation, might favor backshoring or insourcing. A high-end brand might want to concentrate on differentiation in their quality and distribution. Many times this results in a permanent staff from the home country monitoring the quality offshore. Another example for a strategic misfit is a company with its core competency in innovation which consequently should focus on a short time to market (Martinez-Mora et. al., 2014 Gylling et. al., 2015, Van Bossche et. al., 2014).
Outlook: Industry 4.0 and Robotic Process Automation on the horizon
The further development of the backshoring and insourcing trends might be influenced by factors like technological progress and strategic orientation of companies which depends on consumer behavior.
First, a change in the evaluation of supply chain competencies as a competitive advantage resulting from a more holistic business approach and changed consumption patterns might lead to a stronger focus on controlling and owning the supply chain. Companies have started to focus more on total cost and long-term profitability and realized that a completely outsourced or extensively long supply chain presents the risk of interruptions which cause negative impacts on profit and customer relationships (Ellram et. al., 2013; Arlbjørn et. al., 2014). Supply disruptions due to climate change are also looming on the horizon (Bals, 2012) making the shortening supply chains additionally attractive.
Secondly, the topic of backshoring and the related expectations to bring jobs back or create new ones caught the attention of politicians. The (sustainable) impact of governmental incentives on backshoring needs to be further examined (Tate, 2014).
Third, technological progress will have an impact on the future composition of production and service landscapes. Especially Industry 4.0 and Robotic Process Automation are expected to play an important role in the competitiveness of industrialized countries. For manufacturing of goods the technological advances of industry 4.0 (Lasi et al., 2014) are of particular interest as an increased fit between economies of scale and scope, planning and value orientation is expected. Through the use of the Internet of Things, Sensing Technology and Cyber Physical Systems humans and systems as well as digital and physical workflows are connected. This enables digital engineering of products as well as self-controlling and self-guided production in smart factories. This technological development matches the complexity through altered customer expectations and the need for increased flexibility. The consequences might be increased favorability for backshoring or insourcing decisions because the processes become a competitive advantage and production needs to be close to the headquarters as data needs to be centralized for synergy effects and quality control needs to be on the shop floor level, also to utilize product-specific knowledge (Brettel et. al., 2014, pp. 37-38).
For the provision of services the technological advances of robotic process automation (Institute for Robotic Process Automation, 2015) are particularly relevant. Robotic Process Automation (RPA) automates services and therewith substitutes human labor in high volume work and highly transactional process functions in order to use their capacity more efficiently (Lee et. al., 2014; Brettel et. al., 2014, Abramowicz, 2015; IRP, 2015).
Concluding, we do see that the two trends of backshoring and insourcing are gaining momentum and that there is a huge potential to study this further: It is a topic that will become of increasing interest for both the client as well as provider side in both manufacturing as well as services settings. For the providers their competitiveness is at stake and keeping up with the technological trends in particular will be paramount to sustain success.
The Author: Prof. Dr. Lydia Bals is Professor of Supply Chain & Operations Management at the University of Applied Sciences Mainz, Germany and a Visiting Professor at the Department for Strategic Management & Globalization at Copenhagen Business School, Denmark. In 2008 she was a Visiting Scholar at Whar- ton and Columbia Business School, United States. From 2008 to 2013 she worked in the industry full-time, maintaining a re- search affiliation to Copenhagen Business School. Her last po- sition at Bayer was head of the global department of Procurement Solutions (e.g. Sustainability, Methods, Tools & Systems; Benchmarking and Excellence) at Bayer CropScience AG, also steering the international Procurement Solutions network in Germany, North America, France, India, China and Brazil. Prior to that she worked as a Project Manager at Bayer Business Consulting, managing projects in various functional areas and countries (e.g. Spain, Mexico, Turkey).
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This article was published in the “ITO&BPO Operations Edition” of the Outsourcing Journal (Q3/15). You can download this edition free of charge via the website of the German Outsourcing Association (free membership required): https://www.outsourcing-verband.org/outsourcing-journal-special-editions/