Reshoring means to bring back manufacturing operations back into the company’s home country. The supply chain has grown complex and many companies have started to evaluate reshoring benefits due to many factors. Reshoring helps reduce supply chain costs and risks, gain operational efficiencies, and prevent rising overseas costs.
Many companies have reshored some of their operations in recent years especially during the disruption in supply chain during the COVID-19 pandemic. Other factors included tax benefits, increased tariffs, and increased costs in many countries. Understanding the risk and benefits is very crucial before you commit to a large investment into a domestic facility and end the long term relationship with your overseas suppliers.
The Benefits of Reshoring
- Reduced Lead Times: Moving your operations closer to home allows your company to operate more quickly in terms of procurement, production and sales. Your business can react faster to changes in the market. This also helps companies avoid the long wait for weeks for a ship to arrive and frustrated customers waiting for their products. You can complete your order cycles and achieve a turnaround time that far exceeds that of overseas suppliers.
- Tighter Quality Control: When the factory is a two hour drive instead of a 14 hour flight, someone can actually walk the floor and keep tighter control on quality. Reshored operations tend to catch defects earlier and resolve them faster because the feedback loop between manufacturing and the team managing the relationship is not stretched across different time zones and a language barrier.
– Simplified Supply Chain: Domestic production reduces your dependence on overseas partners, effectively safeguarding your operations from the changes in international shipping, unpredictable trade policies, and global political shifts.
– Job Creation: A primary reshoring benefit is the creation of employment. Returning manufacturing operations locally creates new job opportunities, helping to lower unemployment rates and fostering broader economic growth. These jobs also offer better working conditions than those internationally.
– Avoiding Costly Tariffs: The current tariff rates on imports from several major countries are changing more than once over the past two years. Many companies simply absorb the cost of tariffs but these charges are eventually passed on the end customer.
The Disadvantages of Reshoring
– Higher Labor Costs: the cost of wages and employee benefits here are much higher than overseas and can hurt the profit margins. Higher labor cost, compliance fees and finding skilled workforce is a challenge that is faced when reshoring close to home. Companies reshoring today often find that labor may be available but is not trained for the work required. This means investing in training and education programs to develop the necessary workforce, which can be time consuming and costly.
– Large Capital Investment: Rebuilding domestic production requires long term investment in buying equipment, hiring and training a workforce, and investing in advanced automation technology. For many mid-sized manufacturers, this initial financial burden rather than long-term operational costs presents the primary obstacle.
– Supply Chain Disruption: Relocating operations takes time, as most businesses must maintain their existing supply networks until domestic facilities are operational. During this transition, initial operational shifts can lead to temporary production bottlenecks, which may disrupt delivery timelines and delay customer orders.
– Regulatory and Compliance Load: Bringing operations home introduces additional domestic compliance that vary significantly from overseas requirements. While offshoring often leverages favorable international trade agreements and looser oversight, domestic production requires navigating strict local tax structures and demanding legal requirements.
Unbudgeted Logistics Challenges
Most companies underestimate the logistics involved in reshoring. Setting up a new supply chain while winding down an old one, managing new freight, warehousing, and inventory all at once is a huge coordination challenge that most companies are not built to handle.
At TerraLink Logistics, we handle the logistics of your move from freight, warehousing, and inventory so your business keeps running smoothly during the transition. If you’re planning a reshoring move and need a clear look at the logistics before you commit, give us a call.
The advantages of reshoring are neither guaranteed nor the same across organizations and product categories. Achieving success requires companies to do rigorous cost evaluations and manage the operational shift with the same rigor as the strategic choice to relocate.
Final Thoughts
Reshoring makes the most sense if your product relies on fast lead times and tight quality control such as medical gear for example. If you are making high volume but low-margin goods and labor costs are everything, it becomes significantly more difficult to make the business case make financial sense. Many companies are also looking at nearshoring to Mexico or reshoring just the final assembly. Before you make a major investment, double check the financials for every option you’re considering.