Offshoring vs. Outsourcing vs. Onshoring

In the midst of one of the worst economic recessions since the Great Depression, there is a growing shift in the manufacturing industry. Offshoring of U.S. based opportunities are rapidly reaching a plateau, while onshoring has proven to be a more opportune option. In order to understand why onshoring to the U.S. is beneficial to the overall value chain, it is imperative that organizations first understand the difference between offshoring and outsourcing, taking into account the relevant pros and cons.

Offshoring is defined as the relocation of the whole process. This is when an organization sets up production operations overseas in a foreign location. This relocation of operational activities to another country allows for more control of the business process. Due to rising foreign labor costs in most foreign countries, material price increases, shipping fees, political instability, tariffs, trade wars, disruptive natural disasters, and global pandemics, offshoring isn’t as attractive as it once was.

Outsourcing, often referred to as contract manufacturing, is when an organization leverages manufacturing capabilities to a third party, either domestically or overseas, to complete internal operations. This reduces labor and production costs and improves service efficiency to maximize the use of external resources. However, outsourcing brings up the issue of reliance on third-party labor and potential data security concerns.

Both offshoring and outsourcing highlight the potential for communication challenges, either due to difficulties maintaining a long-distance relationship, or issues understanding cultural and industry differences. With regards to services, offshoring and outsourcing allow for companies to compete on a global scale for a lower cost and better efficiency, specifically in information technology (IT), business process outsourcing (BPO), and call center outsourcing.

Think Globally, Act Locally

On the other hand, onshoring is the exact opposite of offshoring. It refers to the relocation of business processes to a location within the national borders. This overseas investment by a domestic company (or overseas affiliate) is reinvested back into the domestic marketplace. Onshoring allows for the quickest possible service, tailored to suit the market needs and supply customers in a timely manner. Onshoring improves the cost structure and allows for flexibility within organizations, making operations more efficient and effective. Although taxation in the U.S. and heavy regulations are major factors that force companies offshore, the economic downturn has made the U.S. more competitive in attracting onshoring.

What makes the decision of whether to go offshore, outsource, or onshore difficult is that there are risks and rewards associated with each option. A universal recommendation is nearly impossible due to the variable factors such as set goals, labor costs, available resources, or other requirements. For example, General Electric (GE) decided to invest millions of dollars to open several domestic manufacturing plants, where energy efficiency and cost efficient measures are implemented on national soil. By moving production from Mexico to Tennessee, nearly 700,000 jobs (and growing) have been added since 2010. Crystal Conklin, a GE second-tier worker at the GE Spring Hill plant, benefited greatly from the $18 an hour wages and subsidized health insurance. Able to save up to buy a car and home, she also aims to send her son to start working at Spring Hill while attending community college. She advocates for onshoring plants in the U.S. saying, “working at a plant has allowed me to come out of this hole that I was in, in life, going absolutely nowhere, not advancing in anything. Now I’ve bought a house, I drive a brand-new vehicle.” Not only has the “Made in the U.S.A” label had a beneficial effect on individuals that affiliate with mega appliance maker companies like GE, but onshoring in America has also swayed big companies like Boeing, Ford, and Intel.

In the wake of the coronavirus pandemic, organizations are evaluating their supply chain statuses in sustainability. Seeking foreign manufacturing is not always the right answer for all organizations, and it is important to understand the different options for labor distribution. In order to prioritize mitigating risk, it is important to consider that the U.S. will see a rise in reshoring and domestic outsourcing.

Over the past few years, U.S. and China relations have continued to take its toll negatively on supply chains worldwide. Particularly after the election in 2016, President Trump began his term by offering incentives to companies, rewarding them for returning to domestic manufacturing to strengthen the internal economy of the nation. Although some American companies and manufacturers turn to alternative foreign factories such as Vietnam and Thailand, others are looking to outsource closer to home. Oftentimes, companies have chosen to offshore because it posed as the more affordable option, often shortening the supply chain from end to end. Trade conflicts and a focus on domestic production have contributed to the growth of over 500,000 new manufacturing jobs in the U.S.

When it comes to hardware, quality products require hands-on attention and fast iterations from the prototyping phase to the production phase. Onshoring drives innovation, allowing for parts to be delivered faster and the design process to be more efficient. Ultimately, with the shift in manufacturing’s role in global supply chains, it is becoming increasingly more attractive for companies to consider onshoring. These faster lead times and increased quality control play a large role in plastic injection molding, die cast tooling, and other plastic supply manufacturing processes.