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In this Nov. 22, 2008 photo, women work on an assembly line at a factory of Proview Technology in Wuhan, in central China's Hubei province. (AP)
In this Nov. 22, 2008 photo, women work on an assembly line at a factory of Proview Technology in Wuhan, in central China's Hubei province. (AP)

Chris Griffiths

Why offshoring may be losing its appeal Add to ...

Outsourcing is a fact of global business. Every business has suppliers; they can’t do and make everything their business needs by themselves. Not all of these suppliers can be found close to home and, to stay competitive, companies often reach around the globe to places like China, where labour is cheaper.

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Over the past 10 years, I have spent countless months in China, Korea, Japan and Taiwan working with suppliers there for both my own businesses and on behalf of clients. We have all heard about the trend towards outsourcing globally for decades, and the effect it has had on domestic businesses, such as manufacturing.

Lately, I have seen the tide turning. More and more businesses are bringing the sourcing of products, services and manufacturing back into their own domestic facilities or local suppliers, and outsourcing to China less and less. It’s a trickle, not a tidal wave, but it is meaningful.

Let’s examine how and why it might make sense for your small business to do the same.

China is an obvious example of a likely offshoring destination. Labour rates are low, taxes for businesses are low, regulations are lighter and the currency is tightly controlled. All of these factors and more make for a low-cost manufacturing base.

Of these factors, labour stands out the most. However, China has started mandating minimum wage increases of about 15 per cent a year, causing regular price increases across the board. In manufacturing processes that are labour-intensive, this is highly inflationary, and, while labour rates in China are still very low compared with North America, these increases are closing the gap in labour cost competitiveness.

For products that are less labour-intensive, like those that rely on high levels of machining or injecting molding, for example, there’s an even bigger case. Since the costs of machinery and raw materials are comparable in many global locales, North American manufacturers can compete more effectively.

In addition, the cost of freight has increased steadily over recent years, so moving finished goods from China to Canada, for example, is getting more and more expensive. This is especially true for items that are large and/or low-cost. The percentage of cost in the end product that is freight is only going up.

Last, lead times from China can be 60 to 90 days plus transit time, so companies that do offshore must carry vast amounts of inventory in their domestic warehouses, and limit their ability to respond quickly to changes in demand or customer tastes. There is an opportunity cost hiding here: Inventory is expensive and not responding quickly enough to customer demand can cause a loss of sales that might have been possible if your response time could have been shorter.

So, if you are in a business that imports components or finished products from places like China, you may want to revisit that which you are currently offshoring and considering “onshoring.” I have recently worked with several clients who found they could bring products back to their own factories or find local suppliers when they factored in all of these costs (direct and indirect) intelligently.

Reducing inventory levels and responding more quickly to demand may be all the business case you need to starting onshoring. Add to that the reduced cost of freight by sourcing close to home and using automation to reduce dependency on labour, and you may be able, in a small way, to reverse your old offshoring logic and bring this work in-house or to a domestic vendor.

It’s not so much about China losing an opportunity or North America gaining an opportunity. It’s more about using the new realities of global business to benefit the end user with a cost -competitive product or service, delivered quickly relative to demand.

Special to The Globe and Mail

Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.

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