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After years of transferring their production processes overseas many British manufacturers are rethinking their decision and weighing up the benefits of reshoring; bringing all or part of their manufacturing processes back to the UK.
Uncertainty over Britain’s future trading relationship with the EU could be a catalyst for action, as a survey by the Chartered Institute of Procurement and Supply (CIPS) found that 32% of UK businesses that use EU suppliers are looking for British replacements to avoid Brexit tariffs.
Companies reshore production for various reasons, including quality, speed of delivery, and reducing the risk of supply chain disruption, but the process is far from straightforward. Crucial to the success of any reshoring move is cost and profitability.
Professor Suzanne de Treville of HEC Lausanne, the business school at the University of Lausanne, is a leading authority on supply chain and manufacturing, mainly in the U.S. and Switzerland, but also in other parts of the world. She has developed an algorithm on the benefits of reshoring, based on demand volatility, that has been adapted as a practical tool for manufacturers and businesses.
She says: “When manufacturing is moved to a low cost region, the costs may be 15% or even 20% lower. However, this means they have to make production decisions before they know what demand will be, which exposes them to demand volatility and impacts on their profitability.”
From a local manufacturing perspective, she says, the real interest is not so much in high volume production, but in making products that the customer cares about; bespoke, customised items that people have preferences about.
“People will still argue that it’s still cheaper to make it abroad,” she says. “However the quantitative finance tools developed by my lab can help businesses reconcile the 20% premium for having that local responsiveness and immediacy, to be able to wait until you know what demand is, and also to respond to the latest ideas that come out of R&D.”
She also sees this model of responsive manufacturing as a real opportunity to retrain people, many of who lost jobs when local manufacturing was lost to cheaper overseas markets, and reskill them in new manufacturing techniques; creating local cells of workers who can make high quality, one-of-a-kind products.
The Cost-Differential Frontier (CDF) calculator has already been used by the U.S. Department of Commerce to help U.S. companies to profitably relocate their production to America.
It can be used both by companies producing locally and considering offshoring and those producing overseas and considering reshoring. By looking at demand variability they can put a number on the costs, making it easier for the decision makers to do their calculations on what to produce, and more importantly, when.
“Brexit has the potential to be incredibly destabilizing and tough on the economy,” says de Treville. ‘But people could use this new thinking to create new business opportunities that end up with large scale reskilling, new infrastructure, new types of innovation and more sustainable jobs that drive growth. The UK would emerge strengthened and taking part in a new game.”
One UK company is already reaping the benefits of reshoring ahead of Brexit, and by developing products in house that were previously purchased in the EU for their manufacturing process, they have created new revenue streams by exporting them – back to the EU.
Totalpost Mailing is a manufacturer and distributor of mailroom products and X-Ray threat detection equipment and a remanufacturer of franking machine ink cartridges.
Three or four years before the 2016 EU referendum Chairman David Hymers sensed things might be heading in the direction of Brexit, and took a pre-emptive look at which products they were importing from Europe and found there was a business case for making their own.
He says: “We were importing some of the chemicals needed to make the cleaning solution, or flush, that we use to clean the insides of the ink cartridges that we remanufacture. We now manufacture that ourselves.”
The costs of setting up that particular manufacturing operation, which involved the conversion of a kitchen area into a small chemical plant, were between £5,000 and £10,000.
“It has been a good move,” he says. “Manufacturing it in-house is more profitable for the business, we don’t have to wait for it to be shipped in, which also has a cost, and importantly, we have a product that we can export.
Regardless of Brexit, having done the research Hymers insists they would have taken the same steps. “It has benefited the business, and we are now looking at making a £50,000 to £60,000 investment to develop better quality cartridges and reduce the number that are unsuitable for remanufacture.”
The EEF is an organisation that helps UK manufacturing and engineering businesses to thrive and innovate. CEO Stephen Phipson agrees that there is good evidence to suggest that reshoring can deliver both cost and time savings, and create opportunities for new revenue streams.
He says: “For businesses grappling with the Brexit disruption as well as those simply looking for new ways to gain a competitive advantage, reshoring offers some interesting options. Our latest research shows that just over 40% of our members have already either taken action or will be doing so to mitigate Brexit risks.”
January 8, 2019 at 08:56AM
Forbes – Entrepreneurs