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«Published Annually Vol. 6, No. 1 ISBN 978-0-979-7593-3-8 CONFERENCE PROCEEDINGS Sawyer School of Business, Suffolk University, Boston, Massachusetts ...»

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http://www.state.gov/r/pa/ei/bgn/index.htm Globalization and information technology have induced many changes in business operations. Companies started to look beyond national boundaries to source and produce their requirements. In the recent past, companies that have offshored their production facilities have often experienced difficulties due to eroding cost advantages, inflexible turnaround periods, and intellectual property infringements. In some cases, this has resulted in bringing the production facilities back to U.S. Similarly, increasing unemployment rates and general dissonance towards offshoring/outsourcing have motivated governments to pressurize companies to create employment locally, despite advantages that companies may have by setting up facilities overseas. Internal considerations, external pressures, or a combination of these have motivated some companies to either bring back their existing facilities from foreign locations to stateside; or start facilities within U.S., despite possibly costadvantageous offshore options. This phenomenon, termed “inshoring”, has not been studied extensively so far. Inshoring to date has been captured mainly by popular media accounts that highlight individual cases of companies which took the decision to either bring back production or start new ventures within the country, despite some advantages overseas. Similar to offshoring, the gaining inshoring trend has to be looked from a theoretical lens. This paper discusses the phenomenon of inshoring. It provides a definition for it by reviewing the literature and looks at different scenarios of inshoring, observable in the recent past. We conclude by suggesting future research directions to study inshoring and its impact on companies, on the U.S. economy, and the environment.

Introduction

Global outsourcing of productive activities – physical as well as service-oriented – has become a common phenomenon for companies in the United States (Contractor, Kumar, Kundu, & Pedersen, 2010; Friedman, 2006; Bronfenbrenner, Luce, & Economic, 2004). Based on a mix of low wages and talented workforce, manufacturers as well as service providers in developing countries and emerging economies have become outsourcing hubs for U.S. companies. In economic terms, significant players in the corporate sectors in both developing countries as well as the U.S. have benefited from such outsourcing relationships. Due to increased mobility of labor and faster global diffusion of technological capabilities, a global (rather than merely national) business and technology services culture is evolving (Beardsell, 2007) Since the early part of this decade there is evidence of a smaller but significant reverse trend: a few U.S. companies are bringing some of their production operations from offshore locations back to U.S. This trend seems to be growing and observable in large U.S. firms as well as Small and Medium Enterprises (SMEs). Large manufacturers like Caterpillar, Ford, Wham-O, and Fuji Film have taken this path. Small and medium enterprises (SMEs) such as Ortho Mattresses, Rico International, Sauder furniture, Crown Battery and Exxcel Outdoors are also bringing production back to the U.S. (Johnson, 2010; Columbus Dispatch, 2008, Toledo Business Journal, 2010). While there have been studies on offshoring, this process of returning production to the U.S., also called ‘inshoring’, has not been studied widely. For example, Farouk Systems, a top maker of curling irons and hairdryers, discovered this the hard way. The enforcement of intellectual-property laws in Asia being less stringent, Farouk Systems had to spend around $500,000 a month battling counterfeiters. In order to counter this problem, and also to reduce inventory costs, Farouk moved some assembly of its curling irons and hairdryers from South Korea and China to its Houston factory. Though manufacturing costs in China are still about 30% lower, Farouk feels that the reduced fear of counterfeiting and the "Made in the USA" stamp on the appliances will increase sales (Davidson, 2010).

This issue is important because anecdotal evidence suggests that returning production to the U.S. has a unique set of challenges not faced by companies that open new facilities – companies where the production never existed outside the U.S. to begin with. The companies bringing offshore operations to U.S. shores fall into two groups: those that maintained a U.S. production line in addition to foreign production capabilities, and those that closed their U.S. facilities when operations were outsourced and therefore no longer had U.S. domestic capabilities. The latter firms face a much greater challenge to inshore than those

Conference papers © Knowledge Globalization Institute, Pune, India, 2012

who maintained some level of US-based production. For example, U.S. companies that never outsourced or only partially outsourced, designed their business processes upfront to comply with U.S. environmental policies, including the disposal of hazardous waste. These companies can inshore by increasing existing capacity. Returning production to the U.S. for those firms that no longer have domestic capability entails designing completely new processes that adhere to stringent new environmental policies.

The purpose of this paper is to define inshoring and identify the motivation for firms to inshore all or part of their business processes; and the implications of such decisions on the internal dimensions of the organization. The paper is organized as follows: First, the term inshoring is defined through existing literature and practice by examining various terms which are used to describe this and cognate phenomena. Next, we examine how inshoring is gaining prominence, and why it has to be examined with greater theoretical attention. Next section discusses the various scenarios of inshoring, and conclusions are presented in the final section.





Defining Inshoring

There is no standard definition for the term ‘Inshoring’. It has been used by practitioners and scholars in different contexts.

Hence, it is necessary to review the earlier usages of this term and to have a clear definition prior to examining the reasons why (or issues involved in inshoring).

Liao (2010) defines inshoring as procuring of goods and services domestically, either internally within the company or outsourced to other parties whose operations are located in the United States. This definition focuses only on domestic procurement. Similarly, Skipper’s (2006) definition defines inshoring as something which is the opposite of offshoring. Though simplistic, it exclusively considers jobs created by foreign companies operating in the U.S. Skipper’s definition does not consider jobs created or re-created domestically by U.S. companies.

Erber & Sayed-Ahmed (2004) consider moving production from a high cost to a low cost country as the sole reason for inshoring. Popular media reports suggest that inshoring is also often done for considerations other than cost. For example, Sauder furniture previously outsourced from countries like China, Mexico and Southeast Asia. But due to regular requests for changes by customers, the company had to rethink its offshoring strategy. For Sauder, inshoring has reduced the span of the product development cycle of many products significantly and also boosted the rate of introduction of new products. In this case, the company decided to inshore the production due to changing market conditions rather than cost of production. Finally, the definition offered by Trefler, Rodrik and Antràs (2006) takes an export-oriented view. The authors consider inshoring as the creation of jobs internally to support export trade. If we take the case of Sauder furniture, however, the products are for the local market, rather than export oriented. An export-oriented definition is quite narrow, and does not capture the complete phenomenon of inshoring.

Some research uses other terms that describe phenomena similar to inshoring such as ‘insourcing’ (Slaughter, 2004), ‘backshoring’ (Kinkel & Maloca, 2009),‘re-shoring’, or ‘on-shoring’(Bagchi, Kirs, & Udo, 2007). Insourcing has been used by a few researchers to indicate the shifting of services or production from an outside location to within the country; however, this definition does not consider the sourcing of products or services from other divisions of the same company, as described in early definitions of inshoring. The term on-shoring refers to any outsourcing done within the host country (Bagchi et al., 2007), which expressly excludes the international dimension of the term.

Backshoring differs from inshoring in that it is defined as the “re-concentration of parts of production from foreign-owned locations as well as from foreign suppliers to the domestic production site of the company” (Kinkel & Maloca, 2009). This focuses on the ownership of the supplying operations – and also includes foreign suppliers. Similarly, reshoring refers to returning operations to the host country. Though many of these definitions appear synonymous, one key feature differentiating them from ‘inshoring’ is the location of the production process. The inclusion of the aspect of ‘concentration’ is an important distinguishing factor with respect to the U.S. market focus of this study. Concentration, in this context refers to the setting up new production facilities in the home country; whereas re-concentration refers to bringing back production facilities already set up in foreign locations. Inshoring can constitute both concentrating and re-concentrating the parts of production, contrary to backshoring. Due to the loss of jobs in the U.S., and the associated negative publicity, some companies that have offshored production for already existing products, are choosing not to do so for new products. Despite the relative cost advantage to do so, consumers and politicians want more domestic production. In such cases, inshoring may entail the set up of production facilities domestically by U.S. companies. So, the term inshoring considers returning as well as retaining new product production in the U.S. This further differentiates inshoring from backshoring, which only refers to the production facilities

Conference papers © Knowledge Globalization Institute, Pune, India, 2012

returned to the U.S. We argue that while inshoring can occur in any country, there is an increasing interest shown by U.S.

companies to inshore. Further, since there is very limited research carried out on inshoring to date, limiting its context to the U.S. during this early stage is useful to deepen our understanding of the inshoring concept.

Table 1 summarizes the literature into four categories. The source is shown in column 1, followed by the definition in Column 2.

Column 3 reports the context for the study, and Column 4 describes what aspects of the operations are the main focus of definition.

We first overview the literature on conceptual basis of the term ‘offshoring’ and proceed to define the concept of ‘inshoring’ from a U.S perspective. Offshoring refers to the relocation of jobs and process to any foreign country irrespective of the ownership of the unit: the offshore unit could be a subsidiary of the U.S. firm or a third party unit (Olsen, 2006). Most contemporary large companies take fractal view of their operations, as linked but independent activities, and constantly exploring options to reconfigure and optimize the operations by outsourcing and offshoring some (or all) of the activities (Zaheer & Zaheer, 2001). Next, in order to integrate these spatially separated functions, appropriate interfaces are being developed. Finally, companies are looking to minimize transaction costs as well as global governance overheads (Contractor et al., 2010) in order to benefit from offshoring. Contractor et al. (2010) have provided a framework for the spatial and organization fragmentation of economic activity. An adapted version of this is shown in Figure 1.

Based on the foregoing discussion, to define Inshoring, the following boundary conditions are necessary:

• From Figure 1, “offshoring” is represented by cells C, D.1 and D.2. These cells refer to the location or relocation of activities outside the home nation of the firm (spatial separation). In contrast, inshoring entails location or relocation of activities inside the home nation of the firm (spatial integration).

• Most of the U.S. companies with considerable sales within the country have offshored their facilities in order to take advantage of cost (e.g., Nike facilities in China) or location specialty (e.g., computer manufacturers in Taiwan for integrated circuits). Hence, the decision to inshore will be considered by companies which have capabilities for offshoring some of the production processes. So, we exclude from our definition of inshoring, the very small companies that source parts or whole Conference papers © Knowledge Globalization Institute, Pune, India, 2012 products from abroad (for sale in the U.S.). We focus on companies, large as well as SMEs, that have clear-cut options to locate production facilities offshore or in the U.S.

• New product lines or production lines set up in U.S. This refers to inshoring of activities for which the company has existing capabilities to offshore, but which are deliberately set up within the U.S. for reasons not related to production costs.

• In our definition of inshoring, we exclude export-oriented units based in the U.S., as export-oriented units are set up to take advantage of some inherent advantage (cost, raw material availability etc).

Using these boundary conditions, we define inshoring as follows:

Inshoring refers to production facilities that serve primarily the U.S. market, and (a) are started in the U.S. by deliberately overriding immediate cost-efficient offshore options, or (b) partially or completely returning production to the U.S. from production facilities located outside the U.S., for cost as well as non-cost reasons.

The framework for ‘Inshoring’ is depicted in figure 2.In figure 2, “Inshoring” is represented by cells A, B.1 and B.2.

Why Study Inshoring?



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