«Published Annually Vol. 6, No. 1 ISBN 978-0-979-7593-3-8 CONFERENCE PROCEEDINGS Sawyer School of Business, Suffolk University, Boston, Massachusetts ...»
In a comprehensive analysis on “Global Outsourcing and Offshoring”, Contractor et al. (2010) observed that any business or technical operation that can be codified and digitized can be outsourced or offshored. This in turn will be a serious threat to advanced economies, where the majority of the jobs are in services and most of the manufacturing jobs have already been offshored. This can be observed in the case of advanced economies like USA and Germany. Faced with economic downturns, these countries are taking necessary steps to discourage outsourcing /offshoring activities. These steps will necessitate companies to look for either expanding the production within their country or bringing back their existing facilities abroad to
Conference papers © Knowledge Globalization Institute, Pune, India, 2012
home country. Further, Contractor et al. (2010) also found some inhibiting factors that led to companies not to opt for offshoring. In an inshoring context, the following are some of the factors that motivate companies to locate or relocate their
production facilities in the U.S.:
Embedded or tacit knowledge which cannot be externalized efficiently Delays and “hold-up” risks in globally spread out supply chains Labor and other costs rising faster at offshore than home locations Fear of misappropriation and leakage of knowledge to potential competitors Inefficiencies resulting from spatial separation Certification and quality concerns Data privacy and security Xenophobia and protectionism in advanced economies Other transaction cost or intellectual property considerations Some of the above reasons have been documented in media reports within the U.S. in the recent past, showing an inclination towards inshoring by U.S. companies. Companies like Sauder, Crown Battery, and Oregon Small Wind Energy Association have decided to ‘inshore’ as they have faced issues with quality of the product. Companies like Farouk Systems have faced a problem of counterfeiting in the offshored locations, and had to move back their production to USA to protect their intellectual property. Apart from this, companies have also faced issues with defective parts and long delivery schedules. Further, in many cases, changes in customer orders or design change in the products have created a problem and companies have decided to bring back the production. Travel to Asia, where most of the low cost production hubs are operating, is a time consuming as well as expensive and tiring experience. Such travel-related concerns have also discouraged companies to offshore to Asia.
Fluctuating foreign currency exchange rates have also started negating the positives of offshoring, making businesses think about inshoring. In addition to all these factors, problems with supervision and inventory management have also been motivators for companies to inshore their production operations.
Research suggests that the reasons for ‘inshoring’ stem from quality or delivery problems experienced by companies. Kinkel & Maloca (2009), who studied the phenomenon of offshoring and backshoring in Germany, found problems related to flexibility and delivery ability as one of the chief motives for bringing back production facilities. Other motives for bringing back the production facilities were related to quality issues, inadequate infrastructure and lack of qualified human resources.
Archstone Consulting reported that nearly 90% of the manufacturers considered or initiated rebalancing their manufacturing and supply strategy. In its Archstone/SCMR Survey carried out in 2008, it also reported that manufacturers cited flexibility, visibility, control over supply chain and bottlenecks in the logistics networks as their top concerns (Ferreira and Prokopets, 2009) Companies have also realized that the ‘hidden costs’ – such as those of quality assurance, training, travel of company personnel – which were not taken into account initially, have also been impacting the overall cost structure. In many cases, such factors have been negating the cost advantage of offshoring the production facility. Hence, there is an increasing interest shown by companies to inshore their activities. There has not been enough research done, however, on these aspects: either to understand the phenomenon as a whole or to assess the impacts of inshoring.
Inshoring – Theoretical framework The decision to inshore creates a change in the structure of the organization (a spatial change in the third party supplier, ownership to non-ownership of the facility or vice versa) and also requires a change in the way organizational linkages operate Conference papers © Knowledge Globalization Institute, Pune, India, 2012 (changes in management structure or reporting structure, for example). These changes impact the way the organization operates and hence, we can anticipate that inshoring creates changes in the companies’ overall organizational structure as well as behavioral aspects.
The challenges also depend on two factors: (a) whether the inshoring decision is related to existing or new facility, and (b)
whether the facility is/should be company’s own or third party owned. The following are some of the potential scenarios:
1. A new own facility to be started stateside: Thai Union Frozen Products PCL is opening canning operations for its subsidiary, Chicken of the Sea. This new facility, which could have been offshored, is creating around 200 jobs in the U.S. (Sams, 2009).
2. A new outsourced facility to be started, on U.S. soil.
3. An existing facility (own) to be inshored (own): Bailey International Corp. which manufactures cylinders and cylinder components for heavy equipment, offshored its production and started a plant in Chennai, India in 2000. This facility catered to five of its eight top cylinder models. However, in October 2009, it moved its production to Knoxville after selling its manufacturing plant in Chennai, India (Marcum, 2010).
4. An existing facility (own) to be inshored (outsourced).
5. An existing facility (outsourced) to be inshored (outsourced): The Outdoor GreatRoom Co., which manufactures and sells various outdoor kitchens, furniture and heating products, used to outsource from China. It faced issues such as flexibility in production scheduling to shipping lags, which affected its sales. Now, it shifted its supplier to one located in the US, effectively reducing the order cycle from nine months to three months (Davidson, 2010).
6. An existing facility (outsourced) to be inshored (own): NCR, which was manufacturing its ATM machines in China and India through Flextronics, has shifted its manufacturing to its own facility in Columbus, Georgia (Holstein, 2010).
In order to study the impacts of inshoring, we examined the existing frameworks utilized to study outsourcing. Two perspectives – TCE (transaction cost economics) and RBV (resource-based view) of the firm – have been widely used to investigate the determinants and conditions under which firms can best leverage outsourcing (Holcomb & Hitt, 2007; McIvor, 2009). For studying inshoring, however, these perspectives have not been employed so far. Moreover, the usefulness of the TCE and RBV frameworks has been questioned by Luvison and Bendixen(2010), who opine that both TCE and RBV do not anticipate ex-post behaviors of the firms, which limit the potential of these frameworks to prescribe operational guidelines to managers. In the present context, we need to ascertain the impact of inshoring decisions on the company. Further, as understood from the media reports, cost advantages are not the sole reason for companies to inshore, but rather other factors – such as quick turnover time, quality of the product, better training and development, etc – may also come into play in inshoring decisions.
As firms expand their core functions into outsourcing activities, managers need to anticipate fundamental organizational and behavioral changes as a result of these outsourcing decisions (Luvison and Bendixen, 2010). Companies which inshore their facilities also face changing organizational structures; hence, companies have to understand the organizational and behavioral changes.
Evaluating and Assessing Inshoring Processes
Inshoring, as a concept encompasses other concepts such as reshoring, onshoring and backshoring. But, it takes a step forward by including scenarios in which companies consider to locate their facilities within U.S. despite offshore advantages. It also considers insourcing, (sourcing of products/components/services from within the organization), as well as outsourcing (sourcing products/ components/ services from third party sources) – as long as the location-of-operation decision favors the U.S.
Conference papers © Knowledge Globalization Institute, Pune, India, 2012 Conclusions The continuously changing business scenario in the globalized world is posing a lot of challenges to companies across the world.
Companies which have offshored their production facilities have experienced difficulties due to eroding cost advantages, inflexible turnaround periods, and patent infringements. Such factors have motivated some firms to bring the production facilities back to U.S. Furthermore, at the level of the macro operating environment, increasing unemployment rates and general public and media dissonance towards offshoring/outsourcing have forced governments to enact policies that sometimes compel companies to create employment locally, despite cost advantages such companies may have from setting up facilities overseas. The combination of such internal and external factors has influenced some companies to either bring back their existing facilities abroad or start facilities within U.S. This phenomenon, which we define as inshoring, has not been studied in much detail. Most discussions of inshoring are found in popular, often local, media which highlighted individual cases of companies which took the decision to either bring back production or start new ventures within the region covered by a particular media outlet, despite some advantages overseas. The job creation angle makes such stories very interesting to the concerned media and their audiences. The lack of systematic research on inshoring provides an opportunity for researchers to study the motivation, process and impacts of inshoring in order to understand the processes at work as well as examine the merits of various inshoring options.
In this paper, we introduced uniformity in usage of the term inshoring, by examining various existing terms used in literature.
Since there were many divergent definitions, we felt it was important to define it precisely. Next, we examined the existing literature and available case studies to ascertain the reasons for companies to inshore. We finally discussed various inshoring scenarios, and how any particular scenario differs from other scenarios. A careful investigation of each scenario, along with the organizational motivations and impacts of inshoring provides us with a better understanding of the phenomenon. We expect future researchers to examine these issues, along with the overall impact of inshoring on the economy as well as environment.
When manufacturing returns to U.S., there would be employment generation, but there would also be huge pressures on resources such as raw material, electricity, and transportation. There will be ripple impacts in terms of sustainability of the locality. Hence, future research needs to examine the impact of inshoring on the sustainability efforts of the companies as well as the country and its regions.
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