Next Shoring: How This Trends Affects Global Flows In A Digital Age
Posted in Operations & IT Articles, Total Reads: 1817
, Published on 25 December 2014
Foxconn, the Taiwanese company which is famous for being the assembler of iphone is investing $10 million in research and development at Carnegie Mellon University. It is also planning to spend $30 million to build a high tech manufacturing facility in Harrisburg, Pa. On similar lines, Toyota and Honda are increasing the number the manufacturing plants both at home and emerging markets. What do all these examples have in common? The answer is they are all examples of companies adhering to the new trend in global business i.e. Next Shoring.
WHAT IS NEXT SHORING?
To understand what is next shoring we would have to rewind a little. Beginning in late 1980s the companies followed a trend of moving their production (or certain production associated phases) outside home. This trend was called outsourcing. This included shifted the manufacturing base of labor intensive products to other countries such as India or China where goods could be manufactured at low cost due to low wages per worker. However, over the last decade this has become increasingly difficult to carry on this trend as there has been a multifold increase in cost in these areas due to increase in minimum wage. The CAGR of wages in India and china is close to 15 percent in the last decade. Also, the rising complexity of quality management due to complex supply chain integration increased the production cost and chances of error. There has also been a decrease in energy cost in developed nations such as USA due to increase in shale gas production. All this is making the companies shift from current manufacturing bases.
Does Next Shoring mean to transfer manufacturing base from outsourced places to back home? NO, then how does a company decides where to shift base? The answer lies in association with two factors i.e. proximity to demand and proximity to innovation. Let’s have a brief look at these two factors.
PROXIMITY TO DEMAND
In the recent years there have been two major diversifications with respect to consumer demand. First is increased demand for variety. Thus there is a need for tailor made products. Secondly, the manufacturing bases of the outsourcing era have now transformed into emerging markets due to increase in income and thus the standard of living. The new manufacturing base by Timken is an example of being within the proximity of demand as these are the emerging markets. As per an analysis by Mckinsey, more than two thirds of global manufacturing takes place in industries that tend to locate close to demand. Also, locating manufacturing close to demand makes it easier to identify and meet local demand. As automotive OEMs (original equipment manufacturer) expand their capacity in emerging markets to serve regional demand, their suppliers have followed. This can be substantiated by the fact that number of automotive-supplier plants in ASIA has tripled in just the past decade. The emerging markets’ share of global demand is steadily climbing, from roughly percent 45 percent in 2008 to an expected 66 percent in 2025. Similarly, there been a substantial increase in the demand for tailor made products, thus increasing requirement for product diversity. As per recent surveys there has been a 15 percentage point increase in the demand for tailor made products. Thus the practice of locating close to such demand location is important to ensure swift customizable delivery. The need of the hour is to maintain hybrid models of work which ensure swift delivery at emerging markets as well as established demand centers. These practices are not just for manufacturing industries but also for retail enterprises, for example Amazon is already reorganizing their operations to meet consumer demand by building a web of distribution centers in major metropolitan areas, rather than relying on a few large DCs in rural outposts several states away.
PROXIMITY TO INNOVATION
There has been a surge in new materials that can be used in production methods. The use of carbon fabric in automobiles, especially light vehicles is in limelight. This is in comparison with the advent of materials such as high strength steel a few years back. Along with this there are new methods that are coming into play for e.g. 3D printing, IoT (Internet of things).
There is a growing conception around 3D printing that it is a nascent technology. It is not, the first 3D printer was built in 1984 in USA. The past few years have been remarkable in terms of improvement in technology and affordability. In a 3D printer the material is built layer by layer, this concept is known as additive manufacturing (AM) and is widely used in “rapid prototyping” in various industries. The technique before this was called building by block which made several products impossible to build. Right now mostly plastic is used in case of 3D printers, however active work is in progress for the use of organic as well as metal compounds. More than 55000 3D printers were sold in 2013 and the sale is expected to grow by 25% in the next 5 years. It has a very strong link with Proximity to Demand as one of the variables in question is the requirement of tailor made products.
IoT (Internet of Things)
The next aspect to be considered in proximity to innovation is Internet of things. IoT can be simply defined as a connectivity of devices and systems that goes beyond M2M (Machine to Machine manufacturing). The best possible benefit is not the connectivity but the results that can be obtained from such aggregation. By connecting the devices one can aggregate all the required data in an easy and concise manner. Analysis of this data can help in maintaining inventory level, estimating demand, configuration of operational details among other uses. This will ensure more accurate and reliable results. As mentioned in the proximity to demand scenario, a company might have to maintain hybrid models of manufacturing. IoT can be used in this situation for better virtual integration to manage above mentioned data related services.
All the above mentioned uses are on a micro level. In the future, however, whole cities can be planned in a way so that they are integrated by IoT. But wait, this is happening right now. Songdo, South Korea, is the first of its kind fully equipped and wired smart city and it is almost near completion. Nearly everything in the city is planned to be wired, connected and turned into a constant stream of data that would be monitored and analyzed by an array of computers with minimal, or no human intervention.
UNCOVERING THE MYTH – YET AGAIN
As stated above in case of proximity to demand, the developing nations are nowhere behind in these technological highlights. Consider this data, the global market for IoT in 2020 will be worth $373 billion in revenue. India will account for $10 – 12 billion of this total revenue. A number of early startups have already taken off in India – and not just in the usual large cities but also smaller ones such as Belgaum, where Sensegiz (IoT Company) is situated. The startup has a range of tags and sensors which can be clipped or strapped on to the body; and provide panic buttons. Others help consumers tag items so they can be easily found, thus saving search time.
ESTIMATED TIMELINE – COMPARISON WITH OFF SHORING
Although the off shoring and next shoring are two entirely different concepts, there are certain similarities between them. These similarities can be useful in predicting the timeline for next shoring. As next shoring is facing a great deal of skepticism regarding the accessibility and feasibility issue, same thing happened with off shoring while it was about to take off. And the mistake the skeptics were making at that time was also the same, i.e. looking at the temporary implications while ignoring the macroeconomic aspects in the long run.This included various trade agreements such as NAFTA and CAFTA among other considerations. What about the implications of these changing business trends? Off shoring transformed the economy of India, Ireland among other nations in a remarkable way. Could it also be true for next shoring? As it is evident from the timeline, from its advent in the lexicons in 1980s and Kodak’s first advent in 1989, it took outsourcing nearly 25 years to become a 100 billion dollar industry. Could a timeline on a same scale after adjustment of differentiating factors be also true for next shoring? The future will tell.
Three conclusions can be drawn from this article. First, next shoring as a concept and practice is not so distant. It is already here as stated by various examples in the text above. Secondly, developing nations will not be biased against in case of proximity to innovation. And last but not the least, the consideration that this concept was always there, in part or aggregation.
This article has been authored by Jalaj Pathak from XIMB