Reshoring – how to assess location decisions for your business

 

One in six UK manufacturers have reshored activities in recent years with service companies also deciding to relocate support aspects closer to their customer base. We spoke to Lee Hopley, Chief Economist at EEF, the manufacturers’ organisation, to find out whether this trend – especially in the current climate – is likely to continue.

Lee Hopley is Chief Economist at EEF, the manufacturers' organisation. She deals with a range of macroeconomic issues and provides insight into issues impacting productivity and competitiveness.

With the dust continuing to settle on June’s referendum result, the full effects of Britain’s decision to leave the EU won’t be completely known for a while yet.

But with the cost of imports rising, due to sterling’s fall in value, you could be forgiven for thinking that price-conscious UK businesses might take advantage of these uncertain times and consider reshoring as a growth strategy.

However, according to Lee Hopley, Chief Economist at EEF, the manufacturers’ organisation, the decision to reshore is often inspired by a number of different factors.

“Although pricing – including the fact that low labour cost economies are no longer as attractive as they used to be – is definitely in the mix, we don’t find that is the only driver of reshoring.”

Quality over quantity

Lee suggests that businesses are typically more concerned about securing increased flexibility and quality.

“For example, if you have short order books, you need predictable lead times. Similarly, if when the product arrives, it isn’t made to the right specification, that clearly impacts on your production schedule and ability to satisfy your end customer. In this case, reshoring can help.”

In fact, in EEF’s survey of 300 manufacturers, the findings underpinned these non-cost drivers:

  • 49% of respondents reshored to improve quality
  • 47% to reduce delivery times
  • 44% to increase certainty of delivery times.1

But as with any strategic investment decision, the relocation of production or services either to or away from the UK requires businesses to first consider several important issues.

Target customers

Understand where your target customers are based. For example, if you’re supplying an original equipment manufacturer in the UK then cost and reliability of delivery might provide a competitive advantage from a local base. Alternatively, “if you’re trying to satisfy a regional market in Asia,” says Lee, “your decision might be to continue to invest in production facilities outside the UK.”

Future growth opportunities

Look to the future to assess which markets you want to expand into. Production location is a long-term investment, so considering first whether there are practical or regulatory reasons for offshoring could very well impact your decision.

Skills base

Deciding to reshore could be driven by the need for high-value manufacturing skills or, at a service level, customer pressure for support from native English speakers. On the other hand, 33% of respondents to the EEF survey were concerned that they wouldn’t find the skills they needed in the UK, citing this as a potential barrier to reshoring.2

Innovation

Businesses keen to innovate may seek a cluster effect to enhance collaboration or look for respected academic institutions to boost innovation lead times.

Access to finance

Tax incentives offered by the UK government could also influence businesses to bring production back to Britain.

Referendum consequences

But how will the UK's decision to leave the EU potentially impact reshoring as a practical option?

“I think at the moment it’s too difficult to call,” says Lee. “Over the next three to five years we'll start to see what our new relationship with Europe will look like. What will happen to the exchange rate? What kind of business environment policies will the government, present and future, introduce? All of these are factors that could make reshoring more or less attractive, but we just don't know which way the coin is going to land.”

What will remain a certainty is that global competition will continue to increase. This will present opportunities and challenges for businesses in terms of both domestic and international trade.

Is reshoring right for you?

There are numerous factors which can put a business off reshoring. These include concerns over potentially lost production time, UK energy costs and the tax environment, as well as accessing the right skills and talent.

Ultimately though, says Lee, the proof is in the pudding.

“We’ve definitely seen tangible bottom line benefits for UK businesses that have reshored, in terms of productivity, profitability and turnover,” she confirms.

“The key question companies have to ask themselves is where is the best place for my business to be located to make sure that we are maximising our growth opportunities.”

In the context of the EU referendum – and all the unknowns including Britain’s role in a new Europe – that question is as relevant as ever.

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