9 Benefits of Onshoring

As trade in commodities and finished products became more globalized, many companies offshored their manufacturing operations, shifting them to overseas locations. This was done in the hope of maximizing profit by reducing labor costs, material costs, and overhead costs. However, as differences in labor rates have decreased over time, the logistical and oversight challenges of overseas manufacturing have become more significant. The strategy of onshoring, or bringing operations from foreign locations to domestic ones, is gathering momentum, allowing companies better access to their primary markets.

Onshoring has many benefits, such as: improved quality control, reduced customs fees, more rapid product launch, and faster shipment. Some of the major benefits of onshoring are described below:

1. Improved Quality Control 

Having domestic manufacturing operations as opposed to overseas operations allows the company to quickly identify and rectify quality issues in products. Additionally, manufacturing standards and regulations vary depending on the country or region of the world. By shifting manufacturing processes to domestic locations, companies can more easily monitor manufacturing processes and meet quality and regulatory standards related to manufacturing processes, materials, and intellectual property.

2. Minimizes Mistakes Due to Cultural and Language Differences

Cultural and language differences at overseas locations can be a barrier to efficient manufacturing and the fabrication of high-quality products. Onshoring production means that communicating manufacturing and quality standards to operators can be done in a commonly understood language. 

In addition, designing and manufacturing goods where they will be sold makes it possible to track and show sensitivity to cultural trends that will lead to customer acceptance of the products.

3. Quicker Product Launch

Onshoring enables companies to launch their products faster not only because it reduces transport time due to shorter shipping distances, but also because it allows companies to more quickly establish manufacturing and quality control procedures. Without a language barrier or the need to communicate over vastly different time zones, the workforce can be trained more effectively. These two things lead to a quicker turnaround for the fabrication, validation, and delivery of products.

4. Increased Job Opportunities

Onshoring creates job opportunities for people within the home country, which can help to stimulate the local economy and reduce unemployment rates. Additionally, creating good, quality jobs for the local population may improve and expand the company’s reputation, which can lead to better access to a skilled workforce and a wider customer base.

5. Faster Shipment 

Since onshored manufacturing operations are located nearer their domestic product sale points than are foreign factories, transportation time from plant to market can be dramatically reduced.  Companies can reduce shipping costs not only due to shorter transport distances but also by strategically placing their new, domestic plants in locations with well-developed existing transportation infrastructure.

6. Decreases Safety Stock and Urgent Purchase Costs 

Onshoring can help decrease the need for either keeping unsold product inventory on hand as a buffer or paying emergency priority shipping costs to protect the final customer against production or shipping disruptions between an overseas location and the domestic marketplace. Since manufacturing operations are based locally, supply chains are simpler and more secure which allows manufacturers to quickly obtain critical materials needed for the fabrication of their products.

7. Reduced Shipping Expenses 

Onshoring helps companies save tremendous amounts of money by simplifying supply chains, thus preventing added spending on shipping raw materials and moving finished products to the market location by air or sea, for example. By having domestic operations, manufacturers benefit from reduced freight costs, faster shipping times, and quicker product launches.

8. Reduces Customs Fees

With manufacturing operations inside the borders of their home country, companies will generate significantly fewer customs expenses. Companies do not have to pay customs fees for importing their products, because the final product is produced domestically. However, companies still have to pay tariffs for any raw materials that are shipped from overseas.

9. Improved Flexibility

Another benefit of onshoring is the improved flexibility it offers companies. With onshoring, companies can speedily react to changing market conditions and modify manufacturing operations and supply chains accordingly. Additionally, the proximity of research and development teams and manufacturing centers fosters better collaboration and more innovation. Moreover, companies have better oversight of manufacturing processes and product quality. All of these factors lead to improved flexibility and resilience of manufacturing operations.

What Are the Disadvantages of Onshoring?

Onshoring is not without its disadvantages. Some of the disadvantages of onshoring are listed and described below:

1. Establishing or relocating manufacturing operations domestically can require substantial upfront investments in the facilities, equipment, and workforce training needed to fabricate the repatriated products.
2. Companies that onshore their operations may be at a financial disadvantage compared to companies that have offshored operations. This is because companies with offshored manufacturing may have lower operating costs which allow them to sell their products at a cheaper price. Consequently, companies that onshore must find innovative ways to remain cost-competitive.
3. Domestic manufacturing and product regulations may be more stringent than regulations that exist in other countries. Federal labor laws and regulations, as well as tax policies, can be obstacles to establishing profitable onshore operations.

How Does Onshoring Work?

The first step in onshoring a production facility is to develop a comprehensive plan for the best way to establish the new operation. Companies will often conduct a cost-benefit analysis to determine whether onshoring even makes financial sense, and will compare onshoring and offshoring costs. Once companies can justify that onshoring is a good option, companies may evaluate different locations that may provide the best access to a skilled workforce, low taxes, low permitting costs, and low operating costs. After final location decisions are taken, construction of the facility can begin. While the plant is being completed, supply chain configuration, training of the labor force, and quality control procedures can be worked out. Once product production begins, continuous improvement and routine assessment of market conditions can help to ensure that the onshored manufacturing operation continues to be profitable.

How Does Onshoring Encourage Innovation? 

Onshoring encourages companies and countries to lean into their economic strengths and leverage the tools and resources near them. Innovative automation and remote/smart factory management offer cost savings that can help the onshored operation be competitive in cost with the goods that previously came from the foreign operation. With easier access to manufacturing operations, companies can focus on developing more streamlined ways of production and on creating innovations.

How Does Onshoring Deal With Global Risks? 

Globalization provided numerous benefits to companies, consumers, and entire countries and cultures alike. Reduced costs for both manufacturers and consumers, access to more innovative technology, increased global cooperation, and economic growth are just a few of the advantages of global trade and manufacturing integration. However, pressures such as political instability, climate change, and global health crises can pose a threat to smooth production operations. 

By onshoring, manufacturers can be more self-reliant and be less affected by supply chain pressures. This enables companies to continue selling their products and gives consumers continued access to much-needed products and services in the face of such pressures.

Does Onshoring Make Products Safer? 

Yes, onshoring can make products safer. This is because onshoring allows companies to more easily manage and monitor the design of the product and its manufacturing processes. Additionally, more stringent domestic product regulations ensure that products are made to more rigorous standards. Finally, simplified supply chains allow companies to more easily track where their materials originate and ensure that these materials meet regulatory standards. These things result in safer products for the end consumer.

Does Onshoring Protect Valuable Ideas and Information?

Yes, onshoring can protect valuable ideas, information, and intellectual property. This is because countries in which the company is based may have more stringent and robust legal frameworks to protect patents and copyrights. Additionally, enforceable contracts such as non-disclosure agreements and non-compete agreements between suppliers and partners further help prevent the dissemination of sensitive intellectual property. Finally, the proximity of manufacturing operations to information technology and cybersecurity groups can further bolster the protection of valuable ideas and information.

Is Onshoring Important in Emergencies?

Onshoring allows companies to quickly respond and adjust operations in the event of an emergency. Emergencies such as natural disasters, public health emergencies, and political instability can affect a company’s ability to reach the end consumer. However, when manufacturing operations are located domestically, companies can rapidly adjust supply chains and recruit workers or downsize their workforces. These things enable companies to be more resilient in times of such emergencies.

Is There Proof of Successful Onshoring Examples?

Yes. There are many successful examples of onshoring, from the automotive industry to appliances. For instance, Ford Motor Company has shifted some of its vehicle production from overseas back to the United States. In 2015, the company announced that it would move production of its Ford Focus compact car from Mexico to a plant in Michigan. This decision was driven by a desire to respond more quickly to market changes and enhance the flexibility of its production processes. Following on the heels of this successful onshoring effort, Ford has earmarked billions of dollars for the construction of new manufacturing facilities in the United States for electrical vehicle assembly plants and battery manufacturing sites. 

Another successful onshoring example is the experience of General Electric (GE) with its appliance manufacturing. In the early 2000s, GE conducted a cost-benefit analysis that revealed rising labor costs overseas, increasing oil and transportation prices, and consumer demand for higher-quality products. Onshoring was identified as a strategy that could potentially address all of these factors. Since 2008, onshoring by GE has directly created 4,000 new jobs and indirectly created about 18,000 in the United States and also reduced its carbon footprint.

How Does Onshoring Differ From Other Outsourcing Models?

The difference between onshoring and other outsourcing models is that onshoring is related to the location of manufacturing while outsourcing is related to the entity that manufactures products. Onshoring can occur with or without outsourcing just as outsourcing can occur with or without onshoring. A good example of where this occurs is within the automotive industry where OEMs often task third-party manufacturers to make specific parts for their vehicles. Tasking third-party companies is an example of outsourcing. Whether these third-party companies have domestic or overseas manufacturing operations determines whether onshoring, offshoring, or reshoring occurs.

How Does Onshoring Differ From Nearshoring? 

While onshoring is the process where companies establish manufacturing operations in the company’s home country, nearshoring is the process where companies establish manufacturing operations near the company’s home country. Typically, nearshore manufacturing operations are set up in a bordering country or within the same general region on the same continent. An example of nearshoring would be if a US-based company established manufacturing operations in Mexico or Canada. Companies that choose to nearshore may benefit from reduced labor and overhead costs but will have slower shipping times and more expensive freight costs for products.

How Does Onshoring Differ From Offshoring? 

Offshoring refers to the process whereby companies establish manufacturing operations in an overseas location, typically on a different continent. This is the opposite of onshoring, in which manufacturing companies set up operations in the country in which they are based. As with nearshoring, offshoring can enable companies to take advantage of reduced labor and overhead costs. However, with offshoring comes cultural and language barriers, increased shipping and customs fees, slower time to market, and reduced quality control capability. 

How Does Onshoring Differ From Reshoring?

Reshoring can be considered a type of onshoring. Reshoring is the process where companies that originally had domestic manufacturing operations and moved existing manufacturing operations overseas, move operations back to the country in which the company is based. 

Summary

This article presented the benefits of onshoring, explained each of them, and discussed each benefit in detail. To learn more about onshoring benefits, contact a Xometry representative.

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