Onshoring vs. Offshoring: Side-By-Side Comparison
Offshoring and onshoring are the placement or retrieval of services and manufacturing provisions into regions that are seen as more appropriate, for a variety of reasons. Offshoring is the placement of demand for manufacturing or other services into lower-cost, geographically distant locations. This enables companies to reduce costs or centralize services in regions with more complete infrastructure and capabilities. It can also facilitate access to a more competitive environment in which multiple suppliers can potentially serve as primary and secondary sources.
Onshoring is the retrieval of previously offshored services to solve logistical issues, meet political pressures, improve control/quality, or consolidate services into more optimally aggregated clusters in a market. Cost, quality, control, proximity to markets, and logistics/supply-chain resilience are all factors that must be weighed in the process of onshoring and offshoring. Both approaches have their merits and challenges, and the best strategy will likely involve a blend.
This article will discuss the difference between onshoring vs offshoring, in terms of importance, advantages, and disadvantages.
Onshoring, also known as reshoring or insourcing, is the practice of bringing back business operations, manufacturing, or services to the company's home country. This can be a byproduct of a number of stimuli such as: domestic focus, control by proximity, quality and compliance, labor costs, supply-chain resilience, and IP protection.
To learn more, see our article about Onshoring.
As companies find that the logistical costs of offshoring outweigh the benefits gained, onshoring becomes important. This was a particularly significant factor during the COVID-19 pandemic, as the global supply chain and logistics networks faltered repeatedly and in both fundamental and esoteric ways. Onshoring comes with the desire for tighter control. This results in companies discovering that, for a variety of reasons, the outcomes achieved by offshoring don’t meet their expectations. They feel unable or under-equipped to enforce the matching of their expectations in terms of schedule, quality, warranty, actual costs, and more.
The process of onshoring usually begins with an assessment of the company's existing operational factors such as: cost, quality, supply-chain risks, strategic goals, and market demands. Based on the assessment, specific business processes that are suited to or can benefit from onshoring of manufacturing activities or services can be defined. These are often tasks whose quality control, intellectual property protection, proximity to customers, or responsiveness to market changes are driving factors in decision-making.
Once the operations are identified, it's necessary to select the locations within the home country that are most suitable for the onshoring that’s required. Factors in this include: labor availability and cost, infrastructure, proximity to suppliers and customers, political and market impression factors, and regulatory considerations. A comprehensive transition plan is critically important, to avoid disrupting the target operations while developing the onshore location. An effective plan includes: realistic and carefully considered timelines, go/no-go assessments, resources, risk-mitigation strategies, contingencies, and detailed communication plans.
The reasons for choosing to onshore tasks can be varied and result from a particular business and project type. Common benefits sought in the process are a selection from the following:
- Reduced logistical difficulties.
- Improved control of schedules.
- Improved control of quality issues.
- Protection of at-risk IP.
- Political and market positioning benefits.
- Easing compliance issues in more regulated product classes.
- Strategic and business equity benefits from increased in-house activity/skills/staffing.
There are clearly defined benefits in offshoring which guide as to the disadvantages of onshoring as a process change:
- Labor costs are liable to be higher as a consequence of onshoring—whether the task(s) moved are performed in-house or locally subcontracted.
- Establishing skills to replicate an established offshore supply chain can be difficult.
- Equipping facilities to match or better those of the offshore source is generally expensive in CAPEX and ongoing OPEX terms.
- Regulatory and QA burdens that were served by the offshore source can represent significant costs in onshoring.
- The scale of work can become an issue if the onshoring involves variable loading that can no longer be seen as carrying variable overheads.
The process of onshoring inevitably creates new job opportunities. The work that was present in another locale is transferred either to the company's own facilities, to local subcontract service providers, or to a mix of the two. This does not automatically imply increased employment levels as a result of onshoring, however. Increased use of automation can serve to counter the increase in labor costs resulting from onshoring. This will limit or alter the nature of increased job opportunities.
In some cases, onshoring of higher-risk or more-demanding work can be balanced by increased offshoring of lower-challenge aspects, once again affecting the scale and caliber of any increase in local employment opportunities. Where the onshoring process is politically driven or encouraged, it is generally performed with a view to increased employment levels in the receiving area, and this effect can be marked.
Offshoring is the process of undertaking geographically distant sourcing, performed for various reasons that present benefits to the company. These reasons include: global reach, cost efficiency, scaling of talent pool, and market expansion.
Offshoring becomes important when companies are looking for access to reduced labor costs and reduction in fixed overheads. This can be achieved by putting work into flexible resource providers. Offshoring also provides access to a deeper and wider skill base as many offshore providers exist in regions of greater activity in particular sectors and some degree of local specialization. Companies can have the capacity flexibility that grow rapidly without the need for the development of resources, staffing, and infrastructure which can be challenging in higher-cost regions. Other benefits are: removing the need for certain quality standards by seeking subcontract suppliers that have existing and suitable registrations and certifications, as well as consolidation of the supply chain by using vertically integrated or well-networked subcontract suppliers as service providers.
Offshoring begins by identifying the processes or services that are your targets for offshoring. These are based on cost savings sought, quality issues to manage, scalability, and expertise. The company should be able to define clear objectives and expectations for the offshoring initiative and determine the goals, timeline, and budget for the project.
Research potential offshore locations based on factors like: labor cost, in-team familiarity or consultant skills availability, language proficiency, time-zone compatibility, political stability, local tax issues, and regulatory environment. Identify potential service providers in the chosen location. Evaluate their expertise, track record, infrastructure, and capabilities, ideally including a site visit. Conduct a competitive bidding process or make an RFP (request for proposals) from potential vendors to assess capability and benefits. Agree the terms of the outsourcing agreement with the vendor(s). Clearly define service levels, responsibilities, pricing structures, intellectual property rights, data security, and dispute-resolution mechanisms.
For established products/manufacturers, develop a comprehensive transition plan that clarifies stages and timelines for migrating the identified work to the offshore location. Establish key performance indicators (KPIs) and milestones to track progress and measure success. Allocate the necessary resources, including: budget, personnel, and technology, to support the offshoring project.
Begin with a pilot phase to test the new operation on a smaller scale. Evaluate the performance of the offshore team and make any necessary adjustments to the processes. After successful pilot testing, proceed with full-scale operational execution of the offshored work. Monitor performance against KPIs and conduct regular reviews to identify issues early and act quickly to adjust or reevaluate. Collect thoroughly considered performance metrics as an ongoing strategy, to enable early identification of areas for improvement. Implement changes early to optimize the outcomes dynamically.
Some potential advantages of offshoring a business are:
- Labor costs will likely be lower.
- Working hours will potentially be longer.
- Your in-house quality certification issues may be reduced, by outsourcing to more tightly controlled and pre-certified facilities.
- Scalability is relatively straightforward, with the right partner.
- Variable demand can be managed without maintaining fixed overheads.
- Greater depth of skills and process availability are usually available, by moving from a sparse manufacturing region to an intensive one.
Some of the disadvantages of offshoring are:
- Logistics disruptions can be a serious problem, particularly significant through the pandemic difficulties, the renewal of which is a risk factor to consider.
- QA and materials control can be more challenging and must be managed, both at a relationship and factory-floor level.
- IP leakage is a cause of nervousness and requires assertive and thorough management.
- The transition from onshore to offshore production can be tricky and should not be considered as simply the opening and closing of faucets.
- Travel costs and personnel pressures in managing complex, long-distance supply can be challenging and must be allowed for from the start.
Offshoring is the removal of jobs and opportunities from the home market, placing them in distant and lower-overhead regions. This can have a net negative effect on local job market opportunities when established production/tasks are exported to offshore locations. It can also have a growth suppression effect when new tasks (never onshored) and new growth (of onshored tasks) are offshored.
The effect is not, however, simple. The management of offshore tasks can create new strata of roles and services within the home region. The capacity freed by offshoring can facilitate greater development and new roles in the higher grade and IP-related tasks that are not offshored.
There is a range of technical, financial, strategic, and political considerations in the choice of onshore and offshore production tasks. No two situations are exactly the same, and every company that needs to make these decisions will need to balance the range of influences in making these decisions. It's also important to maintain a watching brief in this regard, as the more finely balanced influences in decision-making are liable to change, altering the benefits in subtle and significant ways.
The decision to onshore previously offshored product manufacture or services is never a simple one, and every company, project, or even component can present its own decision drivers.
The benefits of offshoring that are given up, or negated in onshoring of tasks are generally straightforward. Lower labor costs are often a big factor. Standards of employee safety (the at-home OSHA compliance issues) may be reduced. Service providers that can offer easy scalability are frequently available. Production levels with seasonal or market development variations can often be accommodated without taking on fixed overheads. Many offshoring locations offer huge industrial infrastructure advantages, as related services are geographically more concentrated.
The drivers of onshoring are often highly significant but potentially less clear, as they require the company to give up the headline-grabbing bottom-line influences of offshoring. The desires for local control, simpler logistics, IP protection, and potential social/political gains can also have great value. The choice to onshore previously offshored work will generally be driven by the desire for several of these aspects, despite their being less tangible in some regards.
A primary driver of offshoring in many cases is the ability to access lower labor costs in the offshore target region. Labor costs of onshoring commonly differ from offshoring by a multiple of 2 to 10 times. This depends on the nature and skill level of the work, the regulatory imposition level for working conditions, health and safety, and fundamental differences in the cost of living.
Where labor cost is the primary driver of decision-making, offshoring is likely to be deeply attractive. Onshoring will generally be driven by factors other than direct labor costs, as it often involves considerable increases in manufacturing direct overheads.
There are various legal and regulatory issues that can be either benefits or barriers to both offshoring and onshoring.
In offshoring, most potential offshore partners who can offer the services a company needs will have the core certifications that are applicable to the product or service such as: basic manufacturing QA certifications, and data security registrations. In highly specialized areas, more burdensome certifications and process regulations can be hard to find among subcontractors in lower-labor-cost areas. For example, medical product manufacture can be very hard to offshore, depending on the equipment classification. Meanwhile, food production capability can be dangerous to offshore, where local controls can be less well enforced (or indeed absent), creating customer risks that can be very serious.
Alternatively, in the onshoring of these sensitive production areas, these barriers are reduced to some degree, or removed entirely. However, the regulatory costs in an onshoring business that is already established in a less-controlled offshore region can be significant. The costs can be considerable, moving production from a low to a highly regulated working environment. This can require OSHA compliances that reduce productivity or increase overheads, attract waste disposal costs that are more realistic and considerably higher, and will likely result in shorter working hours and more holiday/sick pay.
There are social and societal benefits to onshoring that can be hard to measure, but significantly valued by some companies. These are in addition to the business benefits of responsiveness, local control, improved logistics, and potential quality improvements.
There is no simple formulaic answer to the questions that arise as to the relative benefits of onshoring and offshoring. However, some simple guidelines which are indicative of when offshoring is applicable are listed below:
- Industries with a high labor content of relatively low skill level generally can benefit from offshoring.
- Businesses requiring moderate technology manufacturing processes for part or all of their product can also access offshoring with significant benefits.
- Manufacturing that cannot be locally sourced, but can be found in regions with stronger production infrastructure may result in overriding pressure to offshore.
- Depending on the region, data processing and client contact services can successfully be offshored, where the data or client interactions are not highly sensitive.
In terms of onshoring (or the choice to not offshore the work in the first instance), the decision is often driven by direct benefits or the benefits of problem obviation. Examples of benefits are:
- Highly regulated aspects of most business operations pose significant difficulties and risks in offshoring.
- Medical, military, and food production pose variable but extreme risks in offshoring.
- Advanced IP-related activities also pose often insurmountable risks in offshoring.
- The desire for local manufacture (either onshored or never offshored) in terms of quality, logistics, the political/social environment, and many others
It depends. There is an increasing tendency for cultural alignment between offshoring clients and their target suppliers. Long experience and carefully applied learning and sensitivity can overcome the cultural misalignments that are intrinsic to the offshoring process. But when work is onshored, there is little to no cultural alignment needed, as it is intrinsic. There are adaptations, where expectations have been set by offshoring, but these are necessary adjustments that all parties have a fairly clear understanding of.
It depends. A primary benefit of offshoring is the avoidance of the need to develop home-business fixed overhead to the same high degree. An offshore subcontract service that aggregates the needs of a range of customers can generally offer flexibility in demand levels that is impossible to maintain in a home-employed and permanent workforce. This flexibility will, however, come at a price. Contracts can often be based on take-or-pay terms that compensate the supplier for demand fluctuations. This is still likely to be a lower cost than a permanently employed, fixed overhead team at home.
In many regards, onshoring can improve the flexibility of supply, as the company has much more direct influence over the production facility and profoundly more secure communications. This is particularly true when the onshoring involves bringing the work under the company's own roof, into its own closely held facilities.
Yes, in simple commercial terms, offshoring is a convenience that is enjoyed by the majority of large companies, to some degree. For example, offshoring can require a high effort to establish and require considerable resource commitment and travel. Onshoring, on the other hand, requires resource and facility development that can be extensive and costly. Offshoring displaces much of the detailed effort onto the subcontractor, easing the direct labor management burden on the home facility. Onshoring offers the immediacy of feedback/control, a position that can only be achieved through offshoring by very intensive management.
Yes, local facilities working the same hours are more straightforward to manage. However, the flexibility and thorough coms that offshoring requires when done well can obviate most of the timing difficulties. Additionally, the after-hours delivery of tasks can effectively increase the working day, which often has significant benefits.
Offshoring, onshoring, and nearshoring are outsourcing models that vary only by the geographic location of the service provider and the trade-offs between factors such as: cost, proximity, cultural alignment, and regulatory considerations. The choice of which model to adopt depends on the specific goals and priorities of the outsourcing company.
Onshoring is bringing a task or sequence of services or activities to the company's home base. Nearshoring implies bringing those same tasks or services to a closer but still different geographic location. This can mean a different region of the same country or a nearby country.
Offshoring is a specific form of outsourcing. While both terms involve locating (or relocating) business functions or processes to external parties, they differ in terms of the location of the service provider. The differences are in the location of the service provider, cost considerations, cultural and language issues, proximity and collaboration, and regulatory and legal considerations, which can be reduced by proximity and cultural/legal alignment.
Reshoring is the same as onshoring in all essential details. The difference is in the implication that the tasks or services were formerly sited at the home region of the company before being offshored and that they are being returned to the home site by reshoring.
This article presented onshoring vs. offshoring, explained each of them, and discussed their key differences. To learn more about onshoring and reshoring, contact a Xometry representative.
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