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How Digitalization Will Change Outsourcing Strategies

July 14, 2016 by Kai Goerlich 0

For decades, many businesses from developed economies have been moving jobs to low-wage countries. Now, in a recent study on outsourcing and offshoring, A. T. Kearney claims that we might soon see the end of offshoring as we know it.

In an increasingly competitive world, the critical decision to offshore, nearshore, or reshore parts of the business may very well continue to be disruptive. But this time, there’s a twist: The digitization of supply chains, which will likely shift the balance of your outsourcing strategy.

The Truth Behind Reshoring Rumors

As news of more companies moving their manufacturing operations back to developed nations emerge, reshoring is rumored to become the next big trend. But according to an A.T. Kearney’s study on reshoring in the United States, offshoring is still outpacing reshoring. Even industries with high labor and transportation costs show the greatest increase in offshoring.

Labor costs are regularly cited as one of the critical decision factors for offshoring. While such expenses in India and China grew significantly over the last few years and China’s cost advantages dwindle, businesses are not necessarily shifting their operations elsewhere. In fact, A. T. Kearney found that industries with high labor costs tend to outsource production to other Asian countries. Of course, once the global economy becomes truly global, benefits of this strategy may be more or less leveled out. But, we are still some decades away from this ideal, considering that most African nations are still not online.

But this is not where the story ends. According to McKinsey, the global flows of trade and finance are decreasing as well, while data flows grow exponentially. Since 1995, the globalization of finance is likely a contributing factor in the offshoring trend. Even though this boom seems to be flattening, it’s still happening at a high level. In the meantime, container freight rates have been declining for years, and international communication – including mobile – is becoming more prevalent and less expensive every day.

How Digitization Impacts Offshoring

If we take the U.S. economy as a general rule for reshoring, the top reason for this approach is government incentives. Given the latest developments in Western countries and China, more of these programs may succeed in bringing back formally outsourced jobs. As the political climate moves in the direction of nationalism, more governments may be inclined to support their own economy.

A skilled workforce is cited as the second important factor, and digitization might significantly impact it by offering learning opportunities and remote support. This argument is valid for emerging countries as well; but as industrialized production requires highly skilled workers, this slightly favors reshoring scenarios.

Another consideration is time to market, where it still takes a lot of time to produce certain products in one part of the world and distribute them in another. While this may be still the case, technologies such as 3D printing may change that. And as demand for locally produced products increase, the “made in” label may be a paramount part of the buying decision for consumers.

Offshore, Nearshore, or Reshore: The Decision Is Yours

The synergies of digitization are strong evidence for reshoring, especially as supplier networks become more digitized and globalized. At first, the proximity to markets and consumers was a valid argument for time-sensitive products. But in a world of increasing consumer demand for 24-hour shopping and same-day delivery, more products may be affected as digitization enables businesses to find new markets and customers better than ever before.

In the 1970s, automation and robotics significantly influenced manufacturers and their supply chains – and their impact will continue to progress as these technologies become more capable and productive. Soon, more robots will be seen on the shop floor in Western countries as well as Asia. In both cases, a high rate of automation will balance out high wages on a global scale – making reshoring parts of the production process more attractive.

Digitization alone is not a reason to favor or dismiss reshoring. However, it is clear that traditional offshoring practices are increasingly counterbalanced by rising labor costs in offshoring countries and new technologies such as robotics and 3D printing.

How we use digital technology to design and produce products will probably have a greater impact than the classic automation. In the near future, even complex products will be 3D-printed anywhere in the world and assembled by increasingly sophisticated robots. Eventually, we will have to learn how to equilibrate increasing automation, the loss of jobs and functions, and consumer demands with the interests of the societies in which manufacturers operate. In the end, digitization emboldens businesses with greater flexibility, smarter supplier networks, and the freedom in their decisions to offshore, nearshore, or reshore.

For more insight on how digitalization will affect your organization’s business strategies, see Innovation Digital Trends For Profitable New Business Models.

Kai Goerlich is the Idea Director of Thought Leadership at SAP.

This story originally appeared on The Digitalist Magazine as part of the 10 Weeks of Live Business series.

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