"Reshoring" supply chains – the movement to replace international supply chains with (theoretically) simpler, domestic equivalents – is currently high on the political agenda, boosted by Brexit and the disruption caused by COVID-19. However, while there may be merits for some businesses in reshoring, it is far from risk-free – and, for many businesses, it may be neither practical nor desirable. In this briefing, we look at the pros and cons of reshoring, what the alternatives are and how to minimise the risks if you do decide to reshore.
Should you reshore your supply chain?
Covid-19 has certainly highlighted some of the vulnerabilities of international supply chains, but it is worth recalling that globalisation was a political target well before the Covid-19 pandemic, driven in some quarters by the belief that it leads to job losses "at home". This is partly responsible for an increasing focus by Western governments on the national security implications (as highlighted in our recent briefing on merger control here). It has also manifested itself in trade tensions, most visibly between the USA and China. Meanwhile in the UK, the Government has recently decided to prevent telecoms operators from using equipment produced by the Chinese firm Huawei in the UK's 5G network, citing national security concerns. It has also been reported that wider plans are being drawn up to reduce UK reliance on Chinese imports (referred to as "Project Defend", again suggesting an attempt to frame the move in the context of national security concerns).
Does reshoring mitigate one risk whilst exacerbating others?
However, reshoring supply chains is not as simple or risk-free as some politicians might wish for. Perhaps the most fundamental criticism of reshoring is that organisations may simply replace a vulnerability abroad with one that is slightly different – but equally serious - at home. Take the Covid-19 crisis. Whilst it is true that global supply chains have been disrupted, if UK businesses had restructured their supply chains along domestic lines, would they have fared any better? The (uncomfortable) reality is that (according to many economists) the British economy is restarting slower than some of its global rivals, reinforcing the point that domestic supply chains can be just as vulnerable to crises such as pandemics as their global equivalents.
Completely reshoring supply chains may also overlook or even exacerbate other risks. Outbreaks of disease are just one of the risks that businesses need to consider. A cyber-attack on the UK causing severe disruption to local supply chains is a further example of how reshoring could increase the risk to British businesses, as compared with reliance on global supply chains involving countries which were not affected by the attack. Businesses may therefore conclude that rather than a full-scale reshoring, it is preferable to focus on other mitigations such as simplifying and shortening supply chains or looking at options for "just in case" sources of supply.
Reshoring also risks foregoing the benefits afforded by international supply chains, which include access to:
- low cost production and a diverse range of products and raw materials that are otherwise unavailable at home; and
- the broadest range of suppliers and with them the broadest pool of research, innovation and practical manufacturing know-how.
Unless you have ready access to skilled suppliers with enough capacity to meet your demands closer to home, reshoring may be challenging. Decades of outsourcing may have led to a hollowing out of local expertise and capacity, which is likely to take time to restore. Of course, should businesses make a success of restructuring supply chains along domestic lines, the UK develop would eventually develop a stronger, more capable manufacturing base. In turn, this would create a broader backbone of skilled, better paid jobs in the UK, which is no doubt a Government goal when advocating for reshoring generally. In the short to medium term, however, businesses, should consider whether they can afford to wait for such benefits to materialise.
Despite the points made above, a reshoring of supply chains may still be in the interests of some businesses. If this is the case, careful attention should be paid to the timing of withdrawal from global supply commitments, as illustrated by the following case study.
There is a risk of intellectual property (IP) infringement to businesses with supply operations in certain international markets with a poor reputation for upholding protection of IP. That said, while an international manufacturer is being paid by an importer to manufacture goods, they at least have a commercial incentive to maintain a good relationship and to protect the importer's IP. Should the importer withdraw from this arrangement, these commercial incentives will fall away, potentially leaving it exposed to a greater risk of its IP being infringed to manufacture cheaper, "copycat" products. Where possible, therefore, it will normally be preferable to time your exit to coincide with the introduction of a new model whose IP has not been shared with any manufacturers in the international market (and has only been made available to businesses connected with your reshored supply chain).
Steps also need to be taken to make reshoring an economically efficient business prospect, especially where there has been historic reliance on countries with much lower labour costs. Technology is commonly presented as the answer. Should businesses reshore their supply chains, the domestic suppliers they now rely upon will likely operate a very different model of supply and production, involving fewer employees combined with a greater reliance on automation. And machines cannot fall ill – which is an obvious advantage in light of the COVID-19 crisis.
Yet businesses should not be blinded by the promise of technology: a labour-intensive manufacturing process is not guaranteed to translate smoothly to a more automated domestic environment. It will be essential to conduct a thorough appraisal of the technology and make sure it can do the job before committing to a supply chain based closer to home. And as noted above, machines may be vulnerable to other risks, notably cyber-attacks.
Certain modern technology such as 3D printing has been flagged specifically by Government for their potential to contribute to a reshoring of manufacturing capacity. For example, 3D printing would help cut down on transport costs, as well as emissions from an environmental perspective, which is justifiably high on most boardroom agendas today. However, there would still be a need for raw materials, which most countries are not self-sufficient in producing; it follows that technology cannot eliminate the requirement for at least some global supply chains.
Businesses should avoid a knee-jerk reaction to the Covid-19 crisis and instead explore how to implement resilience into their supply chains, ensuring they are able to handle a range of risks, not just pandemics.
Where you conclude that reshoring in response to Covid-19 is not in your best interests, you can still take steps to improve resilience in your supply chains in the round. These might include:
- shortening and simplifying supply chains and ensuring that every "link" in the chain has appropriate plans to cope with a global crisis such as Covid-19 and any similar risks;
- creating reserve "just in case" storage or supply capacity at home; or
- multi-sourcing, which involves managing parallel supply chains, with one item of supply sourced from various suppliers.
Reshoring will not be the right answer for all businesses, but where it is in your best interests to do so, we suggest a phased approach is taken to reduce some of the inherent risk in reshoring. In particular, it would be wise to test-pilot any reshored operations before they are fully scaled up to the level provided by existing offshored suppliers. This approach also calls for maintaining good relations with the existing supplier, whilst you build up alternative capacity. Alternatively, if you are planning to use a third party supplier during the transition, make sure you have undertaken sufficient due diligence before relying on them. Last but by no means least, make sure you have assessed the contractual risks and put in place robust contractual protections.
- How quickly can you terminate your existing arrangements with any offshored suppliers?
- Is the existing supplier contractually obliged to cooperate with the handover to the new supplier? If not, consider what incentives can be put in place to encourage cooperation.
- What does the contract with the existing supplier say about protection of confidential information/data?
- The same points should also be considered when negotiating contractual arrangements with new providers who are part of your new, re-shored supply chain.
- In addition, as with any outsourcing, you may wish to provide for additional contractual "levers" to address under-performance by any new suppliers, such as liquidated damages provisions or "step in" rights.
We have considerable experience in advising on both terminating existing outsourcings and transitioning to new outsourced providers.