Academic journal article Journal of Supply Chain Management

Offshoring and Reshoring: An Update on the Manufacturing Location Decision

Academic journal article Journal of Supply Chain Management

Offshoring and Reshoring: An Update on the Manufacturing Location Decision

Article excerpt

INTRODUCTION

Are manufacturing firms moving back to the United States en masse? What is really happening with respect to preferred manufacturing locations globally? This issue has been receiving substantial attention in the popular press and has been the subject of numerous consulting studies. A number of factors have been suggested as drivers of the global manufacturing location decision today. Some of these include:

* The rising cost of fuel and associated transportation costs (Behar & Venables, 2010; Fishman, 2012).

* The rising cost of labor in low-cost countries (Anon, 2012; Fishman, 2012).

* The slowing of the global supply chain due to the shipping industry adoption of slow steaming (Hull, 2005).

* The improving ratio of U.S. labor output/productivity per labor dollar (Anon, 2012; Fishman, 2012).

* The growing concern toward environmental issues (Mueller et al., 2011)

* Real and anticipated volatility in currency valuation (Culp, 2012).

* Increasing theft of intellectual property when dealing in global regions (Clarke, 2012; Riley & Vance, 2012).

* The fast response time and leaner supply chain associated with locating manufacturing closer to the end customer/consumer (Williamson, 2012).

* Perception of quicker recovery in the case of supply chain disruption (Fishman, 2012; Williamson, 2012).

This research uses the results from a survey administered in August of 2012 to gain a better understanding of the drivers of the manufacturing location decision. It also leverages appropriate theory to improve our understanding of these drivers by addressing the following questions:

* What factors have the most influence on manufacturing location decisions for various regions, and which regions are viewed favorably and unfavorably?

* What factors are seen as important drivers of risk perceptions in various regions across the globe?

For this study, the manufacturing location decision is focused on owned manufacturing facilities. Offshoring refers to the locating of a manufacturing facility outside of the company's headquarters region, whereas nearshoring refers to locating a manufacturing plant within one's region.

After a brief presentation of relevant theory and the research method, results are presented. As a part of this discussion, implications are drawn for the relative riskiness of each of these regions, across a number of drivers of risk. Finally, this work suggests several research propositions as well as several areas for possible future research.

UNDERPINNING THEORY

There are many theoretical perspectives that may inform the manufacturing location decision. Transaction cost economics (TCE), which focuses on the make-or-buy decision, attempts to balance the costs of market friction (transactions) and specific asset investments with the potential risk of buying the item rather than making it (Williamson, 2008). TCE suggests that individual firms will tend to move away from higher cost to lower cost regions, all else being equal. In addition, areas with greater cultural differences or limited intellectual property protection may create a high potential for opportunism and will also be less attractive (NicIvor, 2013).

Internalization theory also considers the make-or-buy decision and is grounded in the work of Coase (1937). However, it views the manufacturing location decision from a global, macro level, as affected by a host of cost and risk-related factors, including foreign direct investment (Casson, 2013). The international business literature reminds us that "... the critical choice of a multi-activity firm is whether it should internalize its intermediate product markets within its home country or in a foreign country; and that the outcome of this choice is primarily determined by the costs and benefits of adding value to these products in the two locations" (Dunning, 1998, p. …

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