Several companies have experienced disadvantages when producing abroad, and with the ongoing corona pandemic, the challenges of global supply chains have become even clearer. What should a company consider when moving production home?
Outsourcing has been a trend for many years, moving production of goods and services from high-cost countries to low-cost countries. However, companies experience that production abroad does not necessarily provide as many benefits as first thought.
Backsourcing is about moving production back to the home country, either to your own production site or by partnering with a supplier in your own country. There are plenty reasons why more companies consider returning to domestic shores. It can be explained by problems with foreign suppliers, coordination costs, lack of infrastructure, or internal or external changes that offer new opportunities in your own country.
But how should companies respond when relocating to Norway?
Plan well and calculate enough time
Hans Solli-Sæther and Jan Terje Karlsen are researchers and professors at NTNU and BI Norwegian Business School, respectively. Previously, they have done research on outsourcing, but they were eager to learn more about the companies that are returning home.
Together, they studied a maritime technology company that has successfully moved several parts of their production process back to Norway. Solli-Sæther and Karlsen wanted to understand how a backsourcing process actually takes place.
As for their findings, the two researchers are clear on one thing - backsourcing is not done in a flash. It is both demanding and time consuming. Planning is an important part of the job. For those companies that want to move all or part of their business home, they should do so attentively.
The four steps
As a starting point, the company can follow a four phased process where different parts of the organization are involved along the way:
1) The initial phase – Making decisions
An incident occurs and triggers the assessment of whether to move production home again. Ideally, companies that once outsourced should have an exit strategy, but in the real world, there is a good chance that there is no plan for the return at all. Consequently, the company must start mapping their situation.
Long-term plans will help the company identify whether there is a need to make changes in the production process and suppliers. Does the company have an overview of all the subcontractors? What chains of consequences will occur in the event of changes in production? Does the company have the capacity to take care or more of the production itself? Analyses will provide clarity.
2) The scoping phase – Good calculations and termination of contracts
During this phase, the goal is to decide which products and services should be flagged home based on various calculations, as well as terminate relevant contracts with existing suppliers.
Some contracts might be nearing their end, but not necessarily so. Settlement of contracts may then involve legal proceedings. Tangible and intangible investments might have been made between the company and its supplier, which require additional assessments. If the parties have collaborated in research and development, they must clarify how rights should be handled.
3) The re-integration phase – preparation of organization and facilities
This is the time for preparing the organization for its production homecoming. What is required to be able to resume production in the home country? What changes need to be made in buildings and facilities, and what kind of equipment is needed?
Even more so, it is important to take a look at what skills are needed. It might have been a long time since the organization handled production at home, if at all, so the organization may now lack relevant expertise as they could have relocated or left the company since then. When professional resources, production equipment and management structures are in place, the company can start with internal production.
4 ) The evaluation phase – A new assessment of the status quo
The final stage of the process is about assessing whether the company has achieved what they expected by moving home. Employees from different parts of the organization can gather and do a joint evaluation. Are there conditions that make the situation different now? Maybe there are new reasons to move some of the production abroad again?
Barriers to relocation
Although companies might have many reasons for moving production back home, some conditions can make it difficult in practice. This can be due to conditions in the home country, like higher costs, lack of qualified labor or challenges related to suppliers.
But there can also be internal conditions hindering the process. As an example, the organization may not have enough capacity to handle the production. Or they might lack employees with the so-called “tacit knowledge”, which is often built up over time through experience. The company may also experience that manufacturing the products in their own production facilities is difficult.
Solli-Sæther, H., Karlsen, J.T. & Slyngstad, A. (in press). Manufacturing Backsourcing: A Case study of Company’s Process Framework. European Journal of International Management. DOI: 10.1504/EJIM.2020.10021179