Is Reshoring Really the Answer for Manufacturers?

McKinsey report says manufacturers should be more focused on proximity to demand and innovation.

The conversation around reshoring of manufacturing – or bringing manufacturing back to the U.S. from overseas – has been going on for several years now, but in many ways, we're still waiting for such initiatives to gain traction.

Part of the problem is that while manufacturing is coming back to the Western Hemisphere, "only a fraction of the manufacturing that's leaving Asia and leaving higher labor costs in China for the United States is actually landing in the United States," says Andrew Duguay, senior economist at the Institute for Trends Research.

Duguay was featured in the recent MDM Webcast, The 2014 Distribution Industry Outlook, available on DVD in the MDM Store.

Instead, a lot of it is moving into Mexico, Duguay says.

"Mexico really stands to benefit a lot from this trend because the cheap labor, (and the) free trade and close border with the United States," Duguay says.

A recent report from McKinsey & Company highlights that maybe the focus on reshoring is misplaced. Instead, manufacturers should be focusing on what the authors call "next-shoring."

"A next-shoring perspective emphasizes proximity to demand and proximity to innovation," the report says. "…Next-shoring isn’t about the shift of manufacturing from one place to another but about adapting to, and preparing for, the changing nature of manufacturing everywhere."

Local needs can vary greatly, so locating manufacturing in areas where demand is growing allows manufacturers to adapt to local needs and wants. And locating manufacturing close to research and development centers – or innovation, as the report identifies it – allows changes to design and function to be implemented more rapidly.

For any company with a global presence, recognizing the differences in different economies and cultures is very important to success, something Author Mona Pearl talked about in Global Markets Are Not Just for Large Companies Anymore. Pearl is the author of Grow Globally: Opportunities for Your Middle-Market Company Around the World.

Pearl advises to really look at your product and ask yourself: Is this product going to sell in these countries? How can the product be modified to make it work? Where is it going to sell, at what price point, and how are you going to make money?

McKinsey's focus on "next-shoring" can help manufacturers prepare to better answer those questions. Read the entire report from McKinsey here.

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