Note: This invited essay underwent a double-blind peer review.Acknowledgments: We would like to acknowledge Ohio State University's Center for International Business Education and Research (CIBER) for supporting this research stream.
The Reshoring Phenomenon: What Supply Chain Academics Ought to know and Should Do
Article first published online: 16 APR 2013
© 2013 Institute for Supply Management, Inc.
Journal of Supply Chain Management
Volume 49, Issue 2, pages 27–33, April 2013
How to Cite
Gray, J. V., Skowronski, K., Esenduran, G. and Johnny Rungtusanatham, M. (2013), The Reshoring Phenomenon: What Supply Chain Academics Ought to know and Should Do. Journal of Supply Chain Management, 49: 27–33. doi: 10.1111/jscm.12012
- Issue published online: 16 APR 2013
- Article first published online: 16 APR 2013
- outsourcing (make or buy);
- international/global purchasing;
- supply chain management;
The popular press has begun to pay attention to the phenomenon of “reshoring”. The task of supply chain management researchers with regard to this phenomenon should be to clarify what it is; to explore whether it is really a new phenomenon; and, paraphrasing (Simon, 1967; p. 1), to conduct research into the reshoring phenomenon so as to contribute not only to the science but also to the practice of reshoring. This essay is a starting point for our efforts in that direction. We make a number of informed assertions about reshoring—assertions that are juxtaposed in relevant literature and that aim to (a) define what reshoring is and is not; (b) explain why the reshoring phenomenon should not be examined in isolation but rather as a reversion of a prior offshoring decision; (c) describe how the reshoring phenomenon might evolve as societies, worldwide, place increasing emphasis on the environmental impact of business decisions; and (d) articulate a plausible scenario in which reshoring eventually hampers employment in Western nations. We hope these assertions will, in turn, jumpstart an intellectual discourse, through scientific research, into the what, how, when, where, and why of the reshoring phenomenon.
GE recently announced a $1 billion investment to “reshore” the manufacturing of appliances from plants in China back to plants in the United States (Crooks, 2012). GE is by no means a maverick in its reshoring agenda; based on recent surveys, about 38% of firms believe that a direct competitor has reshored (Tate, Ellram, Petersen, & Schoenherr 2005) and 14% definitely plan to reshore (Hagerty, 2012). Even Apple announced its plans to manufacture one of its Mac lines exclusively in the USA, starting in 2013 (Polidoro, 1998). In addition to large firms like GE and Apple, smaller companies are also reshoring; one prominent report lists companies as diverse as NCR, Coleman, Ford, Sleek Audio, Peerless and Outdoor Greatroom Company (Sirkin, Zinser, & Hohner 2012). With reshoring initiatives in the USA resuscitating old jobs or creating new ones for the ranks of the unemployed, heightened attention from the popular media on reshoring should be no surprise.
As supply chain academics, we should complement the attention that the popular press has paid to reshoring. More specifically, our task as it relates to the reshoring phenomenon should be to clarify what it is, to explore whether it is really a new phenomenon and — paraphrasing Simon (2011) — to conduct research into the reshoring phenomenon so as to contribute not only to the science but also to the practice of reshoring. This essay is a starting point for our efforts in that direction. We make a number of informed assertions about reshoring — assertions that are juxtaposed in relevant literature and that aim to (a) define what reshoring is and is not; (b) explain why the reshoring phenomenon should not be examined in isolation but rather as a reversion of a prior offshoring decision; (c) describe how the reshoring phenomenon might evolve as societies, worldwide, place increasing emphasis on the environmental impact of business decisions; and (d) articulate a plausible scenario in which reshoring eventually hampers employment in Western nations. We hope these assertions will, in turn, jump-start an intellectual discourse, through scientific research, into the what, how, when, where and why of the reshoring phenomenon.
Assertion 1: Reshoring is Fundamentally a Location Decision
The popular press (Hagerty, 2012) deems reshoring to be “bringing manufacturing back home…” from a current location that is, de facto, not home. The term is agnostic as to whether the manufacturing being brought home occurred in a wholly owned facility in an offshore location1 or in the factory of an offshore supplier. GE, for example, reshored its appliance manufacturing from its production facility in China to the USA in its own plant to meet US demand, whereas US-based Vaniman Manufacturing decided to no longer buy sheet metal fabrication from an overseas supplier and to instead source from a local supplier to meet demand in the USA. Both would be considered reshoring (more precisely, reshoring back to the USA).2 Reshoring, as such, is fundamentally concerned with where manufacturing activities are to be performed, independent of who is performing the manufacturing activities in question — a location decision only as opposed to a decision regarding location and ownership.
Defined as a location decision only, we are hence able to identify the following four possible manifestations or types of reshoring that, we believe, clarify the seemingly different interpretations of what reshoring encompasses in the popular press: (a) in-house reshoring, in which a firm fulfills demand in its local market by relocating manufacturing activities being performed in wholly owned offshore facilities back to wholly owned US-based facilities; (b) reshoring for outsourcing, in which a firm fulfills demand in its local market by relocating manufacturing activities being performed in wholly owned offshore facilities back to US-based suppliers; (c) reshoring for insourcing, in which a firm fulfills demand in its local market by relocating manufacturing activities being performed by offshore suppliers back to wholly owned US-based facilities; and (d) outsourced reshoring, in which a firm fulfills demand in its local market by relocating manufacturing activities being performed by offshore suppliers back to US-based suppliers. We demonstrate this typology in Figure 1.
While all of the reshoring options in Figure 1 are different, they are united in that they are all location decisions. It is important to note that there already exists a wealth of insights from multiple works of literature on such decisions. One such literature stream from economics and international business seeks to explain location choices while simultaneously considering whether to “internalize” the offshore activity (i.e., through foreign direct investment [FDI]) or to outsource it (Buckley & Casson 1976; Hymer, 1976; Dunning & Rugman 1985; Dunning, 1980, 1988, 2000). Although certainly relevant, these studies generally focused on firms in Western nations establishing locations in emerging economies (i.e., offshoring), not the reverse (i.e., reshoring). Relatedly, there is a large body of literature that focuses only on make-buy decisions, without explicitly considering location (e.g., Grossman & Helpman 2002; McIvor, 2009; Poppo & Zenger 1998; Williamson, 1991). There are other large bases of literature to draw from when investigating the factors that may affect location decisions. For example, the “location advantages” of Dunning's (1980) ownership–location–internalization (OLI) framework and the country-specific advantages (CSAs) in the framework introduced by Rugman (1967) both outline location-specific factors that affect location decisions. Many studies have examined specific factors with fairly intuitive effects on location choices, such as tax rates, tariffs, wage rates, energy costs and currency changes. However, many factors are not as easily quantifiable. Some of these factors relate to changes in the levels of different types of risk (e.g., quality risk, disruption risk, currency risk, intellectual property risk), and some relate to network externalities. Finally, some factors are related to the difficulties of operating in a location due to differences between locations, such as cultural and/or language differences. Table 1 lists examples of factors outlined in this paragraph. Understanding and quantifying the hidden costs of long supply chains, under various conditions, is one way in which SCM scholars can contribute to not only reshoring research but also location-related research in general. Indeed, despite the assertion by Giunipero, Hooker, Joseph-Matthews, Yoon, and Brudvig (2008, p. 83) that “[g]lobal supply chains represent one of the least published topics within the SCM literature over the past decade,” SCM literature has made multiple contributions to various topics related to managing global suppliers. These include defining excellence in organizing for global sourcing (Trent & Monczka 1973), assessing performance of suppliers from different regions (Ruamsook, Russell, & Thomchick 1981) and examining the performance implications of different sourcing strategies (Kaufmann & Carter 2006). These works typically focus on supplier management, and thus, their insights are limited to “outsourced reshoring” in Figure 1.
|Input factor costs||Tax rates (De Mooij & Ederveen 2003)|
|Tariffs (Culem, 1988)|
|Currency changes (Froot & Stein 1991; Blonigen, 1997)|
|Risks||Currency risk (Campa, 1993)|
|Expropriation risk (Henisz & Delios 2001; Henisz, 2003)|
|Quality risk (Gray, Roth, & Leiblein 2011)|
|Network effects||Clusters/agglomeration (Porter, 2009; Almeida & Kogut 1999; Bell, 2005)|
|Differences between locations||Psychic distance (Johanson & Wiedersheim-Paul 2011)|
|Cultural distance (Kogut & Singh 2008; Kirkman, Lowe, & Gibson 1988)|
|Institutional distance (Kostova, Roth, & Dacin 2003)|
For many SCM scholars, Assertion 1 may seem intuitively obvious. We believe that this assertion is necessary to fend off the misspecification that comes from failing to define precisely what reshoring is and what it is not, especially as it relates to academic research. As Wacker (2008, 2009) has eloquently argued, rigorous academic research that seeks to build and test theories about phenomena requires a firm foundation anchored in good definitions. Furthermore, we hope this assertion can dispel any confusion that comes from confounding the reshoring phenomenon — a location decision — with a “make-buy” decision — an ownership decision. We have seen this mistake made in research and discussions pertaining to outsourcing and offshoring, with these two phenomena often being referred to as one and the same in casual and scientific conversations. Reference to repatriating jobs back as “insourcing” — a lexicon that the Obama administration had chosen for its January 2012 initiative (White House, 1991) — is one example of what this assertion aims to overcome. The Obama administration uses “insourcing” (which relates to an ownership choice) to refer to the “reshoring” phenomenon that, as we have explained, is a location choice.
Assertion 2: A Firm Cannot Pursue Reshoring Unless It had Previously Pursued Offshoring or Offshore Outsourcing; this Path of Location Decisions Has Not Been the Subject of Study
For reshoring to occur, a choice to pursue offshoring must have been made in the past. Thus, what differentiates reshoring from the typical location decision, discussed above, is that a reshoring decision is a reversion from a previous offshoring or offshore outsourcing decision. This makes the reshoring phenomenon a potentially fertile ground to gain new insights not only about managerial location decisions but also more generally about organizational learning. More specifically, the action of reshoring may have different starting points, depending on why the work was originally offshored, when it was offshored and where and to whom the work was sent, which means reshoring cannot be examined without also examining the starting point. Using Figure 2 as a reference, we show eight different reshoring paths a firm could take. To examine reshoring at the highest level of abstraction, a general theory of reshoring must explain reshoring regardless of the starting point. At a lower level of abstraction, researchers could examine the differences between the different categories in the typology. Clearly, such research poses challenges, including access to detailed historical and longitudinal data.
Assertion 3: There is Reason to Believe That Both the Original Offshoring Decisions and the Subsequent Reshoring Decisions Were/Are Often Flawed
Presuming that the product and process have not changed significantly, some combination of the following must have taken place to lead to the reversion from offshoring to reshoring: (a) changes in the exogenous cost drivers in the two locations, such as wage rates and currency, or (b) changes in the managerial valuation of the true total cost of offshoring relative to producing locally, based on experience with offshore production. If the reason is entirely the former, then managers are rationally reacting to changing conditions, and no updates to our location-related theories are needed. However, we believe the latter — changes in managerial valuations — is often the driver. Through anecdotal discussions with managers, we have heard consistently that the original offshoring decision was based on a tempting per-unit price, with little consideration for total cost analysis, which includes hidden costs (Moser, 2012). Based on this finding, a plausible narrative of the offshoring–reshoring path is that firms have moved activities offshore based on easily measurable costs (e.g., price quotes) and have reshored upon experiencing and learning firsthand about the risks and hassles of offshoring (e.g., midnight phone calls, delivery delays, IP leakage, communication challenges, travel). To the extent that managers correctly value these “hidden” costs when deciding to reshore, this would be an example of organizational learning-by-doing when offshoring. However, it is also possible that some reshoring decisions are suboptimal due to assigning too much “cost” to the hassles and challenges recently experienced, a concept formally called availability bias in the psychology literature (Tversky & Kahneman 2004). If true, the correct decision in some cases may be to improve the management of the offshore activities as opposed to reshoring them. Another plausible decision bias is that both sets of decisions were/are affected by the “bandwagon effect” (Abrahamson & Rosenkopf 1993). Only careful research of the path from offshore to reshore can detect whether such biases are prevalent and what the true drivers of reshoring are. What makes this context interesting is that researchers can evaluate the drivers of two opposing decisions regarding the same product and in so doing can assess the prevalence of decision biases, such as those proposed by Kahneman (2006), in location decisions.
Assertion 4: As Environmental Regulations Become More Synchronized and Standardized Across Global Supply Chains, the Pendulum Should Swing in Favor of Reshoring
One would think that firms would relocate to jurisdictions with less-stringent environmental regulations due to regulatory cost savings, and thus, strict environmental regulations might favor offshoring to countries with laxer regulations. Upon questioning whether this is necessarily true, we argue that it depends on the structure of the regulation. Environmental regulations that focus on a specific jurisdiction might favor offshoring; indeed, this logic has been formalized as the pollution-haven hypothesis (Jeppesen & Folmer 2001; Jeppesen, List, & Folmer 2002; List, McHone, & Millimet 2009; Wagner & Timmins 2012). However, the pollution-haven hypothesis hinges upon regulations that charge firms only for activities performed within a location, and not for pollution across the supply chain. We assert that regulations that consider the whole supply chain, such as carbon labeling, will favor reshoring. This is because offshoring for domestic demand requires shipping products across oceans, often from plants using power generated by dirty coal. Although regulations of a supply chain are more difficult to implement and enforce than those concerned only with local sources, they are actively being considered and even being implemented. For example, several countries have initiated carbon labeling programs such as the Carbon Reduction Label in the UK, the CarbonCounted label in Canada and the carbon footprint labeling scheme in Japan. In spite of this increased regulation, a survey conducted by Accenture in 2008 revealed that only 10% of the 245 companies examined had assessed their carbon footprints. To encourage more activities, we believe governments will continue taking action in order to incentivize firms to consider their carbon footprint. Through such regulation, consumers will continue to grow increasingly aware and concerned, and firms' motivation to reduce their products' footprint will increase. This transition will encourage firms to engage in less offshoring (a practice that leads to more overall pollution) and more reshoring (which leads to less).
Assertion 5: In the Long Run, the Logic That is Leading Firms to Reshore May Cause a Loss of Jobs in the USA and Other Developed Nations
A key aspect of the argument for reshoring is the avoidance of hidden costs and risks created by long supply chains. Today, reshoring presents the opportunity to create up to 3 million jobs in the USA due to the return of manufacturing “back home” where the majority of the demand exists (Sirkin, Zinser, Hohner, & Rose 2012). However, as emerging economies grow and thus demand increases in these locations while leveling in the USA and other developed economies, firms might want to reconsider their location decision. In this case, there might be a point in the future where reshoring to be close in proximity to demand would require moving manufacturing back to today's emerging economies as they become tomorrow's demand centers. This may actually reduce exports from today's developed nations and therefore cost jobs in these economies.
Reshoring is being discussed increasingly in the popular press and political discourse. As academics, we should both provide insight into the phenomenon based on existing research and consider whether we can study it to learn more about SCM location decisions and their consequences. SCM scholars are particularly well positioned to study this phenomenon; this is because SCM researchers are problem-driven and tend to apply a holistic perspective (Mentzer et al., 2011) and because SCM researchers have a deep knowledge of how supply chain length may relate to several dimensions of performance. Analytical models have difficulty incorporating all costs in international location decisions (see review by Melo, Nickel, & Saldanha-da-Gama 2011) and would be particularly challenged while modeling path-dependent — and possibly irrational — offshoring and reshoring decisions. Because the unit of analysis of research on reshoring is below the level of the plant (at the product or component level), public secondary data will be difficult if not impossible to obtain (Roth, Gray, Shockley, & Weng 2007), although it may be possible to get rich data on multiple decisions from a single firm. Standard surveys would face difficulty disentangling decision biases and actual costs, and controlled experiments will likely prevent the researcher from capturing both the rich context and the path-dependency of location decisions. Without rich data from one or more large companies, it is our belief that in-depth case studies are necessary to facilitate an understanding of the context and real drivers of both the previous offshoring and more recent reshoring decisions; however, rich scenario–based experiments may be effective. While clearly challenging, rigorously executed research on reshoring decisions can and will lead to better managerial decisions in the future and will also influence policy.
The term “offshoring” is itself imprecise; for example, while sourcing manufacturing in China for demand in the USA is clearly “offshoring,” it is less clear whether England, Canada, Puerto Rico or Mexico are “offshore locations.” We do not solve that issue here.
While our examples are US-based, reshoring is not a US-based phenomenon only. Firms in countries other than the USA can also engage in reshoring to bring manufacturing activities back to domestic locations where demand is present. Assertion 5 explicitly discusses this.
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