Introduction:
In this paper we are going to discuss two major relocation decisions i.e. offshoring and backshoring. Along with that we will discuss the advantages and disadvantages of both relocation decisions keeping three manufacturing location factors in mind (1) access to low-cost manufacturing, (2) proximity to market, and (3) access to development competences. In this research, the roles and relevance of the manufacturing site locations have been analyzed and the relocation decision has been investigated based on that. The research was conducted on 232 Swedish manufacturing plants, since Sweden offers a variety of manufacturing plants and R&D units, out of 133 have conducted offshoring project and 99 have conducted backshoring project.
The primary motivation behind the research was to understand, how the above mentioned three manufacturing site location factors relate to relocation decisions. The second aim of this research was to investigate how the three major strategic location factors relate to performance benefits experienced because of the corresponding manufacturing network changes, as most of the related literature have indicated mixed views about the performance benefits keeping in mind to figure out the relationship between the reason for the relocation and how just the relocation decision in terms of performance. The main aspect of this research is that the authors have investigated the role and relevance of manufacturing site location factors in the context of off-shoring and backshoring and also collected performance effects in terms of the manufacturing relocation projects benefits.
Review of related literature:
The manufacturing location decision is an important strategic decision, which is long term you can’t change the location that easily as you can change the other parameters. From numerous researches, it has been confirmed that, because of ownership, location and internalization advantages, the companies go multinational. The ownership and internalization advantages are internal, whereas the location advantages are external to the firm. In this research, as we are focusing more on the relocation decision, we are concentrating more on the location advantages. Several studies say, the location can help to get the resource seeking (availability of the raw material, infrastructure and local partners), market seeking (market proximity, supplier proximity etc.), efficiency seeking (low cost production, industry clusters etc.) and strategic seeking advantages (knowledge related assets, understanding market and consumer patterns etc.). The related lectures analysed the reason for companies to be multinational. The primary reasons are to be flexibility, responsiveness to the market requirement, achievement of low-cost leadership by producing and selling the products in global market and finally, to transfer the knowledge between the main plant and subsidiary plants.
Ferdows researched on location factors and created a model to explain how international factory networks developed and evolved over the time. He has considered Low-cost operations, Market proximity and Development competences as the parameter to group the factors which are important for the plant location decision. His model gained lots of recognition in operations management field and empirically tested and supported in numerous studies. Even though numerous factors may affect site location decision, low-cost operations, market proximity, and development competences seems to be the major among all of them.
Out of all movements, offshoring and back-shoring have received much attention than others. Although there are lots of benefit to have offshore the plant location, there are some disadvantages as well. The lower costs of the resources in the developing areas are the major benefits for off-shoring the manufacturing site. Along with that, the flexibility, access and growth in new market, access to specialised labour and the concentrating on the core activities in the home country are also the benefits.
The benefits of the backshoring decision cannot be ignored as well. Moving the plants, back to home country improves the quality of the production and innovation. There will be benefits like reduced inventory costs and transportation costs as well. Other benefits include improved coordination of operations, higher productivity, being closer to customers, and having skilled personnel in reach for complex production sites will be very much beneficial.
A number of survey studies have been conducted on both offshoring and backshoring. Cost (primarily labour cost) is the key driver for offshoring, while backshoring is motivated by several aspects, including quality, flexibility, delivery, access to skills and knowledge, and changing cost of operations. As per study, if backshoring decision is made, then it is based on the re-evaluation of the importance location factors compared to risk and other challenges, which had not been checked as they are non-quantitative measures.
Relationships between location factors and performance
Many studies concluded that the backshoring is done, when the performance is very weak at the offshore site and after moving the plant location to the onshore the performance, in terms of increased quality, flexibility and delivery performance, has been increased significantly. In this paper, the authors hypothesise that the three factors (low cost, market proximity and development) are associated with the performance. Fig. 1 illustrates the research model. In this study, unlike other research papers, have tested the impact/validity of three location factors in both relocation context. They have also done their research on similarities and differences of two relocation directions. The reason for site selection at the offshore or backshore mainly because of low-cost operation factors. The selection is done to take advantages of the cost related benefits which cannot be obtained in other location. Hence the first hypothesis is
H1. Low-cost location factors have a positive relationship to cost-related benefits.
Others then investigated on the market related factors. Close proximity to market increases the delivery performance and the outward logistic costs can be minimized significantly, hence the next hypothesis is
H2. Market location factors have a positive relationship to delivery performance, including logistics costs.
Finally, the authors considered the development competencies, which is very much needed to increase the quality performance and flexibility in producing the products. Several other studies also indicated that, development competencies have positive influence on product mix and volume, hence the final hypothesis is on H3. Development-competence location factors have a positive relationship to quality and flexibility.
Survey design and sample
In the research, the researchers have investigated the applicability of the three manufacturing location factors in the context of relocation directions. They have tested the applicability of the location factors in the relocation decision making process and tested if the factors’ associations with benefits in terms of quality, flexibility, delivery and the most important one i.e. cost. They have thoroughly investigated the decision making and performance effects of the relocations. The sample data was collected from the plants, having employees count more than 50, which have done the relocation in between 2010 and 2015. The conducted survey was based on the previous research on offshoring and backshoring. The survey was assessed on five-point scale, after being validated by the person concerned with this matter. Out of 373 Swedish plants, 133 plants have done offshoring and 99 plants have done backshoring project during the 5 years. The survey questionnaires were asked to the knowledgeable people related to the plant relocation project and have quite a good experience in the relevant industry. As per the survey repor
t, larger firms were more active in the relocations than the smaller ones. Considerable care has been taken to minimize the biasness.
Results
After working out on the models, the results were noted down and the location factors and other performance factors were considered in both the relocation methods. This study used ‘low-cost operations’, ‘market proximity’, and ‘development competences’ as the three main plant location factor methods. The respondents were asked to rate the importance of location factors for relocation decision on a five-point scale of importance ranging from ‘very low’ to ‘high’.
The labour cost was found to be exceptionally important for offshoring decisions related to low-cost operations. The overall perception of the findings is that strong similarities were found between the factor loadings for off-shoring and backshoring, which indicates that these constructs for location factors are relevant for manufacturing location in general and are not specific to a particular context (e.g. offshoring or backshoring).
The offshoring and backshoring groups were analysed with respect to the three plant location constructs. Result shows that, the offshorers and backshorers rated the importance of location factors differently; ‘low-cost operations’ was the dominating location factor for offshoring decision and was even higher than ‘low-cost operations’ for backshoring. The ‘development competences’ factor was dominant in backshoring and was significantly higher for backshoring than for off-shoring. Market had low ratings for both offshoring and backshoring, which indicated that this was not a strong driver of manufacturing relocation in any direction. Manufacturing related operational performance includes cost, quality, delivery, and flexibility measures. These measures capture internal efficiency because such measures are directly affected by managerial decisions and organisational activities. We kept the operational performance measures at a disaggregated level because performance is invariably a multidimensional construct and we subsequently assessed the effect of site location factors on several measures of operational performance.
Costs (Labour cost, logistics costs, and other costs), quality (product quality and process quality), delivery (speed and reliability), and flexibility (product mix and volume) – all these nine are the measures of performance. The respondents were also asked to rate the perceived performance benefits from offshoring and backshoring projects on a five-point. The effects of location factors on performance benefits were examined using multiple regression analysis, and organisational size was included as a control variable. The product-mix flexibility model for backshoring was not significant and indicated no significant relationships.
Larger firms were found to be performing better, with respect to labour costs and other costs when backshoring. Smaller firms, in contrast, were found to be better at improving product and process quality when they brought manufacturing back home because it is easier to improve quality in smaller-scale operations, and the initial offshoring decision had led to deteriorating quality at the offshored location compared to the domestic location, and manufacturing was brought back to regain control over quality-related problems.
Low-cost operations factors were strongly related to cost benefits in terms of labour costs and other costs (but not logistics costs) for both offshoring and backshoring. Thus, the results indicated that a low-cost relocation strategy indeed led to cost benefits, so hypothesis 1 was fully supported. The finding indicated that offshorers enjoyed labour-cost benefits to a larger extent, while backshorers primarily enjoyed benefits from other types of costs, assuming an equal emphasis on cost as a location factor. The findings indicated that the associations between low-cost factors and benefits related to quality, delivery, and flexibility were very low or even negative.
Market factors were found to have a positive and significant impact on delivery speed, delivery reliability and logistics costs for offshoring as well as for backshoring. Hypothesis 2 was thus fully supported. In addition, market factors were found to have a positive and significant impact on product and process quality for offshoring but not for backshoring.
Development competence factors were significantly associated with quality and flexibility performance in both relocation directions. For offshoring and backshoring, a significant impact was found on product quality, process quality, and volume flexibility but not on product-mix flexibility in backshoring alone. Still, we may consider hypothesis 3 to be fully supported.
Overall, this research has provided strong support for all three hypotheses. But no single relocation driver was found that significantly affected all performance measures. One particular relocation driver might expectedly lead to certain performance effects, while other relocation drivers could lead to other effects. If a broader set of performance effects is desirable, then a broader set of relocation drivers must be considered.
Discussion
The results gave multiple information. First, the finding that the three major location factors loaded for both offshoring and backshoring has confirmed that these factors are relevant to manufacturing relocation in both directions. Second, the relative importance of these location factors for off-versus backshoring suggests that the relocation decision is contingent upon geographical context, which may be different, if we consider some other developing nation. In the country like Sweden, the offshoring of manufacturing is done for cost advantages, while development competences, including access to skills and knowledge, are the key incentive for backshoring. Third, the findings on the relationship between relocation factors and performance benefits have reaffirmed the strong. Fourth, market factors are strongly associated with delivery and logistics cost performance. Being close to the market provides opportunities for shorter and more reliable delivery are expected performance effects. Fifth, this research has also provided support for a general striving towards transnational solutions. Using only one perspective as the basis for manufacturing relocations may not help the firm to achieve holistic performance improvement. Thus, firms do not pursue one-dimensional strategies. Instead, they actively seek to balance all three major factors in their manufacturing relocation decisions.
Implications, limitations, and further research
For managers, this research has emphasised the importance of considering all three major location factors in offshoring as well as backshoring decision-making. If only one or two factors are considered, then the operational performance improvements will be limited to certain areas. Relocating manufacturing to a high-cost region such as Sweden is not driven by a desire to set up low-cost manufacturing but to attract development competences, while the reverse is typical for offshoring from such a region. Furthermore, this research has identified subfactors of low-cost operations, market proximity, and development competence, for a more detailed analysis of factors for manufacturing relocation. The overall implication of this research is that the firm or plant should consider low-cost, market as well as development factors in the relocation decision – for offshoring and backshoring. In addition, market factors play a specific role. Market proximity is also a driver for offshoring and backshoring as it led to improved delivery and lower logistic costs.
One limitation of this research is its focus on one country i.e. Sweden. Testing various location factors in developing or newly industrialised regions would yield interesting results. Another limi
tation is that the low-cost operations construct for off-shoring was not perfectly aligned; the item ‘labour costs’ is the most important individual factor for offshoring and dominates the other two items in the construct. However, since this construct worked well for backshoring, we kept it as a full construct for both relocation directions. In addition, in this research, we do not distinguish between internal (captive) and external (outsourcing and insourcing) manufacturing relocations, which can be added in further research.
The role of market proximity and the composition of the low-cost operations factor need to be investigated further. Future research could also include longitudinal studies of manufacturing network relocation decision-making and the related performance benefits in order to identify (1) any time lags between relocations and benefits and (2) any other types of performance benefits beyond those included in this research.