February 20, 2014

The rise of next-shoring and its fundamental impact on manufacturing site selection

McKinsey & Co. resently published an awesome analysis about the future of offshoring. I guess these trends will shape the way how to approach manufacturing site selectors.

source: brainstuck.com

Manufacturing site selection is dramatically changing, because manufacturing is changing. You cannot blame it on China anymore. McKinsey created a new term to describe it: next-shoring. There are "two defining priorities for manufacturing strategy in the era of next-shoring: proximity to demand and proximity to innovation, particularly an innovative base of suppliers." If you add the rapidly increasing energy and labour costs in emerging markets (Chinese wages nearly doubled since 2008), the limits of labour arbitrage is obvious.

Technology disruption
"To derive value from these shifts, companies will have to make significant investments and ensure access to hubs of innovation, capable suppliers, and highly skilled workers."
"Cheaper, more proficient robots that can substitute for a wider variety of human tasks are another reason companies may locate more manufacturing closer to major demand markets, even where wage rates are higher."
"3-D printers open up the possibility of more distributed production networks and radical customization. Products will communicate with each other, with robots and advanced machines inside factories, and with customers and suppliers."

Oh yes, remember of the magic world of 21th century manufacturing: product customization. You cannot manage it from China, expect your target market is China. "Locating manufacturing close to demand makes it easier to identify and meet local needs. Volkswagen has coped by moving from vehicle platforms to more modular architectures that provide greater flexibility for manufacturing several product variants or derivatives."

So, based on these trends, how can you gain new manufacturing companies for your location?

#1 Build supplier ecosystems and clusters

"New combinations of technical expertise and local domain knowledge will become the basis for powerful new product strategies. Responsive, collaborative, and tech-savvy supplier ecosystems will therefore be increasingly important competitive assets in a growing number of regional markets."
I guess it's time to develop a cluster policy, if you have not any. Clusters are regarded as tools for small enterprise development and innovation (in Europe, I don't know to US situation). In fact, clusters will be your strongest argument in manufacturing site selection.

#2 Developing people and skills

Education is too important to entrust it to teachers. Nowadays education is important - but it will be critical in the future (it will deliver the American Dream, if you haven't realized yet). If your local labour market doesn't fit to your local advanced manufacturing cluster, it's no way to attract new companies from the target industries.

When you think about education development, look at the "German modell". It has very strong company presence in the education, and react very quickly and efficiently for technology changes.

For more details about reshaping manufacturing, watch the following McKinsey video:

Do you have any question or comment? Do not hesitate to share it - publicly or privatly (csorjan @ businessparkinstitute.com)