Globalisation has transformed where and how businesses operate by allowing them to shift production, source materials, and rethink supply chains on a global scale.
Offshoring
Offshoring refers to relocating part or all of a business’s operations—especially production or services—to another country. This is usually done to achieve cost advantages, enhanced efficiency, or to capitalise on global capabilities.
Definition and Purpose
Offshoring occurs when a company moves its business activities—such as manufacturing, customer service, or IT services—to a foreign location. The main drivers behind this decision include:
Lower labour costs: In many developing countries, wages are significantly lower than in developed nations. By shifting production to these countries, companies can drastically cut their payroll expenses.
Favourable taxation and government incentives: Many host countries offer tax breaks or grants to attract foreign companies, reducing the cost of doing business.
Proximity to raw materials: Offshoring to countries with easier or cheaper access to natural resources helps minimise procurement costs.
Availability of skilled labour: Countries such as India and the Philippines have built global reputations for providing skilled IT and customer service professionals at competitive rates.
Operational efficiency and scalability: Businesses can increase production capacity more cost-effectively in countries where land, labour, and infrastructure are more affordable.
Real-World Examples
Call centres: Companies in the UK often offshore customer support services to the Philippines or India, where English-speaking agents are available at lower costs.
Manufacturing: Electronic giants like HP and Dell offshore assembly operations to China and Vietnam to benefit from scale and efficiency.
Pharmaceutical R&D: Firms like GlaxoSmithKline conduct drug trials and development in regions like Eastern Europe and Asia to reduce costs and speed up processes.
Reshoring
Reshoring is the process of bringing back production or services to the business’s original domestic market after they had previously been offshored. It has grown in relevance due to rising foreign costs, political shifts, and the need for more resilient supply chains.
Definition and Purpose
Reshoring involves reversing earlier decisions to offshore operations. The reasons for reshoring include:
Rising overseas costs: Labour costs in previously low-cost countries may increase over time, eroding the original financial advantage.
Quality assurance: Managing product quality becomes easier when production is local and within stricter national standards.
Risk reduction: Reducing dependence on politically unstable or logistically distant countries minimises risk.
Supply chain simplification: Shorter supply chains are more responsive and less vulnerable to global disruptions.
Improved customer perception: Some consumers prefer products made domestically and may view reshoring as a socially responsible decision.
Reshoring Examples
Hornby, the model train manufacturer, reshored some of its production from China to the UK to improve lead times and quality.
General Electric reshored appliance manufacturing from China to the US, citing quality control and rising foreign wages.
Benefits of Offshoring
Offshoring offers several competitive advantages, particularly for large firms with international ambitions and strong logistics systems.
Cost Savings
Wages: Labour-intensive tasks such as sewing garments or assembling electronics can be done at a fraction of the cost overseas.
Lower operational expenses: Rent, utilities, and overhead costs are often much cheaper in developing economies.
Favourable exchange rates: When the domestic currency is strong, importing services or goods from countries with weaker currencies is more cost-effective.
Economies of Scale
Offshoring enables firms to consolidate production in massive factories abroad, reducing unit costs.
Larger operations in centralised foreign hubs allow for specialisation, which increases efficiency.
Global Market Integration
Building operations abroad helps companies penetrate new markets.
Allows firms to tailor offerings to local tastes and regulations, expanding brand reach and appeal.
Challenges of Offshoring
Despite its appeal, offshoring can introduce complications that may affect a company’s performance, brand reputation, or compliance.
Quality and Oversight Issues
Quality control is harder to enforce when production is far removed from corporate headquarters.
Inconsistent standards between countries can lead to product defects or regulatory issues.
Communication and Cultural Barriers
Language differences, time zones, and cultural misunderstandings can slow down decision-making and reduce cohesion.
Differences in workplace expectations and norms can cause friction and errors.
Ethical and Environmental Concerns
Offshoring to regions with lower labour standards can damage a company’s image if unethical practices (e.g. child labour or poor working conditions) are exposed.
Environmental regulations may be weaker abroad, leading to sustainability concerns and public backlash.
Logistical Complexities
Lengthy global supply chains can suffer from port delays, shipping disruptions, and customs issues.
Natural disasters, pandemics, or political unrest can cripple offshore operations and deliveries.
Benefits of Reshoring
Reshoring allows businesses to reassert control over their operations, improve their responsiveness, and enhance their public image.
Improved Product Quality
Closer oversight and adherence to domestic quality standards reduce defects and improve consistency.
Streamlined communication between design, production, and sales teams ensures better coordination.
Better Supply Chain Resilience
Reduced reliance on long and fragile international supply routes.
Ability to respond more quickly to market changes or emergencies.
Ethical and Social Value
Creating domestic jobs improves brand image and appeals to socially conscious consumers.
Better compliance with environmental and ethical standards.
Challenges of Reshoring
Reshoring is not always straightforward or beneficial in the short term.
Higher Operating Costs
Labour and facility costs are typically higher in developed economies.
Initial investment in machinery, factory space, and training may be substantial.
Limited Domestic Capabilities
Certain skills or technologies may no longer be readily available at home due to years of offshoring.
Businesses may need to upskill local staff or rebuild infrastructure.
Disruption and Change Management
Transitioning back to domestic production can disrupt existing supply chain relationships.
Risk of production delays during the move or during re-establishment.
Global Sourcing
Global sourcing refers to the practice of obtaining goods or services from suppliers located around the world. This can include raw materials, finished products, or skilled services.
Why Businesses Source Internationally
Access to Raw Materials
Some materials, such as lithium, cobalt, or tantalum, are found only in specific regions (e.g. DRC, South America).
Global sourcing ensures companies have access to the inputs they need, regardless of domestic availability.
Specialised Labour and Capabilities
Countries often develop niche specialisations. For example:
Japan: Precision components and electronics.
India: Software development and IT services.
Germany: Advanced engineering and machinery.
Technological Innovation
Suppliers in countries like South Korea and Taiwan may offer advanced manufacturing processes not yet developed elsewhere.
Partnerships with international firms can provide access to cutting-edge designs and tools.
Advantages of Global Sourcing
Competitive pricing from diverse supplier markets.
Higher-quality materials when sourced from regions with expertise.
Speed to market when working with established international networks.
Reduces reliance on a single country or vendor, thus spreading risk.
Risks of Global Sourcing
Currency fluctuations can cause volatility in costs.
Trade restrictions, tariffs, or embargoes can affect availability.
Regulatory compliance may vary by region, increasing legal complexity.
Case Study: Apple
Apple is a textbook example of a firm that has mastered the art of global supply chain management, offshoring, and sourcing.
Offshoring and Assembly
Apple offshores most of its hardware assembly to China, partnering with firms like Foxconn.
The country’s manufacturing ecosystem provides skilled labour, industrial clustering, and logistics efficiency.
Global Sourcing of Materials
Apple sources key materials from:
Cobalt: Democratic Republic of Congo.
Glass: Japan (e.g. Gorilla Glass by Corning).
Rare Earths: China.
This vast sourcing network spans more than 40 countries, showcasing Apple’s reliance on global supply chains.
Challenges Faced
Labour rights issues in Chinese factories have attracted criticism.
US–China trade tensions have threatened Apple’s operational stability.
In response, Apple has begun diversifying by investing in Vietnam and India for alternative assembly hubs.
Case Study: Dyson
Dyson provides a contrasting view—offshoring for production while maintaining a strong domestic R&D presence.
From UK to Asia
Dyson offshored its manufacturing to Malaysia in the early 2000s to reduce costs.
Headquarters were later moved to Singapore, aiming to be closer to key Asian markets.
Strategic Benefits
Access to highly skilled manufacturing labour in Asia.
Benefited from low corporate taxes and favourable business conditions.
Proximity to growing middle-class markets in Southeast Asia.
Continued UK Presence
Dyson continues to invest in research and innovation at its Malmesbury campus in the UK.
The company maintains a balance between international production and domestic design leadership.
Strategic Considerations for Businesses
When deciding whether to offshore, reshore, or source globally, companies must evaluate their goals, risks, and capabilities.
Key Factors to Evaluate
Company size and ability to manage international operations.
The nature of the product: perishable items may be less suitable for long-distance shipping.
Consumer expectations: many customers value sustainability, local sourcing, and ethical practices.
Regulatory environments and their impact on costs and operations.
Strategic Trade-Offs
Offshoring offers cost savings but brings complexity.
Reshoring simplifies oversight but can raise costs.
Global sourcing increases flexibility but introduces risks around supply stability.
By carefully weighing these considerations, businesses can craft supply chain strategies that align with their long-term objectives in a globalised economy.
FAQ
Technology is essential for enabling offshoring and global sourcing as it facilitates real-time communication, efficient logistics, and digital coordination between international partners. Advanced software allows companies to track shipments, monitor production remotely, and manage international payments. Cloud computing supports collaborative design and planning across time zones. Automation in offshore facilities further increases productivity. Technology reduces the complexity of managing global supply chains, making it easier for businesses to work with international suppliers while maintaining control and efficiency.
Businesses compare outsourcing and offshoring based on control, cost, and core competencies. Offshoring involves relocating operations abroad but still managing them in-house, ideal for firms wanting tight control. Outsourcing means hiring external suppliers to handle tasks, often abroad, which reduces fixed costs and administrative burden. Companies assess whether the activity is central to their value proposition—if not, outsourcing might be preferred. If maintaining internal standards is critical, offshoring is more suitable despite requiring more oversight and investment.
A hybrid strategy allows firms to combine the cost benefits of offshoring with the control and responsiveness of reshoring. For instance, a business might offshore bulk production to lower-cost countries while reshoring final assembly or customisation to meet local customer preferences. This approach balances efficiency with agility and can enhance product quality and delivery speed. It also reduces reliance on a single region, spreading geopolitical and operational risk while keeping part of the supply chain closer to key markets.
Geopolitical factors such as trade wars, tariffs, political instability, and diplomatic relations directly affect the risks and costs of offshoring. For example, rising tensions between countries can result in import restrictions or increased tariffs, making offshored goods more expensive. Political instability can disrupt production or transport in host countries. Businesses must assess these risks through scenario planning and risk analysis. A volatile geopolitical climate may prompt firms to diversify offshore locations or consider reshoring to mitigate future disruption.
When sourcing globally, businesses must consider working conditions, fair pay, environmental practices, and supply chain transparency. Ethical sourcing ensures workers are not exposed to exploitation, such as child labour or unsafe environments. Companies should conduct supplier audits and uphold standards like those set by the Ethical Trading Initiative. Environmental considerations include the carbon footprint of shipping and the use of sustainable materials. Failure to meet ethical standards can harm a brand’s reputation and lead to customer boycotts or regulatory action.
Practice Questions
Analyse the potential benefits for a UK-based electronics company of offshoring its production to Vietnam. (9 marks)
Offshoring to Vietnam could provide significant cost savings due to lower labour and operational expenses, improving profit margins. The company may also benefit from Vietnam's growing manufacturing infrastructure and skilled workforce, enabling faster and more efficient production. Additionally, offshoring could allow the firm to scale up operations and access emerging Southeast Asian markets, driving revenue growth. However, these benefits must be balanced against the risks of reduced quality control and communication barriers. Ultimately, if managed well, offshoring could enhance competitiveness and support long-term strategic growth through economies of scale and market expansion.
Evaluate whether a UK clothing retailer should reshore production from Bangladesh back to the UK. (16 marks)
Reshoring may improve quality control and reduce lead times, allowing the retailer to respond more quickly to trends, enhancing competitiveness. Ethical concerns over labour conditions in Bangladesh could be avoided, improving brand image and appealing to ethically conscious consumers. However, UK production costs are considerably higher, reducing profit margins. The firm may also face difficulties in sourcing skilled workers or suitable manufacturing facilities domestically. Additionally, it may lose price competitiveness compared to rivals still using low-cost countries. Whether reshoring is beneficial depends on the retailer's strategic priorities—if brand reputation and responsiveness outweigh cost, reshoring may be justified.
