Does it make sense to re-shore manufacturing production?

The recent re-shoring trend that has seen manufacturing firms repatriate production to the UK, having previously offshored in search of lower cost labour¹ seems set to continue over the coming years.

Research from Lloyds Bank found that, while 5% of manufacturers have already re-shored operations, a further 39% of those with overseas operations plan to re-shore within five years while 17% remain undecided. Overall, just a third (33%) have no plans to bring manufacturing back to the UK.²

The re-shoring drivers: quality, cost, and agility

The reasons behind that 180 degree change in strategic direction are many and varied, but chief amongst them is a desire to improve quality, cited by 71% of manufacturers with re-shoring plans. But that is not the only reason.

For instance, 44% of manufacturers believe that re-shoring would help them to reduce costs², while 41% pointed to a desire to shorten supply chains. In part, that reflects the rising cost of labour in previously low cost Far East and European markets, but also an increasing focus on the ‘total cost of production’ – which looks at wider costs such as capital investment and freight, not just labour.¹

The change in direction is also being driven by customer demand, which is increasingly for high-quality, highly personalised products with fast delivery times. In turn, that has encouraged manufacturers to adopt a just-in-time management strategy, creating shorter, more reliable, supply chains and operating closer to the point of demand.¹

Manufacturing re-shoring: the risks

Re-shoring well established manufacturing processes does not happen without risk. The precise nature of that risk will vary from business to business, but some of the most common include:

• Finance and investment: Re-shoring commonly requires significant investment in premises and high-tech production lines. For instance, Clarks Shoes’ decision to re-shore to a wholly owned, state of the art manufacturing plant in Somerset carried an overall cost of £3 million.³ Cadbury invested £75 million in its Bournville factory after bringing production back from Poland⁴, and Frog Bikes’ re-shoring to Pontypool in Wales was backed by £1.7 million in government and bank funding.⁵

• Access to skills: It is no secret that the UK manufacturing sector is in the midst of a significant skills shortage, with around 88% of firms affected by a shortage of skilled labour. In response, around 28% of manufacturers are considering plans to relocate to areas offering access to graduate talent or more relevant skills¹, so it seems that significant re-shoring may increase competition for highly prized skills.
  
  
• A weak pound: The current weakness of Pound Sterling on the currency markets is a something of a double-edged sword – boosting exports while harming profitability by increasing supply chain costs, particularly for those sourcing materials and components from overseas⁶.

Clearly, then, any manufacturer thinking about re-shoring will take time to consider the risks and rewards in detail – looking in particular at risk mitigation and transfer as a key re-shoring enabler.

Re-shoring manufacturing: the insurance dimension

This is where specialist insurance brokers can play an important role – working closely with manufacturers to assess operational risks, identify risk management strategies, and build insurance programmes that protect assets, liabilities, revenues, people, brands, reputations and, ultimately, the bottom line.

Of course, the right risk and insurance programme is individual to each manufacturing business. Firms thinking about re-shoring might consider:

• Formalising Business Continuity plans and reviewing supply chain risk.
  
  
• Reviewing Business interruption insurance and current extensions and limits applied to specified suppliers.
  
  
• Management liability insurance, which protects a company’s management team from claims which may arise from decisions and actions taken including actual or alleged “wrongful acts”. Parties that commonly pursue management liability claims include shareholders, creditors, investors, the Health and Safety Executive or the Environment Agency.
  
  
• Cyber liability insurance, the pandemic has increased the relevance of Industry 4.0 with further automation and use of artificial intelligence reshaping the manufacturing landscape. As manufacturing is re-shored firms should review the cybersecurity risks present and cyber coverage available – particularly as firms invest in technology to drive innovation in both production and the supply chain.

For more information

More information about re-shoring in manufacturing is available from the full Lloyds Bank report, which is available here, while help and support for manufacturers considering re-shoring is available from Reshoring UK.

Meanwhile, further information on the manufacturing risk and insurance support available from Marsh Commercial can be found here.

 

^Sources: 

<sup>1. wiltoninternational.com/posts/reshoring-uk-manufacturing/
2. lloydsbank.com/assets/resource-centre/pdf/business-in-britain-report-manufacturing-july-2019.pdf
3. reuters.com/article/us-clarks-manufacturing-idUSKCN1IN34S
4. mirror.co.uk/news/uk-news/cadbury-bringing-dairy-milk-production-10179721
5. bbc.co.uk/news/uk-wales-south-east-wales-37093221
6. ft.com/content/1766c574-cd5e-4d39-9f29-7bb8e86bb08b</sup>