The difficulties, challenges, and risks of offshoring production

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What is offshoring?

Offshoring relates to moving an activity overseas. It is common in manufacturing and aspects of service (such as aftersales support), where firms look to move manufacturing to lower-wage countries.

While offshoring may be combined with outsourcing (offshore outsourcing), offshoring and outsourcing and distinct. It is for example possible to offshore an activity in-house, utilizing company-owned facilities in a different country. 

Challenges of offshoring

Difficulty 1: Longer lead times

One of the key challenges associated with offshoring is that there may be longer lead times on the goods. Items may need to be shipped from around the world. This can pose challenges to forecasting demand and may result in having to keep a much high amount of stock or buffer inventory. While you may be able to use just-in-time manufacturing when parts are shipped from a local supplier, if you are sourcing them from overseas, it may not be possible to keep the supply chain so lean.

Difficulty 2: Challenges monitoring production

Another challenge associated with offshoring is that it is difficult to monitor the operations. While you may have full visibility in your own operations and can take periodic trips to local suppliers, achieving this level of overview with offshored production is a lot more difficult. This can lead to deviations from how you expect activities to be undertaken – potentially posing a risk to your brand image or reputation. 

Difficulty 3: Language difficulties

Another challenge associated with offshored activities is the language barrier. This can lead to confusion with mistakes in transition. It may also further complicate integration between your activities – changes to production may now be a lot more difficult to make. 

Difficulty 4: Exchange rate fluctuations and import tax costs

When offshoring production you also run greater risks associated with exchange rate or import tax fluctuations. A currency change of 10% – not an uncommon change – may suddenly squeeze your margins. What may start off appearing to have substantial cost savings could completely change with changing macro-economic conditions.

Difficulty 5: Different laws and regulations

A final important challenge with offshored activities is having to operate in different regulatory conditions. There may be differences in local laws, which may range from environmental regulation to labor laws. Operating overseas, and maybe especially if you undertake the activity yourself potentially via a subsidiary, requires you to become accustomed to a different set of regulations.