Bringing it all back home

Will Green is news editor of Supply Management
12 September 2013

Onshoring is building up steam. Companies have proudly announced the return of manufacturing to the UK and big-name retailers are making noises about sourcing their goods from the UK.

Marks & Spencer has unveiled a ‘Best of British’ range, featuring clothes made in the UK, while John Lewis says it wants to boost sales of UK-sourced goods to £550 million by the end of 2015.

With reports that production costs are on the rise in China, might this be the time to bring it all back home?

Research by Versapak suggests many companies would say yes. The firm produces specialist bags for the NHS – where they’re used to transport blood and organs – banks and retailers, to name a few.

Results showed that satisfaction with Chinese suppliers has dropped and two thirds of companies would consider bringing manufacturing back to the UK or Europe. Difficult communication, rising prices, quality, long lead times and large minimum orders were the most frequently encountered problems.

Some 12 years ago Versapak manufactured in the UK, but its three key rivals began sourcing in China, where group managing director Leon Edwards says prices are typically 40 per cent less than European manufacturers.

“All our competitors went to the Far East, but we didn’t want to do that,” he says. “People were asking for ridiculous prices and comparing our prices to the Far East.”

Instead of trying to compete on price, the firm moved production to Romania, where Edwards says wages are 40 per cent lower than the UK, and found different selling points.

“We needed to find a different way of competing,” he says. “If we’re not going to compete on price, we will compete with things such as a five-year guarantee and shorter lead times. We’ll provide a bag in four weeks rather than three or four months. We focus on delivering well and quickly to customers.

“We like the fact it’s in Europe; we like the fact we control it. I don’t get that from my suppliers in the Far East.”

Edwards says his ambition is to bring production back to the UK, although he accepts that for sourcing raw materials there is no alternative to the Far East. “What we’re going to do is bring finishing back to the UK. It will not surprise me if in five years we have some production in the UK.

“I think we’re approaching a tipping point, certainly for our business, where it’s marginal whether working in the China and the Far East is economical.”

Other firms have voted with their feet, including Symington’s, the makers of Pot Noodle, which earlier this year announced it will be bringing manufacturing of the snack to Yorkshire from China. Increasing costs and long lead times were given as reasons. And following difficulties with its supply chain, model train maker Hornby said it was bringing production of its Humbrol paint brand back to the UK.

Electronics group Premier Farnell, the maker of Raspberry Pi, the credit card-sized computer, has also moved production from China to the UK, to a Sony production facility in Wales specialising in industrial TV cameras. The product, intended as an educational aid but popular in many sectors, was launched in March last year. Originally expected to sell 20,000 units, in the first year more than a million have been sold, with the key markets being Europe and North America.
Claire Doyle, head of global Raspberry Pi at Premier Farnell, says transport costs were a key reason.

“For a period we were using multiple carriers to transport the product. Customer demand exceeded supply for quite some time.

“The time zones – China is eight hours ahead – meant we were losing a day a week in hands-on, day-to-day communications. [Onshoring] gave us greater flexibility at a time when demand has outstripped supply, despite an increase in manufacturing.”

Doyle would not be drawn on the difference in production costs between the UK and China, saying: “We don’t share our commercial agreements, but in a negotiation you look at the whole package.”

So is it getting more expensive to produce in China?

Brad Feuling, CEO at Kong and Allan Consulting, is clear. “Yes, costs are rising. Labour and overheads are increasing and, paired with the exchange rate, this does increase export costs.”

Feuling believes there has been a decrease in manufacturing in China, but says this may be down to a “natural correction of the market” to the boom years and M&A activity that’s consolidating production.

He is familiar with criticisms of sourcing in China, but feels they are not fair. “If a company is working in the UK and sourcing from China, it must expect difficult communication, long lead times and larger minimum orders. They are working with firms where English is not the native language, they’re thousands of miles away and the companies in China can’t operate on small volume orders, unless they price themselves out of the market.

“For companies that source direct from factories in China, but are from the UK or the US, I do hear concern. They would prefer to work with factories closer to their home country, if there were cost-competitive alternatives.”

Mike Flanagan, CEO at garment-sourcing consultancy Clothesource, says China remains a safe bet. “The double-digit inflation in labour costs has been matched by double-digit improvement in productivity,” he says.

“Although people like to talk about onshoring, the good commercial case is to move part of the production process [abroad].”

However, he believes that the decline in UK garment manufacturing is “bottoming out” and there are opportunities for niche producers.

“We are seeing lots of tiny niche products. That is more sustainable and useful than trying to compete with Bangladesh or Vietnam.”

UK manufacturers’ organisation EEF says there is a “slow trickle” of firms bringing production back to the UK, drawn by flexibility, closer customer collaboration and more visible supply chains.

The group’s chief economist Lee Hopley says: “It’s less about cost and volume, and more about driving value for the customer, providing a range of services on top of the product.

“There are cash advantages to sourcing and producing in low-cost countries. But we have exceptional manufacturing quality in the UK. It’s about quality and capability, and we have an awful lot of that.”

Less distance, more visibility

The economic crash of 2008 brought home to many firms the vulnerability of supply chains in China and the Far East.

Lee Hopley, chief economist at UK manufacturers’ group EEF, says the collapse of companies in China had knock-on effects for UK firms in terms of disrupted production and management time.

“They didn’t have brilliant visibility of their supply chain,” she says.

“Even when demand is weak, you still need to be sure suppliers are in financial shape and will meet your requirements when you need them. Suppliers went out of business and were in shaky financial shape.

“There were disruptions for companies in terms of their own production. It was taking up time. If parts of the supply chain feel unpredictable, that’s difficult to manage, particularly if your demand outlook is challenging.”

Hopley says supply chain visibility is a key reason that firms decide to bring production back to the UK and Europe.

“It’s about making sure your whole supply chain is resilient. It’s much more complicated if it’s far away,” she says.

Natural disasters and the threat they pose to supply chains – highlighted by the disruption caused by flooding in Thailand in August – also play a part in the decision, according to Hopley.

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