The four phases of successful backsourcing

22 January 2021

A study has identified four steps required to successfully move the production of goods and services back to a home country.

Academics from BI Norwegian Business School and Norwegian University of Science and Technology (NTNU) analysed the experiences of a firm that successfully shifted production in a process they called 'backsourcing'.

Backsourcing was defined the process of bringing previously outsourced production and services in-house, as opposed to reshoring where firms move activities back to the organisation’s country of origin but not necessarily in-house.

The report said while moving production from high-cost to low-cost countries had been a trend for many years, some firms had experienced disadvantages.

Both backsourcing and reshoring have been on the agenda due to Covid, the US-China trade war, and geopolitical events such as Brexit.

Professor Hans Solli-Sæther, from NTNU, and professor Jan Terje Karlsen, from BI, analysed how a Scandinavian maritime technology supplier had successfully been able to backsource and the steps it took to achieve this, from the initial event that triggered the decision through to evaluation.

The firm faced challenges including limitations in production capacity and employee capacity, reintegrating knowledge back into the organisation, and adapting backsourced products to the production site. 

Karlsen said: “There are a number of reasons why a company might move production back home but some conditions can make it difficult in practice. This includes higher costs in the home country, lack of qualified labour, or challenges related to suppliers. Internal conditions can also hinder the process including lack of capacity to handle production or finding manufacturing products in their own production facilities difficult.”

The four phases to successful backsourcing are:

1. The initial phase

Solli-Sæther and Karlsen said if an event occurs that triggers the possibility of moving production home, firms should have an exit strategy. 

“However, if there is no prepared plan, the company must start making long-term plans to identify whether there is a need to make changes in the production process and suppliers.”

Steps included creating an overall plan for “long-term capacity utilisation based on existing and expected orders in the future”, and coordinating and delegating orders so the load in all departments is evenly distributed, the report said. 

Based on the long-term plan, management must then decide whether there is room for backsourcing or if they have to proceed with outsourcing. 

2. The scoping phase

This phase determines which products and services should be moved home, as well as deciding to terminate relevant contracts with existing suppliers.

“If certain parties have collaborated in research and development, it must be clarified how rights between parties should be handled,” it said.

If the departments have free capacity, management should start to identify potential products to backsource and carry out cost analysis. 

Firms should then organise product evaluation meetings to identify products or production methods that can be improved, therefore reducing costs to an acceptable level. 

“Based on the findings in this process, the management decides what product(s) should be backsourced and the contract with the external supplier is terminated,” the report said. 

3. The reintegration phase

Requirements to resume production at home and what changes need to be made to buildings or facilities must be addressed. 

“It may have been a long time since production was handled at home, so there might be a lack of relevant expertise in the organisation. Therefore, it is important to look at what skills will be needed,” Solli-Sæther and Karlsen said. 

Within this phase, firms must establish a team responsible for the backsourcing and develop a plan for reintegrating the product, and understanding if this will require investment in new equipment or machinery. 

“If the backsourced product has been outsourced for up to 15–20 years, it is possible that valuable knowledge regarding the product is forgotten or gone. To cover this knowledge gap, the team often include employees who have participated in the production of this product previously in the planning meeting. If the knowledge is gone, the team starts to rebuild the knowledge,” the report said. 

Once these measures have been taken, production can then begin. 

4. The evaluation phase

The final stage involves assessing whether the company has achieved what they expected by moving home and whether there are new reasons to move production abroad again. 

“Employees from different parts of the organisation can come together for a joint evaluation on this,” Solli-Sæther and Karlsen said. 

“At this meeting, they evaluate the product and the production process in terms of what went well and badly. Then they plan how they can further improve the product and production process,” the report added. 

Firms should then decide whether they want to keep the backsourced product or outsource the product again.

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