In September, ten years will have passed since the investment bank Lehman Brothers suddenly went bankrupt. This event marked the beginning of a global financial crisis that took a big toll on the manufacturing industry. In Denmark, the crisis resulted in the disappearance of 20 % of manufacturing jobs and many of these jobs were outsourced to countries with lower wages. In the following we will touch upon some of the reasons that can explain why the previously outsourced jobs are now returning.
International outsourcing
Outsourcing — meaning for one company to hire another company to perform tasks, handle operations or provide services that the original company used to be in a charge of itself — used to be the go-to way for businesses to save money since the outsourcing would usually go to countries with lower wages such as China in Asia or Hungary in Europe.
There are a lot of different reasons for outsourcing but according to Danish surveys, 71 % of industries indicate that wage costs are the primary motive for international outsourcing. The aforementioned decrease in outsourcing then appears in statistics, which show that while 10,312 jobs in the industry sector were outsourced in 2009–2011 (around the financial crisis), only 3,676 jobs were outsourced in 2014–2016. Also, fewer companies than before are outsourcing in the first place. While 28 % of industrial companies were outsourcing internationally in 2009–2011, that number had fallen to 17 % in 2014–2016.
Further analyses show that the most common reasons for companies deciding to take back labor from abroad is the hope for increased flexibility, quality and productivity. These numbers indicate that the level of international outsourcing is related to the financial crisis, but it makes you wonder: What happened during that time that made outsourcing a less popular way of saving money and keeping your business afloat? One answer is the question of proximity.
Closer proximity between production, development and market
Before it was normal, if not customary, to have separate departments in different countries taking care of separate tasks relating to production. While this meant that production itself could be made cheaper it also meant that there would be a bigger risk of disconnection between departments. Also, having cooperating departments in different geographical regions meant higher travel and shipping costs.
Manufacturing companies now more than ever see a clear advantage in having production, innovation and R&D in closer proximity to each other in order to obtain greater synergy between the departments. Greater synergy can for example mean that the design department, the engineers and the technicians who work on the production of a specific item can make sure that the work each of them is doing is compatible with what else is being developed in other departments.
Also, the companies experience advantages when it comes to having production be closer to the customer and the intended markets. By minimizing the distance between development and market, companies can create a better foundation for creating innovative solutions that target what the specific customer is looking for. The ability for a company to anchor their production locally is made possible by other trends that for example the manufacturing industry has been seeing for a while now, that is digitalization and automatization.
Current trends in manufacturing
Digitalization — meaning the integration of digital technologies in industrial processes — and automatization — the technique, method, or system of operating or controlling a process by highly automatic means, as by electronic devices, reducing human intervention to a minimum — are key trends in Industry 4.0. Both trends minimize the need for human workers since activities and processes that used to be carried out by people are now being carried out digitally or by machines such as robots, and only supervised by humans.
The integration of digital and automated solutions into manufacturing processes was a trend that was happening simultaneously with the financial crisis and the post-crisis realities highlighted the need for systems that were more stable and less vulnerable to external factors.
The two mentioned trends fit that description and many companies realized that the financial benefit of investing in them far surpassed the financial benefits that international outsourcing had had up until then. The inclusion of digitalization and automation in today’s manufacturing processes require a new skill set for the workforce who now had to work more extensively with IT and robots and this is one of the major challenges that have occurred with this industrial revolution.
Do you see something you recognize?
At MADE, our members in the manufacturing industry, they mention the trends above — the importance of proximity and the rise of digitalization and automatization — as contributing factors to the decline in international outsourcing but there are probably more equally relevant explanations. Do the realities you face echo what our members are experiencing, or do you have other suggestions that can explain these trends? Please, add your comments in I4MS Online Community!
Written by Amanda Koppel, from MADE
