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Near Shoring Continues, Labor Becomes a Limiting Factor, and Automation Takes Root

The trend of near shoring - in which companies in developed markets like the United States and western Europe move production facilities closer to their main bases of consumption - continues apace. By AlixPartners

February 3, 2017

Many of the labor-cost advantages that initially spurred companies to move their manufacturing offshore have eroded - most notably in China - yet as companies bring manufacturing capacity back, they face a new challenge: not all local labor markets are sufficiently deep to meet rising demand.

That rising demand represents a clear challenge, but automation in select circumstances could offer a solution.

Automation technology, including robotics, has made tremendous strides in the past five years.

Capabilities have improved dramatically, and costs have shot down.

Today this kind of technology can help manufacturers augment - or entirely replace - functions previously performed entirely by humans.

To exploit those technologies, manufacturers will likely have to make capital-intensive investments, but they should understand, too, that automation cannot replace a human workforce.

Instead, automation shifts the focus to a new set of critical skills.

As automation technology becomes more available and more affordable, companies will have to adopt longer-term views on developing and retaining talent aligned with the tactical use of robotics.

Two caveats are in order.

First, Brexit and the recent US presidential election introduced significant uncertainty into global trade, with a strong possibility of moreprotectionist stances, which are serving to reverse several decades of steadily easing global trade barriers.

In addition, currency markets introduce another layer of uncertainty. For example, the Chinese renminbi declined about 10% against the US dollar during the past year.

Companies will have to consider both factors - trade barriers and volatile exchange rates - as they develop their manufacturing and sourcing strategies.

Conclusion
A decade ago, the labor-cost advantages of offshoring were clear. Today, determining the strategic location of manufacturing assets is a complex, high-stakes process.

Moreover, rapid technological advances in robotics and automation are introducing new variables that compound the challenge, but also introduce some new opportunities.

Given these factors, executives and investors need a rigorous process to assess, design, and implement strategic manufacturing sourcing programs.

The decisions aren’t easy, but management teams that get them right can give their companies a clear competitive edge.


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