Offshoring versus Reshoring: A Tug-of-War between Operational Flexibilities

Reshoring refers to the emerging practice of once-offshoring manufacturers moving their factories back onshore. Conventional wisdom suggests that reshoring offers demand responsiveness due to market proximity, whereas offshoring provides lower cost. We however argue that, if a manufacturer remains heavily dependent on offshore suppliers for component sourcing, moving its factory back onshore may also bring disadvantages due to the loss of supply proximity. For such manufacturers, we show that the market and supply proximities enable different operational flexibilities, leading to an operational tradeoff between offshoring and reshoring even under identical cost structures. We find a simple characterization of the manufacturers’ preferences between offshoring and reshoring, which sheds light on how demand and cost structures can affect the profitability comparison of the two manufacturing modes. We further identify operational strategies that can swing the manufacturers’ preferences between offshoring and reshoring.