OM Forum—Benchmarking Global Production Sourcing Decisions .
MANUFACTURING & SERVICE OPERATIONS MANAGEMENTVol. 20, No. 3, Summer 2018, pp. 389–402ISSN 1523-4614 (print), ISSN 1526-5498 /OM ForumBenchmarking Global Production Sourcing Decisions: Where andWhy Firms Offshore and ReshoreMorris A. Cohen,a Shiliang Cui,b Ricardo Ernst,b Arnd Huchzermeier,c Panos Kouvelis,d Hau L. Lee,e Hirofumi Matsuo,fMarc Steuber,c Andy A. Tsayga TheWharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104; b McDonough School of Business, GeorgetownUniversity, Washington, DC 20057; c WHU–Otto Beisheim School of Management, 56179 Vallendar, Germany; d Olin Business School,Washington University in St. Louis, St. Louis, Missouri 63130; e Graduate School of Business, Stanford University, Stanford, California 94305;f Graduate School of Business Administration, Kobe University, Kobe 657-8501, Japan; g Leavey School of Business, Santa Clara University,Santa Clara, California 95053Contact: -8644-8820 (MAC); 0002-6643-6865 (SC); 203-9535 00-0003-2178-3254 (AH); -4537 (PK); haulee@stanford.edu (HLL); matsuoh@kobe-u.ac.jp (HM); marc.steuber@whu.edu -8027 (AAT)Received: May 1, 2017Revised: July 6, 2017Accepted: July 8, 2017Published Online in Articles in Advance:May 8, t: 2018 INFORMSAbstract. Problem definition: Manufacturing firms are undergoing restructuring defined bya collection of adjustments and decisions, which affect the source and destination of manufactured products throughout the firm’s global supply chain network. We report on acomprehensive picture of manufacturing sourcing on a global basis. Academic/practical relevance: With dynamic changes in global economic, political, and technological conditions,the design of global supply chain strategies has become critically important for executivesand has great potential for operations management research. Methodology: Our work isbased on a global field study conducted in 2014 and 2015 among leading manufacturersfrom a wide range of industries. The data set has the distinguishing feature of reflecting actual decisions that the firms made recently (during the last three years). Results:Companies are currently restructuring their global production footprints. The majority offirms engage in offshoring. Reshoring does occur but seldom for corrective reasons. Chinaremains the most attractive site for production sourcing, followed by Eastern Europe andSouthern Asia. Manufacturing continues to decline in the developed economies of Japanand Western Europe. We observe that while North America may be at the cusp of a manufacturing renaissance, such a change is not just because of reshoring by domestic firms.Labor cost no longer dominates manufacturing location decisions; rather, firms decidebased on complex trade-offs among a variety of factors. Finally, firms localize productionin developed economies and use developing economies as production hubs. Managerialimplications: Our goal in this paper is to inform both managerial policy decisions and theacademic research agenda by developing insights on managerial practices that concernproduction sourcing and on the factors that drive such decisions. We develop hypotheses concerning how firms make these strategy decisions, and we discuss implications foranalytical and empirical research.Keywords: manufacturing location decisions offshoring reshoring1. IntroductionAlthough many commentators have expressed doubtthat such promises will be fulfilled, the debate on whatgovernments should do has intensified. For example,following the 2016 U.S. presidential election, the newadministration has focused on providing incentives tofirms to remain in the United States and to reshore,1while the United Kingdom’s decision to leave the European Union has led politicians to pressure firms not tooffshore from the United Kingdom. This discussion hasexpanded to include the growing role of automationin manufacturing and its potential to reduce future jobgrowth and modify capacity decisions.There is much confusion and disagreement aboutwhether and how firms should respond to suchThe globalization of manufacturing is well establishedin many industries and has led to a high level of interaction throughout global supply chains. Recently, however, there has been a negative reaction to globalizationbased on the uneven distribution of its benefits. Whilemany in developed economies now have access to lowercost products, many others have lost their jobs and haveseen their prospects for economic advancement diminished. The discussion on how to deal with the globalization of manufacturing has become highly politicized,with some politicians and political candidates in theUnited States and other developed economies promising to restore lost employment and industrial activity.389
390Cohen et al.: Benchmarking Global Production Sourcing DecisionsManufacturing & Service Operations Management, 2018, vol. 20, no. 3, pp. 389–402, 2018 INFORMSpolitical pressure as well as to changes in the globalbusiness environment (i.e., potential modification oftrade treaties such as the North American Free TradeAgreement, changes to corporate and border taxes, orshifts in labor costs in certain countries). On the onehand, a recent survey by the Boston Consulting Groupfound that more than 30% of U.S. manufacturing executives said their company was embarking on expansion of manufacturing capacity in the United States,while only 20% said that their company was expanding in China (Sirkin et al. 2014). On the other hand,A.T. Kearney used aggregate economic data to conclude that offshoring is occurring at a higher rate thanreshoring (van den Bossche et al. 2014).Globalization is a concern central to operations, andthus the operations management (OM) research community has an opportunity to contribute to one of thecore issues of our time. In recent years, the operations literature has looked at these issues from multiple perspectives. Similar to other empirical studies, weanalyze an empirically grounded data set concerningthe status of global supply chain sourcing for manufacturing, based on a recent survey of a diverse sample of global manufacturing firms.2 However, our dataset has the distinguishing feature of reflecting actualdecisions that the firms made recently (during thelast three years). This decision-based approach contrasts with typical surveys conducted in recent yearsthat are based either on the responses of specific individuals who are asked to speak to their firm’s plansand intentions or on aggregate volumes of importsand exports of manufactured goods. Other relatedbut incomplete sources are company announcementsand press releases that typically present a limitedamount of information and may have a public relationsmotive. Our results confirmed that a significant waveof restructuring of global supply chains is indeed inprogress. Our response data allow us to address thefollowing questions.1. To what extent have global production sourcingnetworks changed over the last three years?2. Has the offshoring or reshoring activity of firmsincreased or decreased over this time frame? What arethe major drivers of the observed change?3. What role do the three main manufacturing regions (North America, Western Europe, and China)play in the restructuring of global production sourcing? Which regions have attracted manufacturinginvestments, and which have seen divestment? Whatare the drivers of these changes? How do these resultsvary by industry?4. What is the role of developing economies (i.e.,Southern Asia and Eastern Europe) in the global sourcing of production? What changes have arisen over thelast three years? What factors can explain these observations?Our observations revealed a pattern of changes thatreflects the widespread restructuring of manufacturingsupply chains that is underway, on a global basis, derived from complex trade-offs among factors that mayinclude but are hardly limited to labor cost. This restructuring is defined by a collection of adjustments anddecisions, which affect the source and destination ofmanufactured products throughout the firm’s globalsupply chain network as well as the use of technology. These changes are occurring in every industry wesurveyed. While we are able to validate expectations,some of the results of our survey are surprising—that is,China is still the most attractive region for productionsourcing, followed by the countries in Eastern Europeand Southern Asia. Whereas Japan and Western Europesuffer from a net outflow of production volume, manufacturing in North America is actually growing—butnot because of reshoring by American companies.Our goal in this paper is to develop insights thatinform both managerial policy decisions and the academic research agenda. We believe that the detailedand comprehensive picture of global manufacturingsourcing that emerges from our survey is especiallyrelevant to OM research, which has a long history ofanalyzing global supply chain strategy as well as developing optimization models to support manufacturingplanning and control.At the managerial policy level, our analysis of thedata, in particular, illustrates how industry and product factors are especially relevant for understandingthe observed pattern of global sourcing adjustments.These results, enabled by our decision-focused survey methodology, identify specific trade-offs, risks,and constraints derived from both resource and policyconsiderations, which firms report to be important inexplaining the drivers of their actual global sourcingdecisions. These insights suggest new model formulations for optimizing a firm’s global supply chain strategy and for analyzing manufacturing sourcing policy questions. Our observations also provide evidenceconcerning adoption of automation and investment inresearch and development (R&D) in different industries and geographies.Analysis of the results leads us to several hypotheses about the drivers of these decisions and the potential impact of environmental factors. These hypothesescould be tested in further empirical and analytical studies. While we do not claim to have developed a causalmodel of global sourcing that generalizes across multiple industries and geographies, we believe our resultsprovide direction for ongoing research in both the OMand policy domains.At the academic research level, our research addresses the gap between current theory and the empirical issues of offshoring and reshoring relevant forpractice in global manufacturing sourcing strategy.
Cohen et al.: Benchmarking Global Production Sourcing DecisionsManufacturing & Service Operations Management, 2018, vol. 20, no. 3, pp. 389–402, 2018 INFORMSMoreover, this research has led to methodologicalinsights concerning empirical research in strategicdomains such as global sourcing. Finally, our researchis informative with respect to corporate decision making for global supply chain sourcing. Specifically, weobserved firms that are making such decisions basedon analysis of trade-offs and risks and not on individual criteria such as labor cost differences (e.g., theUnited States versus China).Additionally, our study is distinguished by the nature of our sample, which yields an unprecedenteddepth of information that enables wide-ranging observations of how individual firms are modifying theirglobal supply chains. More specifically, we gathereddata from a global sample of leading firms in multiplemanufacturing sectors, and respondents shared comprehensive details concerning their individual production sourcing decisions.Decision-specific responses provided information atthe product (group) and location levels. These dataallow us to take an exploratory perspective similarto “grounded theory” research so that we can better understand, unbiased by preconceived notions orhypotheses, how executives think about location decisions and technology investments. Our approach isthus closer to the theoretical sampling typical of casestudy research than to statistical sampling (Eisenhardt1989). Although the size and selection of this samplepreclude generalization of our results, the rich information content leads to conclusions that are consistent with the current global manufacturing landscapeand are informative for the ongoing policy debate.Hence, we view this research as a field study into recentproduction sourcing decisions that is relevant to allcompanies that are engaged in global manufacturing.3Finally, a key purpose of this paper is to guide the OMcommunity on the challenges and opportunities associated with conducting research on global supply chainsourcing strategy. Accordingly, we develop recommendations to inform the OM research agenda.The rest of our paper is structured as follows. Section 2 reviews the literature including prior empiricaland analytical work. We then explain our methodologyin Section 3. Section 4 gives an overview of the production sourcing and restructuring decisions made byour respondents. We contrast offshoring, which consistsof locating manufacturing operations in regions otherthan where the business unit is headquartered, withreshoring, which is the relocation of manufacturingoperations to the region of a business unit’s headquarters. We describe these two sourcing strategies in detailand explore them further by identifying the drivers ofdecisions to invest or divest in the particular manufacturing regions. We also discuss several other sourcing strategies observed in our sample. Section 5 introduces hypotheses suggested by the observed pattern391of decisions and the implications for OM research andglobal supply chain model formulations.2. Literature ReviewThe study of manufacturing sourcing has generated avast literature with contributions from multiple disciplines. See Mihalache and Mihalache (2016) for a recentreview of the past 25 years of academic research inthis area.Both anecdotal evidence from business press articles and empirical evidence presented by scholars inthe field suggest that companies are indeed reconfiguring their supply chains and global manufacturing footprints. We reviewed publications from academics aswell as professional associations and management consulting firms researching recent decisions on the configuration of global supply chains. We find results thatare consistent across these publications yet also findingsthat seem to be idiosyncratic to the underlying sample.Across the publications, we observe a tendency to baseanalyses on the total pool of decisions taken by a firmand not individual decisions, which constitutes the keydifferentiator between these studies and ours.This section briefly discusses three of the principalstreams—strategy frameworks, analytical modeling,and empirical studies—devoting the most space to thethird since this paper falls primarily into that category.2.1. Strategy FrameworksThe theory of industry competitiveness (Porter 1990,1998) highlights the benefits of a firm being locatedclose to peers that perform similar activities and theconsequent lively ecosystem of enabling resources(“industry clusters”). The eclectic paradigm is a comprehensive framework for explaining the entry modechoices of multinational enterprises (MNEs) (Dunning1980, 1998, 2000). Internalization theory (Buckley andCasson 2009) explains the behaviors of MNEs fromthe perspective of setting the boundaries of a firm andutilizing location-specific advantages. Rugman andVerbeke (2009) review the literature on the interactionsbetween the location advantages and the competitiveness of MNEs. Faeth (2009) reviewed the internationalbusiness literature and concluded that determinantsof foreign direct investment (FDI) by MNEs cannot bewell explained by any individual one of the existingtheories.Finally, we point out that in the theory of the firm literature, the analysis of the timeless question of makeversus buy (i.e., outsourcing), which specifies the organizational boundaries of the firm, can also speak to thechoice of geographical boundaries that is intrinsic tooffshoring decisions (McIvor 2013). Branches of this literature include transaction cost economics (Williamson1975), the resource-based view (Wernerfelt 1984), andthe knowledge-based view (Kogut and Zander 1992,Grant 1997).
392Cohen et al.: Benchmarking Global Production Sourcing DecisionsManufacturing & Service Operations Management, 2018, vol. 20, no. 3, pp. 389–402, 2018 INFORMSThe work noted above tends to use exogenous variables of either a firm-specific, industry-specific, or acountry-specific nature. The resulting insights havebeen very important for the framers of government policy but have had less impact on actual strategy formulation or implementation of sourcing policies by firms.2.2. Analytical Modeling in OperationsManagement and Operational ResearchThe operations management and operational research(OM/OR) literatures provide conceptual and mathematical models to account for manufacturing location decisions in international manufacturing networks(for reviews, see Melo et al. 2009, Cheng et al. 2015).Mathematical models (e.g., Cohen and Lee 1989, Donget al. 2009, Huchzermeier and Cohen 1996, Lu andvan Mieghem 2009, Wu and Zhang 2014, Chen andHu 2017) tend to focus on optimal production networkconfigurations under specific circumstances, whereasconceptual models (e.g., Kouvelis and Niederhoff 2007)organize the factors relevant to decisions about globalproduction sourcing.We note that the OM/OR analytical literature contains models that are framed at various levels of detailand are positioned over a range of planning horizons.These models also incorporate various decisions takenfrom the hierarchy of decisions associated with globalsourcing. It has been our experience that these models are rarely implemented or are not used directly tosupport analysis of company-specific decisions. Rather,it seems that companies have adopted more basicapproaches to developing the business case for a contemplated structural or policy change associated withglobal sourcing. The data collected for our study suggest that this may no longer be the case.2.3. Empirical StudiesMost of the studies find evidence that companies areindeed reconfiguring their supply chains (O’Marahand Lee 2013, Accenture 2014, Chen et al. 2015). Yetwhile Kinkel and Maloca (2009) observe offshoringdecisions to Eastern Europe and China, O’Marah andLee (2013) argue that China has lost its appeal as anoffshoring destination and that countries in SoutheastAsia are becoming an attractive alternative. The samestudy further observes decisions to nearshore manufacturing to the United States and Mexico, whichis supported by the findings of Ellram et al. (2013)and Accenture (2014). By contrast, van den Bosscheet al. (2014, 2015) conclude that reshoring to NorthAmerica is not happening to a large extent, somethingthat Kinkel and Maloca (2009) confirm for Europe aswell. A recent study by Goldman Sachs (Delaney et al.2017) reports that, for the first time, FDI by Chinesecompanies into the United States has exceeded theinvestment of U.S. companies into China.Just as the literature reports a wide range of trends,multiple studies document a move beyond mere laborcost comparisons to decision drivers such as proximity and access to markets, risk resilience, and supply chain flexibility (Kinkel and Maloca 2009, SimchiLevi et al. 2012, Ellram et al. 2013, Chen et al. 2015,Delaney et al. 2017). Yet there is still evidence for costdriven offshoring, especially to Eastern European andAsian countries (Kinkel and Maloca 2009, O’Marahand Lee 2013). The factors driving decisions vary byregion (Kinkel
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