Understanding and developing decision making in manufacturing relocations - A case study on offshoring and backshoring
Valkonen, Tommi Juha Johannes
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Since the 1960’s, companies have searched for competitive advantage from offshoring their manufacturing processes to countries of lower labour cost, or countries that are located closer to interesting markets. However, since about 2005, the trend has partly reversed: large amounts of offshoring projects face unprecedented costs and setbacks, making domestic production more favourable again. The reasons for both offshoring and backshoring of production have been studied in detail, but little focus has been given to how those decisions unfold day by day in the board rooms. In this study, three case companies, one offshoring case and two backshoring cases, were interviewed to find out how manufacturing relocation decisions are really made. The investigation was divided into four major sub-questions: how could the case decisions processes be modelled; what is the role of management accounting information in those decisions; what factors affect the risk perceptions of decision makers, and; how could the decision making processes be improved. It was found that offshoring and backshoring decisions are very different by nature due to the differences in uncertainty that the decision makers have to deal with. The myriad of options and factors present in choosing an offshore location from anywhere in the world translates into huge information and accounting needs, as well as complex decision making processes including several nested subdecisions. Meanwhile backshoring decisions were found to be very straightforward, less reliant on large amounts of accounting information and less time consuming to implement. This is due to the fact that these decisions usually consider only two locations, the offshored and the domestic location, both of which are well known and measured. The case companies were also asked to determine what parts of the decisions they would want to improve the most. The high level conclusion is that companies that seek global success should remain extra vigilant of the immense complexity of these decisions, and that there is a clear need to quantify and concretify the benefits of domestic production, such as quality, flexibility and trust between suppliers and partners.