Reshoring is transforming how companies approach manufacturing and supply chain strategy. In this guide, we’ll explore what reshoring entails, the benefits it offers, the challenges it poses, and how organizations can successfully transition their operations back home.
What Is Reshoring?
Reshoring is the process of bringing manufacturing operations back from a foreign country to a business’s home country.
For example, if an American manufacturing company moved production overseas to reduce costs, reshoring would mean returning those processes to the United States. The goal is often to regain control over quality, lead time, intellectual property, and supply chain visibility while reducing the risks and geopolitical hazards of foreign production.
Reshoring vs. Nearshoring vs. Offshoring
In short, reshoring is the opposite of offshoring, but nearshoring sits somewhere in between. Let’s break down the key differences:
- Reshoring: Bringing operations back to the company’s home country (e.g., a U.S. company moving production from China back to the U.S.).
- Nearshoring: Shifting operations to a nearby country that offers some advantages of offshoring (e.g., a U.S. company moving production to Mexico). The advantage is proximity, which reduces transportation costs and time while still maintaining lower labor costs.
- Offshoring: Moving production or services to countries that offer lower labor costs and often less stringent regulatory environments (e.g., a U.S. company manufacturing goods in China or India).
When companies engage in contract manufacturing, they typically work with suppliers overseas. So, it’s most often associated with offshoring. In truth, however, contract manufacturing can include reshoring — the only difference is that the OEM outsources production to a domestic third party instead of a foreign one.
What’s Driving the Reshoring Trend?
There are many forces at work, but you can broadly group them into three key categories:
1. Industrial Policies and Government Incentives
The CHIPS and Science Act of 2022 is a landmark policy aimed at reshoring semiconductor manufacturing in the United States. It was introduced in response to the global chip shortage that severely impacted industries like automotive and electronics. The Act allocates $52 billion in subsidies and grants for U.S. semiconductor manufacturing and research, aiming to reduce the nation’s reliance on foreign chip producers, particularly in Taiwan and South Korea.
The Inflation Reduction Act, passed in 2022, primarily focuses on climate change and reducing the federal deficit, but it also includes provisions to boost domestic manufacturing, particularly in clean energy and green technologies. It provides substantial tax credits and incentives for companies that manufacture products like solar panels, wind turbines, batteries, and electric vehicles within the U.S.
By incentivizing domestic production, the IRA supports reshoring efforts, especially in the clean energy sector, where companies now have a financial motivation to build and manufacture in the U.S. rather than outsourcing production abroad. According to a 2022 report, the IRA and CHIPS Act helped boost reshoring to an all-time high, up 53% from the previous year.
2. Geopolitics and Supply Chain Resilience
Geopolitical risks have played a major role in reshoring as companies reassess the stability and reliability of their offshore operations. Some of the key factors include:
- Trade wars: Escalating tensions between the U.S. and China, marked by tariffs, export restrictions, and heightened trade barriers, have pushed many companies to reconsider their reliance on foreign manufacturing. In the past, tariffs on Chinese goods reached an average of 19.3%, significantly impacting costs for U.S. companies importing from China. Renewed tariffs or additional trade restrictions could add further costs and push companies to explore alternative geographies outside of China.
- COVID-19: The pandemic exposed significant vulnerabilities in global supply chains, especially for industries reliant on China and Southeast Asia for key components. As countries implemented lockdowns and shipping delays mounted, companies faced disruptions in receiving critical materials, prompting them to rethink the risks associated with offshoring.
- Military conflicts: The invasion of Ukraine and the subsequent sanctions on Russia highlighted the geopolitical risks in the European region, particularly for companies with supply chains tied to affected areas. Energy prices spiked, and commodity shortages rippled through the global market, emphasizing the need for more localized and secure supply chains.
Indeed, these factors have made reshoring much more attractive to American businesses. At the very least, they’ve led many companies to invest in alternate locations to mitigate risks, if not the United States.
In fact, U.S. imports from Vietnam have grown nearly 20% per year since 2018, making Vietnam one of the fastest-growing sources for U.S. imports as companies diversify away from China. Other Southeast Asian countries like Thailand and Malaysia have also seen increased manufacturing investment, with foreign direct investment in the region rising by 42% in 2022. Many companies are expected to explore India as an alternative, which received over $4.7 billion in new U.S. manufacturing investments in 2023 alone.
3. Automation and Technological Advancements
Advances in automation, robotics, and other smart technologies have made U.S. manufacturing more cost-competitive by reducing reliance on manual labor, which historically influenced offshoring and sourcing decisions.
Not only does automation make domestic production more affordable, but it also boosts worker safety. That’s especially important in the United States, where workplace safety laws are more stringent than overseas.
Benefits of Reshoring Initiatives
National Benefits
The reshoring trend is good news for the United States. Not only can it yield substantial advantages for the U.S. economy, but some of its benefits are already manifesting themselves across the country:
- Job creation: Reshoring brings manufacturing jobs back, helping to bolster local economies, particularly in regions hit hard by offshoring. In fact, the Reshoring Initiative reported that more than 350,000 U.S. manufacturing jobs were restored or created through foreign direct investment in 2022, a record high. The federal government may further boost this trend by offering tax incentives and grants to companies relocating to the U.S. or nearby countries like Mexico, which could make nearshoring even more attractive.
- Strengthening domestic supply chains: Manufacturing locally builds a more resilient and responsive supply chain within the U.S., reducing dependency on global sources. In a survey by Thomasnet, 83% of U.S. companies reported that they plan to source more locally in response to global trade volatility. This shift indicates a broad trend of supply chain diversification, which could accelerate under policies that favor domestic or allied-country production. In doing so, supply chains can withstand the shocks of disruption that might otherwise have significantly impacted operations.
- Boosting innovation: By investing in domestic production, businesses are more likely to invest in new technologies and innovations, driving growth in high-tech industries.
Organizational Benefits
For businesses, the benefits are just as substantial. According to the Reshoring Initiative, these include:
- Improved quality control: With production nearby, companies can maintain stricter oversight of processes, leading to better product quality. Plus, it’s easier to protect intellectual property (IP). Compared to the U.S., other jurisdictions don’t have the same legal protections and enforcement challenges that ward off potential IP theft and misappropriation.
- Reduced lead time: In a world where customers expect faster deliveries and customization, manufacturing closer to key markets allows companies to respond more quickly to demand changes, reducing lead times and improving customer satisfaction.
- Lower costs: While the cost of labor in offshoring destinations may be lower, rising transportation expenses, tariffs, and logistical challenges often erode these cost savings. Bringing production closer to home can lead to cost stabilization over the long term.
- Greater sustainability: With pressure from consumers and governments to adopt more eco-friendly practices, manufacturers are looking for ways to reduce their carbon footprint. Local production reduces transportation emissions and offers better oversight of manufacturing processes.
How Does Reshoring Work?
Reshoring is not a simple process. It requires careful planning and significant investment in technology, infrastructure, and workforce development to ensure a successful transition from offshore to domestic production.
Typically, it involves the following steps and considerations:
1. Initial Feasibility Assessment
Businesses must first assess the financial viability of reshoring. This involves a cost analysis, or total-cost analysis (TCO), where they compare offshore to domestic production costs. They weigh numerous factors like labor, logistics, tariffs, energy, and technology. Organizations also consider proximity to customers and the potential savings they may gain by shortening their supply chain.
Aside from cost, they also conduct a thorough risk assessment. For example, they evaluate their dependency on foreign suppliers, currency fluctuations, and potential regulatory changes. This is critical to support an effective supply chain risk management strategy and avoid disruptions like those seen during the COVID-19 pandemic.
2. Supply Chain and Infrastructure Evaluation
With production returning to their home country, companies must assess the availability of local suppliers. Moreover, they evaluate supplier capabilities to ensure they can meet quality, quantity, and pricing demands. A lack of local partners or infrastructure can be a major obstacle to reshoring, especially in highly specialized industries.
For supply chain optimization, businesses may also analyze their domestic distribution networks for logistical efficiency gains. While shorter lead teams benefit industries with time-sensitive products, reshoring may also require finding new logistics partners and warehousing facilities.
3. Technology and Automation Investment
Automation is a key difference-maker for manufacturers that choose to reshore operations. American labor is generally more expensive than in offshore locations, so businesses try to offset these costs through automated processes. This step involves assessing robotic systems, artificial intelligence (AI), and Internet of Things (IoT) technologies to find those that can streamline and enhance productivity.
Notably, some organizations may consider digital twins, advanced analytics, and IoT to monitor their reshored facilities. Smart manufacturing technologies like these not only make domestic production more efficient but also more cost-competitive.
4. Location Selection and Site Development
In the United States, incentives vary by region. Some states offer tax breaks, subsidies, or grants to attract American manufacturing jobs. Companies often evaluate available incentives — alongside other factors, like workforce availability — to determine the best site for their operations. For example, Texas, Michigan, and Ohio are popular destinations thanks to their favorable business climates.
At this stage, organizations also decide whether to build new facilities, retrofit existing ones, or lease local properties. This ultimately depends on their specific manufacturing needs, regulations, and available capital.
5. Workforce Planning and Development
One of the most important considerations for reshoring is whether your chosen location has a skilled workforce in areas like automation and advanced manufacturing. Some firms may partner with local colleges and training programs to build these necessary skills if the available talent doesn’t already have them.
To that end, manufacturers also invest in employee training and skill development to ensure workers are adept with new technologies and processes. They may implement continuous improvement programs to boost productivity and maintain competitive quality standards. This not only creates a healthy pipeline of engineering talent but also avoids costly mistakes during production.
6. Compliance and Regulatory Considerations
The United States has stricter environmental and labor regulations than many offshore locations. Thus, companies must budget for compliance costs and ensure their operations meet the applicable safety and sustainability standards. In some cases, this may involve auditing processes and implementing new procedures to maintain compliance and avoid legal penalties or fines.
7. Pilot Runs and Gradual Scale-Up
Once set up and ready to go, companies typically conduct pilot production runs to validate their reshored operations. This ensures the new setup can meet quality, efficiency, and reliability benchmarks before scaling up to full production.
Sometimes, rather than an immediate relocation, companies adopt a phased approach. This means they might move specific product lines or components first to manage risk, gradually adjusting to the new operational model.
Potential Reshoring Challenges
One key obstacle is supply chain realignment, as shifting from global to local suppliers can be complex. Specialized materials or components might not be readily available domestically, requiring businesses to rebuild supplier networks and invest in alternative sourcing methods.
Another significant hurdle is the upfront capital investment needed to establish domestic operations. Companies can expect increased manufacturing costs initially, driven by higher labor expenses and infrastructure requirements. They may also spend resources recruiting, onboarding, and training a skilled workforce, which can be challenging amid a U.S. labor shortage.
Many organizations also encounter delays as they scale up domestic production or partner with nearshore suppliers to meet capacity needs. Overcoming these challenges requires careful planning and strategic investment — and with the right partner, companies can streamline and simplify the effort.
Simplify Reshoring With Strategic Workforce Solutions
The reshoring trend is gaining steam, fueled by a swarm of long-term advantages. But, to maximize these benefits and simplify the transition, organizations may need some help along the way.
At Supply Chain Resources Group (SCRG), we offer strategic workforce solutions that can mitigate the challenges of reshoring your manufacturing operations:
- Recruiting: With a shortage of trained personnel in robotics, machine operation, IoT, and more, finding skilled labor isn’t easy. Our recruitment services can help you identify the most qualified candidates for all your engineering, supply chain, and specialized manufacturing needs.
- Talent on Demand: Manufacturing cycles often experience temporary spikes in labor demand, whether for ramping up production lines, managing quality assurance, or handling increased procurement needs. Talent on Demand offers a flexible, contingent workforce solution, providing skilled personnel precisely when and where they’re needed. This helps you navigate surge periods efficiently while leveraging a variable cost model.
- Supplier Selection: Unlike established offshore manufacturing hubs, the U.S. may lack specialized suppliers or components, especially in electronics, textiles, and high-tech parts. SCRG’s Supplier Selection can help you build new relationships and identify the best, most reliable partners for your specific needs. Using our rigorous evaluation criteria, we’ll empower you to make informed supplier decisions with clarity and confidence.
Ready to get started? Contact our team today.