Major events such as geopolitical tensions, the Covid-19 pandemic, or truck driver shortages have disrupted global supply chains. These unforeseen events are forcing manufacturers to rethink their sourcing strategies. Whereas historically firms predominantly sought to reduce their sourcing costs by relying on offshore suppliers, re-shoring by sourcing from local suppliers has been gaining popularity in the last years. Instead of choosing between offshoring versus re-shoring, firms may also use two suppliers simultaneously (referred to as dual sourcing). By combining a fast, responsive replenishment with a more expensive, local one, manufacturers may efficiently balance costs and responsiveness.  

Typically, however, local suppliers tend to be less flexible due to more stringent labor regulations and a limited workforce capacity. Overtime labor, for instance, tends to be more strictly regulated in developed countries. Although these rules are not bad per se, they may discourage firms to invest in countries where regulation is tighter.

Belgium, for instance, is known to have more strict rules for nighttime labor, which caused large e-commerce players to invest in facilities in neighboring countries, and simply delivering the Belgian market from abroad. Even though these rules were developed to protect workers, it turns out they put pressure on the number of local jobs, which may harm the local economy.  

Joren Gijsbrechts and his co-authors have developed a model to capture the dynamics that play a key role when firms decide from which countries to source. They find that, when the base workforce of local suppliers is scarce, increasing the flexibility of local workers tends to increase the attractiveness of local suppliers. For instance, manufacturers will rely more on local suppliers that lower their premium on nighttime labor or allow workers to have more flexible working hours. The authors separate the effect of flexibility from wages and find that, even when the average remuneration for workers stays constant, having a more flexible workforce encourages manufacturers to source locally. From a macro perspective, the mathematical model may quantitatively support policy makers to develop rules that encourage more flexible working hours for workers, resulting in a net positive effect on the number of jobs, in turn contributing positively to the local economy.

Joren Gijsbrechts, Professor at CATÓLICA-LISBON

To read the full article "Volume flexibility at responsive suppliers in reshoring decisions: Analysis of a dual sourcing inventory model" you can access the journal Production and Operations Management page or you can request a copy directly from the author.