Case Study – Offshoring versus Reshoring Decision for an Australian Manufacturer

Introduction

Australian manufacturers have spent three decades relocating production to lower-wage economies, yet the direction of travel is no longer settled. Manufacturing still employed close to 900,000 Australians and generated value added of approximately A$130 billion in 2022-23, but the pandemic exposed how thin domestic capability had become in several categories of essential goods (ABS 2024; Productivity Commission 2021). Medical devices sit squarely in that group.

This case study evaluates whether Barwon Medical Components Pty Ltd (Barwon), a hypothetical privately held manufacturer, should retain offshore production of its principal product line or reshore it to a purpose-built facility in Geelong, Victoria. The analysis builds a total cost of ownership (TCO) comparison, derives a break-even volume and payback period, scores both options against weighted qualitative criteria, assesses risk, and tests the result against wage and freight assumptions. The aim is to establish not which option is cheaper today, but when the answer would change.

Company and Decision Context

Barwon designs and sponsors Class IIa sterile single-use infusion sets, listed on the Australian Register of Therapeutic Goods and supplied to public hospital networks through state procurement panels in New South Wales and Victoria. Since 2014 all manufacturing has been outsourced to a contract manufacturer in Penang, Malaysia. Barwon retains design authority, regulatory sponsorship and final release; Geelong houses engineering, quality and distribution only.

Current annual demand is 2.4 million units. The supply agreement expires in 2027, and three developments have prompted the board to reconsider it. First, contracted and pipeline volume is forecast to reach 3.7 million units by 2030 following a panel award and a New Zealand export agreement. Second, freight and currency volatility since 2020 have made landed cost far less predictable than the ex-works price suggests. Third, the Future Made in Australia framework and the National Reconstruction Fund have made domestic medical manufacturing an explicit policy priority, and state health procurement is beginning to weight local content in tender evaluation (DISR 2024; Austrade 2023).

The reshoring proposal involves an A$8.4 million investment in a cleanroom, moulding cells and assembly lines at Geelong, depreciated over ten years with nil residual value. Figure 1 sets out the decision framework applied.

Total Cost of Ownership Analysis

Comparing an ex-works quotation with a domestic conversion cost is the commonest error in location decisions, because it omits the costs that distance creates rather than eliminates (Ellram, Tate & Petersen 2013). A TCO frame captures freight, duty, pipeline and safety inventory and the cost of poor quality, all of which scale with distance (Christopher 2016). Four elements were calculated below.

Inbound freight. A forty-foot container carries 24,000 units, and the all-in door-to-door cost from Penang to Melbourne, including insurance, terminal handling and drayage, is A$5,760:

Containers per annum = 2,400,000 ÷ 24,000 = 100; freight per unit = (100 × A$5,760) ÷ 2,400,000 = A$576,000 ÷ 2,400,000 = A$0.240

Customs duty. The finished device enters at a free rate under the Malaysia-Australia Free Trade Agreement, but roughly 20 per cent of ex-works value comprises accessories and packaging from a third country that fail the regional value content test, attracting the general 5 per cent rate:

Duty per unit = 5% × 20% × A$3.100 = A$0.031

Inventory carrying cost. The offshore pipeline holds 16 weeks of demand: 5 weeks ocean transit and port handling, 3 weeks clearance and batch release, 2 weeks cycle stock and 6 weeks safety stock. The 18 per cent annual carrying rate comprises 9 per cent cost of capital, 4 per cent shelf-life obsolescence, 3 per cent storage and handling and 2 per cent insurance. Applied to the pre-carrying landed cost of A$3.371:

Carrying cost per unit = A$3.371 × (16 ÷ 52) × 0.18 = A$1.037 × 0.18 = A$0.187

The domestic option holds only 4 weeks, giving A$3.121 × (4 ÷ 52) × 0.18 = A$0.043, a reduction of 77 per cent.

Domestic direct labour. Production employees would be engaged at Level 4 of the Manufacturing and Associated Industries and Occupations Award 2020, at a base rate of A$27.30 per hour with on-costs of 30 per cent covering the 12 per cent superannuation guarantee, leave, workers compensation and payroll tax. Standard labour content is 72 seconds per unit, or 50 units per labour hour (Fair Work Ombudsman 2024):

Labour cost per unit = (A$27.30 × 1.30) ÷ 50 = A$35.49 ÷ 50 = A$0.710

Table 1 consolidates these elements. Domestic conversion cost of A$3.063 comprises materials of A$1.930, the labour derived above and variable overhead of A$0.423 covering energy, cleanroom consumables and contract ethylene oxide sterilisation. Materials are dearer domestically because Barwon would buy resin and componentry in its own name rather than through a contract manufacturer aggregating demand across several clients.

Table 1: Total cost of ownership comparison at current annual volume of 2,400,000 units

Offshore fixed costs of A$690,000 comprise supplier quality management and audits (A$285,000), the third-party warehouse lease (A$240,000) and brokerage, trade compliance and sponsor regulatory maintenance (A$165,000). Domestic fixed costs of A$2,040,000 comprise depreciation (A$840,000), salaried plant labour (A$620,000), lease, rates and fixed utilities (A$395,000) and ISO 13485 certification with sterilisation revalidation (A$185,000). The regulatory element is not discretionary: a change of manufacturing site requires conformity assessment evidence and a variation to the ARTG entry (TGA 2023).

At current volume the offshore option is cheaper by A$272,400 a year, or 11.4 cents a unit. The Penang manufacturer’s unit price advantage is only 3.7 cents; the balance is fixed cost avoidance.

Break-even volume

Because the two options differ in cost structure rather than merely in level, the comparison is properly a break-even problem (Slack, Brandon-Jones & Burgess 2022). The domestic plant carries A$1,350,000 more fixed cost but saves A$0.449 per unit, so:

Break-even volume = ΔFixed cost ÷ ΔVariable cost per unit = A$1,350,000 ÷ A$0.449 = 3,006,682 units per annum

That threshold is 25.3 per cent above current volume. On the forecast ramp it is first crossed in Year 3, when volume reaches 3.15 million units.

Payback on the domestic plant

Payback must be assessed on cash flows, so depreciation of A$840,000 is added back, leaving an incremental cash fixed cost of A$510,000 and an annual cash saving of (A$0.449 × volume) less A$510,000. Reshoring also releases working capital, since 16 weeks of pipeline stock is replaced by 4 weeks:

Inventory released = [(16 ÷ 52) × 2,400,000 × A$3.371] – [(4 ÷ 52) × 2,400,000 × A$3.121] = A$2,489,354 – A$576,231 = A$1,913,123

Net investment = A$8,400,000 – A$1,913,123 = A$6,486,877

Cash savings on the forecast ramp are A$567,600, A$724,750, A$904,350, A$1,039,050 and A$1,151,300 across Years 1-5, and A$1,151,300 thereafter. Cumulative savings reach A$5,538,350 by the end of Year 6, leaving A$948,527 outstanding:

Payback period = 6 + (948,527 ÷ 1,151,300) = 6 + 0.82 = 6.82 years

Held at current volume, payback extends to 6,486,877 ÷ 567,600 = 11.43 years. Neither figure clears Barwon’s five-year hurdle, and 6.82 years consumes more than two-thirds of the plant’s ten-year life.

Qualitative Evaluation

Financial dominance is not decisive where the omitted factors are strategic rather than merely intangible (Fratocchi et al. 2016). Table 2 scores each option from 1 to 5 against criteria weighted by the board, with weights summing to 100 per cent.

Table 2: Weighted qualitative evaluation of the two supply options

The two methods disagree, which is the substance of the case. Offshore wins on cost by A$272,400 a year; domestic wins on weighted score by 0.875 points. Raising the cost weight and reducing the other six pro rata, the switching value is a weight of 60 per cent, at which both options score 3.767. Cost would then outrank quality, lead time, risk and sovereign capability combined, a position no medical device board could readily defend.

Risk Analysis

Currency. The Penang agreement is denominated in United States dollars, so the ex-works price is fixed only in a currency Barwon does not earn. A 10 per cent depreciation of the Australian dollar, well within observed annual ranges (RBA 2025), lifts the ex-works cost by A$0.310 per unit, or A$744,000 a year at current volume, nearly three times the offshore advantage. The domestic option is not fully insulated, since resin is imported, but its exposure is roughly one-third as large.

Lead time. A 16-week replenishment cycle forces demand to be forecast a full quarter ahead. When hospital panel volumes shift, the result is either obsolescence of dated sterile stock or air freight at multiples of sea rates. The domestic option compresses the cycle to two weeks, converting a forecast-driven chain into a responsive one (Christopher 2016).

Geopolitical and concentration risk. All volume passes through one facility and one shipping corridor. The Productivity Commission (2021) found that vulnerability in Australian supply chains arises less from imports than from concentration without substitutes, which describes Barwon precisely. No qualified second manufacturer or validated alternative tooling exists, and requalifying a site would take 12-18 months given conformity assessment and sterilisation validation (Manuj & Mentzer 2008).

Sovereign capability. The 2020 shortages of personal protective equipment showed that supply of low-margin medical items can fail precisely when demand peaks. Domestic medical technology capability is now a stated priority under the Future Made in Australia framework and an eligible investment stream of the National Reconstruction Fund (DISR 2024), and the reshoring literature identifies this class of policy and resilience motive as a growing driver of relocation (Barbieri et al. 2020). The countervailing point is that onshoring is an expensive form of insurance where diversification would achieve the same resilience more cheaply (Productivity Commission 2021).

Sensitivity to Wage and Freight Assumptions

The break-even volume is a ratio of two uncertain estimates. Australian award wages have risen with recent inflation outcomes, annual wage review increases running at about 3.75 per cent (Fair Work Commission 2024), so a cumulative 10 per cent rise represents roughly two and a half years of award movement. Container freight has been the more volatile variable, moving by multiples rather than percentages since 2020. Table 3 recalculates break-even under each scenario, holding fixed costs constant.

Table 3: Sensitivity of break-even volume to wage, freight and exchange rate assumptions

Freight and currency dominate: a 50 per cent freight increase alone brings break-even to 2,372,583 units, marginally below current volume, and adding a 10 per cent currency movement drives it to 1.54 million units, 36 per cent below current demand. Wage growth moves the threshold the other way but with less force, a 20 per cent increase lifting break-even by 1.39 million units.

The asymmetry matters because the variables differ in predictability. Award movements are announced annually and can be planned for; freight and currency move without notice, and in the same direction as the disruptions that make domestic supply valuable. A rule anchored solely to the base case is therefore systematically fragile.

Recommendation

Full reshoring should not proceed in 2027. At current volume it costs A$272,400 a year more, payback of 6.82 years fails the five-year hurdle, and break-even lies 25.3 per cent above present demand. Retaining the status quo unchanged is equally unsatisfactory, however, given a weighted qualitative score of 3.125 against 4.000 and a single point of failure carrying every unit.

A staged hybrid model is recommended. Barwon should invest approximately A$3.2 million in a domestic final-assembly, packaging and batch-release cell at Geelong, sized for 30 per cent of volume and dual-listed on the ARTG alongside the Penang site. This establishes a qualified second source, removes the requalification exposure and satisfies local-content weightings in state procurement without committing the full A$8.4 million against an unproven ramp. The Penang agreement should be renewed for three years rather than five, with fortnightly shipments and an indexation clause tying price to a published freight benchmark, and 70 per cent of United States dollar exposure hedged 18 months forward.

Full reshoring should then be authorised automatically on any of three triggers: contracted volume above 3.0 million units, a sustained 40 per cent freight increase, or an Australian dollar below the base case level for two consecutive quarters. Concessional finance through the National Reconstruction Fund should be tested in parallel, since a A$1.5 million contribution would cut payback at Year 3 volume to below five years.

Conclusion

This case study has compared offshore and domestic supply for a hypothetical Australian medical device manufacturer using total cost of ownership, break-even and payback analysis, weighted scoring, risk assessment and sensitivity testing. Offshore supply remains cheaper at current volume by A$272,400 a year, but the margin is narrow, sensitive to variables Barwon does not control, and reverses under a plausible freight and currency scenario. The qualitative evaluation favours domestic manufacture unless landed cost is weighted at 60 per cent. The wider lesson is that location decisions framed as a binary understate the options available: a staged commitment buys most of the resilience benefit for roughly a third of the capital while preserving the ability to reverse course as the assumptions resolve.

References

Australian Bureau of Statistics (ABS) 2024, Australian industry, 2022-23, cat. no. 8155.0, Australian Bureau of Statistics, Canberra.

Australian Trade and Investment Commission (Austrade) 2023, Australia’s medical technology sector, Austrade, Sydney.

Barbieri, P, Boffelli, A, Elia, S, Fratocchi, L, Kalchschmidt, M & Samson, D 2020, ‘What can we learn about reshoring after Covid-19?’, Operations Management Research, vol. 13, no. 3, pp. 131-136.

Christopher, M 2016, Logistics and supply chain management, 5th edn, Pearson Education, Harlow.

Department of Industry, Science and Resources (DISR) 2024, Future Made in Australia: national interest framework, Department of Industry, Science and Resources, Canberra.

Ellram, LM, Tate, WL & Petersen, KJ 2013, ‘Offshoring and reshoring: an update on the manufacturing location decision’, Journal of Supply Chain Management, vol. 49, no. 2, pp. 14-22.

Fair Work Commission 2024, Annual wage review 2023-24 decision, Fair Work Commission, Melbourne.

Fair Work Ombudsman 2024, Manufacturing and Associated Industries and Occupations Award 2020: pay guide, Fair Work Ombudsman, Canberra.

Fratocchi, L, Ancarani, A, Barbieri, P, Di Mauro, C, Nassimbeni, G, Sartor, M, Vignoli, M & Zanoni, A 2016, ‘Motivations of manufacturing reshoring: an interpretative framework’, International Journal of Physical Distribution and Logistics Management, vol. 46, no. 2, pp. 98-127.

Manuj, I & Mentzer, JT 2008, ‘Global supply chain risk management strategies’, International Journal of Physical Distribution and Logistics Management, vol. 38, no. 3, pp. 192-223.

Productivity Commission 2021, Vulnerable supply chains, study report, Productivity Commission, Canberra.

Reserve Bank of Australia (RBA) 2025, Statement on monetary policy, February 2025, Reserve Bank of Australia, Sydney.

Slack, N, Brandon-Jones, A & Burgess, N 2022, Operations management, 10th edn, Pearson Education, Harlow.

Therapeutic Goods Administration (TGA) 2023, Australian regulatory guidelines for medical devices, Department of Health and Aged Care, Canberra.