Nearshoring Could Alleviate Some Supply Chain Woes
Last Updated Aug 2, 2023
For decades, many companies have largely relied on outsourcing manufacturing to faraway countries such as China and other areas throughout Asia. In doing so, businesses across a variety of industries were able to enjoy lower operating costs and increased overall profit.
However, we live in a time of transition. Supply chains around the world have been devastated over the past few years. In many ways, the issues these supply chains have experienced can be traced back to the reliance on manufacturing in China and surrounding countries.
For this reason, nearshoring has become a much more popular manufacturing option.
What Is Nearshoring?
Nearshoring refers to the practice of partnering with manufacturers in nearby nations. This is in contrast to what has become the predominant manufacturing process over the years: offshoring.
As you might imagine, nearshoring offers its fair share of benefits, but also poses some serious challenges. In the following sections, we’ll outline some of the major considerations businesses must make if they are considering switching to a nearshoring model.
The Benefits of Nearshoring for Supply Chains
Nearshoring offers an exciting alternative to the traditional model of offshoring manufacturing services. Let’s take a look at some of the specific benefits inherent in this practice.
Increased Supplier Diversity and Supply Chain Resilience
First and foremost, increasing supplier diversity through nearshoring practice could be a major step towards overcoming any future supply chain issues. For example, companies operating out of the United States might elect to nearshore some of their operations by working with manufacturers in South American countries.
This doesn’t necessarily mean that all companies need to completely cut ties with their partners in Asia. Rather, by aligning manufacturers in multiple areas, supply chains are likely to be more resilient to any major disruptions that might occur.
Disruptions that we’ve witnessed over the past few years include major weather events as well as direct/indirect results of the COVID-19 pandemic. It is very difficult to predict (with any level of certainty) when natural disasters will strike and exactly how various governments around the world will respond. Therefore, having diverse supplier relationships will be a necessity as time goes by.
Improved Supply Chain Communication
Besides increasing diversity and supply chain resilience, nearshoring also allows many businesses to communicate with their suppliers and manufacturers more easily. When companies are on opposite sides of the world, communication tends to be less direct. For instance, messages may be received when it is the middle of the day in one location, and the middle of the night in another.
Conversely, we can see that companies based in the United States who work with South American suppliers will likely be operating in the same time zone (or nearly the same). This makes for increased supply chain visibility and better coordination overall.
Reduced Transportation Costs
Over the past few years in particular, shipping goods from Asia to the United States was stressful for many businesses. Costs of shipping rose dramatically while, at the same time, shipping containers themselves were hard to come by.
These issues led to port backups which, in turn, led to late orders, spoiled goods, and numerous other problems.
By working with countries in closer proximity, many U.S. businesses can bypass or at least mitigate the problems associated with shipping goods from the other side of the Earth.
The Challenges of Nearshoring for Supply Chains
The benefits of nearshoring are many. But switching from the current offshoring model may also present significant challenges to companies and supply chains as a whole. One particular challenge is the issue of cost. Is it more expensive to nearshore operations rather than offshoring them?
The Cost of Nearshoring Vs. Reshoring Vs. Offshoring
For a number of reasons, nearshoring is likely to be more expensive than offshoring operations to Asian countries. Keeping this in mind, consider the following thought experiment.
Many Americans are perfectly happy to pay a little bit more for a product that is made in their home country. An interesting question, however, is whether or not Americans would prefer to pay more for a product made in Mexico or a bit less for one made in China. Would most consumers appreciate the difference between nearshoring and offshoring?
Reshoring operations and moving toward more regional supply chains may be an important move in the future. But this is a complicated, expensive step, and many countries/companies simply aren’t prepared to shift to fully regional supply chains. Nearshoring allows for a more intermediate step and may allow many businesses to find middle ground between offshoring and reshoring.
The world has become increasingly interconnected over the past few decades. Unraveling the complex supply chain web upon which so many of our key elements rely is no easy task. Nearshoring offers a simple, yet enticing solution to the complex problem inherent in global supply chains.
Ideally, many companies will, in the future, work towards reshoring their operations. But for various reasons, many countries simply can’t do so at this time. Luckily, nearshoring is a compelling option that businesses and supply chains should consider moving forward.