Nearshoring and reshoring have gained significant attention as effective ways for businesses to rethink operations while mitigating risk and increasing speed to markets to optimize operations. What are the benefits and challenges?
What Is Nearshoring?
If you haven't heard of nearshoring, you're probably familiar with offshoring, the practice of shipping jobs like manufacturing and assembly overseas to lower-cost markets like China, India, or Mexico. The practice, a form of outsourcing, gained momentum in the 1970s and 1980s, hollowing out once-strong U.S. industries like steel and textiles.
These days, there may be more talk about nearshoring, which is a cousin of offshoring. Rather than outsourcing jobs to distant countries, nearshoring refers to outsourcing jobs closer to home, in nearby countries.
What is nearshoring, exactly?
Nearshoring is the practice of bringing jobs closer to the home country of the employer and to the end consumer. The central idea is similar to offshoring. Jobs are being outsourced, but the company sends them to a nearby country rather than one across the world.
For example, in the U.S., nearshoring could refer to moving jobs from China back to Mexico, a low-cost country that is much closer to the U.S. than China. It could also mean simply directly outsourcing them to Mexico.
Companies that practice nearshoring tend to do so around the world. If they operate in Europe, they may outsource to a neighboring country and adopt a similar practice in other parts of the world.
Why are companies nearshoring?
Nearshoring has arisen in response to some of the challenges with offshoring, in particular those that came up during the COVID-19 pandemic, such as supply chain delays.
The gap in labor costs has also narrowed since the first wave of offshoring in the 1970s, and ocean freight costs have gotten more expensive as well, further incentivizing the return of manufacturing and assembly jobs.
Nearshoring gives a company more control over its workforce, the ability to manage the work in question, and the cost of other factors of production, whether it's manufacturing or something else.
For example, it's easier for a manager in the U.S. to visit Mexico than China. The distance to ship between the two countries is closer, and while cultural and language barriers still remain between the U.S. and Mexico, they are lower than with China.
Additionally, the similarity between time zones makes communication easier, and China's regulatory environment has become more challenging for U.S. companies.
What kinds of jobs are being nearshored?
The types of jobs that are being nearshored are similar to the same ones that were taken offshore. Information technology jobs, for example, are among those being nearshored, including semiconductor manufacturing.
Logistics and supply chain management is another example of a job that is being nearshored as companies look to avoid the earlier supply chain delays that cost businesses billions of dollars.
Finally, there are also some manufacturing jobs being nearshored as companies see more benefits to bringing production closer to home, where they can save on shipping and better oversee manufacturing and assembly since it's closer to home.
The trend is likely to continue in the wake of the pandemic as companies look to avoid the uncertainty around outsourcing to faraway locations where they are exposed to more risk and have less control.
Nearshoring strategies
Nearshoring strategies can help de-risk supply chains and bring predictability and stability back to operations. However, companies that have spent years creating global, complex supply chains might be intimidated by the prospect of “undoing” all of this work and moving operations closer to home, which could be costly and time consuming
Nearshoring comes with its own set of challenges including political and regulatory implications, infrastructure and logistics considerations, and risks associated with intellectual property and data security.
Additionally, given the inevitably higher costs of the different inputs (such as labor) in nearshore territories, sourcing will almost always come at a higher base cost—especially for western organizations.
Depending on where the company is based, risks in the geopolitical landscape can also introduce new challenges, as we saw with Russia’s invasion of Ukraine, which impacted not only resource availability but also fuel costs, making it difficult for companies to reshore their operations. Companies must be mindful of political and geographic disruptions when nearshoring to remain secure and confident in their supplier relationships and supply chains.
PRACTICAL STRATEGIES
Choosing the right location is critical to the success of nearshoring operations. When selecting a location, companies must consider factors such as labor availability and costs, infrastructure, regulatory environment, and proximity to the home country.
Whether you’re nearshoring or offshoring, the most fundamental parameter has not changed. Selecting the right supplier partnerships are crucial to nearshoring success. Additionally, it’s important to note the need for a diverse supplier base and avoiding sole-supplier situations. It’s crucial to build close relationships with a focused set of strategic suppliers in the nearshore destination, as they enable stronger supply chains.
Having a set of transparent, mutually aligned performance goals is key. When buyers and suppliers work toward agreed performance goals together—by sharing data, insights, and ideas—risks decrease, innovation opportunities are uncovered, and costs can be optimized.
Close relationships also allow for suppliers to collaborate and be involved in product innovation and design as well as supply chain planning and sustainability-related projects.
Building strong supplier relationships can be also highly beneficial during challenging economic and political times. For instance, during the pandemic and energy crisis, positive relationships proved to be invaluable due to the high level of established trust.
Another practical strategy to adopt when nearshoring is analytics-driven supply chain monitoring. Having access to ongoing insights into suppliers of suppliers and emerging demand-supply situations allows companies to see the bigger picture, analyze details and take appropriate action. Organizations using analytics driven solutions are generally more successful in managing supply chain disruptions.
It’s essential for businesses to navigate the practice of nearshoring strategically to reap potential benefits.
