April 19, 2023 | Supply Chain Strategy
For many businesses, the biggest concern today is how to prevent supply chain disruption in the future.
And, in many cases, nearshoring seems to be the one simple answer.
While ongoing trade wars between the U.S. and China have compelled many American companies to relocate operations, recent events such as the pandemic, geopolitical conflicts and economic uncertainty have accelerated this transition.
Many companies, particularly in the automotive and electronics industry, have announced plans to expand operations and build manufacturing bases in regions such as Mexico. Automotive giants Tesla and BMW, for example, plan to leverage the region’s advantages and manufacture electric vehicles in the country.
However, for many other companies, the decision to nearshore is not easy, considering their long dependence on one region for raw materials and labor. They are now finding that it is easier said than done.
Nearshoring is a strategy that enables a business to partially shift its production and operations to regions located closer to the home country and end-users.
For a company located in the U.S., this can mean moving production out of Asia into Mexico, for example.
Such an arrangement allows a business to enjoy all the benefits that are typically associated with offshoring and minimize risks, too. It accelerates speed to market by shortening the supply chain and lead times. Further, it reduces dependence on overseas suppliers and lowers costs associated with transportation and logistics.
The question now is: is nearshoring practically feasible, given the high cost of labor and raw materials in many regions?
Despite its advantages, there are some key challenges for businesses looking to deploy the nearshoring strategy. Here are some of these.
Many businesses looking to move their operations from Southeast Asia are likely to face challenges in finding suppliers with adequate raw material and similar production standards and capacities.
Nearshoring is not easy for industries such as pharmaceuticals where the production process involves highly polluting chemicals. Bringing production closer to North America will be tough because of stringent environmental regulations.
During the last two decades, China and a few other Southeast Asian countries have emerged as manufacturing hubs. Rob Handfield, professor of supply chain management at North Carolina State University, tells the reason for this trend. “It’s in China for a reason: cost. Bringing it back would increase costs and raise prices,” he explains in this white paper. Again, while customers in the U.S. may be willing to pay a premium for goods manufactured locally, they may not be ready to shell out extra for products that come via nearshoring.
At the outset, nearshoring may require a business to invest a lot of time in restructuring their supply chain. In fact, it can take months (or even years) for the new setup to run smoothly. Such a long initial time duration is likely to discourage businesses from nearshoring.
Many businesses have long-term commitments and contracts with their suppliers. Due to the long-term association, suppliers have a firm understanding of the business requirements. Nearshoring requires a business to start this process afresh and work with new suppliers.
The workforce in a nearshoring destination may not have the required skills. Supply chain professionals may have to conduct training programs to inculcate these skills among workers. This may again take a lot of time. Along with skills, the cost of labor can also be a key factor. In recent times, this cost has shot up in several regions. Industries that are labor-intensive are therefore not suitable for nearshoring.
A company’s proprietary information may be at risk if a nearshoring destination does not have stringent intellectual property laws. Supply chain leaders would have to consider investing in additional security measures to protect intellectual property.
Whether you decide to nearshore and shorten your global supply chain or continue to retain the status quo, there is little doubt that supply chain operations require careful monitoring amid growing uncertainty.
For some industries, nearshoring may be the ideal solution under current circumstances. For others, it may not be practically feasible because of varied reasons.