Can nearshoring give you an edge over your competition, or will it cost too much in the long run?

14/08/2015

Nearshoring

NearshoringCompanies are constantly looking for ways to expand their profit margins. For a long time, outsourcing manufacturing overseas has been a popular way to do so. While this strategy can yield great benefits, there is an alternative that is sometimes overlooked: nearshoring.

Nearshoring is the practice of moving manufacturing, or other key operations, to countries that are adjacent or near to a company’s headquarters or key markets.

The Pros

1. Faster time to market

The speed with which products reach their market can have a huge impact on sales. If the competition can produce their goods and sell them faster than you can, this can cause trouble for your business.

Container ships traveling from Asia to the United States take an average of two to four weeks to reach America. Then they still have to go through customs, be unloaded, and shipped domestically to their final destinations.

This adds even more days, and potential delays, to your shipping times.

All of this transit time can be an incredible competitive disadvantage compared to nearshoring from Mexico. Products made in Mexico can be put on trains, trucks, or ships, and reach many destinations in the United States within a few days.

This is hugely significant, considering that business is essentially a race to connect supply with demand, faster than the competition. Nearshoring can really help companies win this race.

2. Protection from foreign logistics problems, such as natural disasters

Some areas overseas that supply cheaper manufacturing labor are in locations where natural disasters are more likely to occur. For example, there are frequent tsunamis in Indonesia, where many footwear and textile products are manufactured.

When you combine this with the fact that building codes are often less strict in developing countries, and journeys over oceans can be perilous in and of themselves, this can amount to quite sizable financial hazards.

In fact, a representative from major U.S. consulting firm McGladrey puts the risks into perspective, stating that “Remote manufacturing increases risk through factors such as natural disasters, which produced $300 billion in added supply chain costs in 2012.”

3. Greater control over production

If a supplier is in a country that is geographically closer, that means it is easier to visit to oversee operations and make changes.

Regulations are also more likely to be similar in the country where that supplier is located.

For example, NAFTA, or, the North American Free Trade Agreement, helps to generate cooperation between Canada, the United States, and Mexico by creating flexible visa regulations for participating countries, and trying to accommodate co-country work in other ways.

All of these factors are competitive advantages over offshoring, where it can be very difficult or costly to ensure that manufacturers are meeting all specifications, guidelines and standards.

The Cons

1. Loss of potential overseas market expansion

China, the world’s most populous country, continues to have massive amounts of manufacturing, but is also still growing as a huge consumer economy.

In fact, according to a 2013 report from McKinsey & Company, “By 2022…more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 renminbi ($9,000 to $34,000) a year. Just 4 percent of urban Chinese households were within it in 2000.”

Running manufacturing operations in China can actually lead to increased sales there as well, because consumerism is growing in the country as the middle class dramatically expands.

If the product is already there because it was made there, it is easier to bring to these consumers.

Many Chinese manufacturers are also likely to have business relationships with Chinese retailers. So, Western countries who use nearshoring, as opposed to offshoring, could miss out on the sales benefits of these relationships.

2. Nearshoring is still not local

Many people view domestic manufacturing as a great thing for their country. This is because it gives jobs to their fellow citizens, rather than transporting them elsewhere.

So, although nearshoring brings the jobs closer to the original country, it does not qualify as domestic manufacturing. Therefore, it is exempt from the benefits of national pride that people often feel when they know that a company is producing goods in its own country.

So, if a particular company is aiming to appeal to national pride, its brand could be hurt by nearshoring. In these circumstances, in-country manufacturing could help the company to better upkeep its domestic image.

3. Nearshoring costs more

This is perhaps nearshoring’s greatest flaw. Companies who consider nearshoring as a manufacturing option often do so because they are looking to reduce costs.

So if the costs of nearshoring are higher than the costs of outsourcing overseas, the benefits of nearshoring decrease significantly.

The ten countries with the lowest labor costs – Egypt, Sri Lanka, Senegal, Kenya, India, Vietnam, Ghana, Pakistan, Bangladesh, and Madagascar – are all located overseas from Canada and America. All of these countries have labor costs that average under a dollar per hour.

As a comparison, the average labor cost in Mexico is around two dollars and fifty cents. So, labor costs that are significantly higher in nearshoring countries could be a definite problem for companies trying to maximize their net gains.

Ultimately, it is up to the individual company to decide which route is the best one for it to take.

Which side of the argument are you on?

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Bennett O'Brien

Author: Bennett O'Brien

Bennett O'Brien is a freelance writer from the state of Massachusetts in the United States. He holds a bachelor's degree from Westfield State University, and graduated cum laude. Currently he is expanding his freelance writing career, and enjoying the opportunity to write on a variety of business topics.

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