Since the pandemic, industrial companies have accelerated the rethinking process of suppliers’ relocation from countries, with great advantages, but with a distance that can be an obstacle to maintaining the continuity of their operations. The process of supply chain regionalization had already started, but the serious supply chain disruption in 2020, has led to an urgent search for supply alternatives.
Companies have been looking for new possibilities for their traditional intercontinental suppliers, mainly in Asia, and considering the proximity factor. Making this factor a particularly attractive option, depending on the type of product. Even if migrating manufacturing and processes is costly in the short term. This approach is the basis of a nearshoring or regionalization strategy for supply chains.
Nearshoring in Logistics
Nearshoring in logistics may be the ideal strategy for a company and its products. To better understand what it is about, it is appropriate to first explain offshoring. Which refers to a relocation strategy that seemed unbeatable just a few years ago.
Offshoring occurs when a company moves its operations or manufacturing to a country with a lower cost of production. This country is where it costs the company the least to operate and manufacture products. Offshoring can also relocate business processes from one country to another. Both to manufacture products and to outsource specific business functions to a foreign location.
Nearshoring focuses on the same concept as offshoring but is located in a country with closer geographic proximity. For example, companies from the European Union subcontract in Eastern countries or North American companies that subcontract in Latin America. On the other hand, there is BPO (Business Process Outsourcing) which refers to business process outsourcing. This is an alternative for office tasks outsourcing and relocation. Companies can outsource entire departments or considerable parts abroad.
In recent years, nearshoring has become more common. Which involves moving activities to a neighbouring country, which has lower costs, such as labour, taxes, energy, or land. This closeness has the great advantage of having greater control, as well as sharing common cultural norms, ease of transportation, and similar time zones. And highlighting a relevant aspect, nearshoring is an alternative for sustainable logistics due to the ease of carrying it out by train or road and transporting shorter distances.
- Outsourcing, Onshoring/Offshoring and Nearshoring/Farshoring defined, explained and compared in 1 minute
Nearshoring benefits
To develop a successful nearshoring strategy, it is necessary to evaluate the entire value chain to design a sustainable system that allows the efficiency and profitability of the entire process. Performing nearshoring actions can bring great benefits, let’s see some:
- Cost reduction: One of the main motivators for companies that get involved in nearshoring is the profitability that results according to the characteristics and their company’s needs. This is relevant when you consider that the same quality of work can be obtained for drastically lower costs from a supplier that is close to the company. With the advantage that the transport will travel a shorter distance. We know that shipping costs have increased dramatically and the current problems of long-distance transport. By working with countries that are closer to each other, these problems associated with shipping goods long distances can be mitigated.
- Increased supplier diversity and supply chain resilience: Increasing supplier diversity through nearshoring can save us future supply chain problems. This does not mean that all companies should cut ties with their intercontinental partners. It is about rethinking and reassessing to alienate manufacturers who can react and resist any major unforeseen that may occur. Being closer, the reaction capacity and the possibilities are much greater than at a long distance.
Today it is still difficult to predict with certainty natural disasters or system changes. Therefore, various suppliers’ relationships at different locations are a necessity in the times we live in, where change and instability are constant.
- Access to global talent: Expansion possibilities in terms of talent is another reason why companies look for nearby hiring. In North American markets, where there is a low unemployment rate, it can be extremely difficult to find workers. Employment rates are different around the world, and often more workers are available in different regions nearby.
- Contractual flexibility: The ease of making labour contracts, as well as flexibility and dynamism advantages to manage labour matters, are some of relocating advantages in searching for facilities and better local regulations.
- Same or similar time zone: Having workers or operations nearby allows activities to take place during the same business hours as those in a local market. This benefit is one of the great differentiators between nearshoring and offshoring. Proximity allows for greater organization and activity management.
- This allows companies to communicate with their suppliers more easily: When companies are on opposite sides of the world, communication tends to be less direct. With nearshoring, communications operate under the same (or close to the same) time zone, allowing for greater visibility and control of the supply chain, as well as better overall coordination.
- In-person meetings: Although less and less common, this approach allows you to meet face-to-face when required. It is a reality that much can be done virtually, but there is no replacement for in-person contact or the productivity that can be achieved with face-to-face meetings when necessary.
- Cultural proximity: If our operations and talent are relocated close to our country, this lends itself to a more compatible cultural similarity. A similar work ethic and relatively similar cultural touchpoints can pave the way for easier communication and understanding.
- European supply chain disruptions and nearshoring opportunities in the Western Balkans
The world we live in has become increasingly interconnected, within the supply chain network technology has raised the possibility of global remote management. However, the complexity of the logistics on which many key elements depend on each other is not an easy task. Nearshoring offers a simple, yet attractive solution to solve the problem of control, flexibility, and monitoring that is required in each process and system.
Nearshoring can be an excellent option for companies, bringing new possibilities and many benefits. These include improving profitability, having access to new talent, convenient time zones with minimal cultural barriers, as well as improving distances and transportation times; the latter is to make logistics more sustainable.
The companies will explore the possibility of a closer relocation. It can result in a compelling option to improve resilience and productive capacity; the main ingredients to transcend in the market we live in.
In today’s world and depending on the sector, its energy costs, raw material, labour, capital, legislation, and the criticality of the supply chain, we will see different local production strategies coexist. Nearshoring and farshoring will be important to take them all into account and apply the most suitable one to satisfy customers since without them there is no future for a company.
Also, reflect on the matter that the scenario is changing and that what works for us now may change completely in a matter of months. Just take to look at what has happened in recent years to understand it.
