What are reshoring and nearshoring?
Reshoring is “the practice of bringing outsourced personnel and services back to the location from which they were originally offshored.”
Nearshoring is “the transfer of business or IT processes to companies in a nearby country, often sharing a border with your own country.”
The reason companies are choosing to reshore is because supply chain costs are becoming too expensive to sustain overseas operations. For a long time, it was common for businesses to move their manufacturing segments overseas to regions with “cheap labor” such as China, Vietnam and the Philippines.
The U.S. has lost about 25% of its high-tech manufacturing jobs to lower labor cost countries like China. You may have heard recently that America has dropped to number two among world economies – China rising to number one.
However, more and more companies are discovering that overseas production is not the most efficient way to operate because wages and transportation costs are rising.
So how will this gradual reshoring impact the supply chain?
First, there is no one-size-fits-all approach to reshoring and nearshoring, because of many moving variables within each unique supply chain.
Here are some factors that would be affected by reshoring:
- Transport costs due to oil and fuel fluctuations
- Currency changes as buying and selling in different currencies can be problematic
- Inventory costs that will increase because of market volatility and write-offs due to frequent product launches and increased variations
- Importation costs especially as importation and taxation changes
- Manufacturing costs due to increased labor costs and/or decreased productivity
The list could continue, but these are some basic examples of changes when companies re-route their supply chains and bring them back to America.
Three questions that companies need to ask themselves when considering any type of reshoring move are:
1. Costs: Are you assuming that manufacturing costs will stay the same, increase, or decrease? What is the cost/benefit decision point? Take transportation costs into consideration and ask what expectations you have for inventory levels.
2. Risk Considerations: You must consider the risk profile of the supply chain. Will global risk increase substantially? What is the associated cost to mitigate the risks?
3. Competitive Factors: Will you maintain first-mover advantage, and are you still competing on cost or now on other supply chain attributes like reliability, responsiveness and agility?
Reshoring the supply chain means more than just regaining a competitive edge. It must be a fact-based decision-making process that utilizes supply chain teams to analyze current processes, technologies and people power to determine is reshoring is feasible.
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