Map out reshoring/nearshoring challenges and opportunities to set the right direction for your journey.
More and more U.S. and Canadian manufacturers have weighed the pros and cons and made the decision to pursue reshoring and/or nearshoring to bring sourcing closer to home, improve the total cost of ownership, and introduce renewed stability to the supply chain. Now, it’s time to finetune the strategy and better define the specific approach you will take. As a next step, it’s well worth giving some careful consideration to the biggest challenges and opportunities you’ll face with each type of relocation strategy.
In Part 2 of TBM’s OnDemand Webcast series on Making the Decision to Reshore or Nearshore, I join my colleagues, David Pate,Vice President of Operational Excellence, and Paul Vespoli, Managing Director of Client Services, in breaking down what we see as the biggest areas worthy of a deeper dive:
- Cost and risk management
- Human capital considerations
- Service and quality implications
There are advantages and challenges within each of these three categories with either a reshoring or a nearshoring approach, and we compare and contrast the nuances. I’ve outlined the highlights of our discussion, and you can use the insights to continue the conversation in your own company.
Less risk usually comes at a higher direct cost.
Both reshoring and nearshoring improve cost structure from a logistics, transportation, and inventory perspective, afford better control over the manufacturing process, and improve intellectual property security, thus increasing stability and reducing risk profile. Reshoring (vertically integrated within your company or via a nearby or co-located supply base) obviously has an edge over nearshoring on all of these factors, but it does typically come with higher CapEx and labor costs and an increase in operational complexity.
The best way to understand the tradeoffs between cost and risk with both approaches is to take the time and commit the resources to build out a total cost of ownership model including quantifying the direct costs as well as the cost of risk associated with each approach. Some additional factors worth including in the analysis are costs associated with establishing new supplier relationships as well as economic stability considerations, regulatory requirements, paperwork and auditing, tariffs, taxes, and governmental policies associated with different sourcing options. Remember to also factor in the clear cost advantage associated with a shorter, more responsive, and more reliable supply chain. Companies don’t always adequately account for the costs involved in waiting for supply and holding up production, but it is important to understand the true total costs of a potential sourcing strategy.
While you can expect some direct costs to increase with reshoring or nearshoring, you will also have opportunities to control and reduce these costs. Establishing strategic vendor relationships and choosing or setting up facilities with established lean processes and optimized operational capabilities are both effective strategies to keep total costs in check. These approaches drive up productivity and efficiencies and can have a significant impact on reducing the total cost of ownership in either a reshoring or nearshoring model.
Nearshoring typically beats reshoring from a human capital perspective.
When reshoring and nearshoring go head-to-head on the issue of human capital, nearshoring is usually the winner. While skilled labor availably varies from region to region, it always tends to be higher than in a reshoring scenario. There will likely be some language barriers and culture and process differences to consider when nearshoring, but none of these challenges present insurmountable obstacles.
With reshoring, companies must give careful consideration to the challenges most industries face in acquiring and retaining labor domestically. The U.S. does tend to have a higher-skilled workforce than other countries in general, but the stability of that workforce can present a problem, and companies will need to have a labor strategy in place to address the challenges. Often, successful strategies require some out-of-the-box thinking and willingness to look at less traditional solutions for growing and maturing labor capabilities within the organization.
From an opportunities perspective, location matters and conducting a labor market analysis can help clients identify their best options for finding and/or developing the people they will need to make their new sourcing strategy successful. Consider opportunities for developing existing talent rather than simply trying to onboard new talent. Working through community colleges to build a skilled workforce can be a highly successful model. Finally, productivity improvements and automation present opportunities for companies to reduce dependence on labor and can factor into the human capital solution for both reshoring and nearshoring approaches.
Service and quality improvements can pave the way to big wins.
One of the greatest advantages of a reshoring or nearshoring approach is the reduction in lead times, which translates into better order fulfillment rates and better service to customers. At the same time, better control over manufacturing processes often leads to higher-quality products.
Reshoring is typically associated with the greatest control, most predictable deliveries, and the shortest lead times, but there can be major gains with a nearshoring approach as well. For example, we helped one company transition from global sourcing to a nearshoring strategy, cutting lead times from 150 days to 60. The next step was to move to reshoring, which further reduced lead times to 30 days, requiring even less inventory and freeing up considerably more cash for the business. Think through the level of variability you are willing to accept in your supply chain in terms of time and availability—and the inventory you will need to cover that variability—to help determine which approach is best for your organization. Also, consider what you will gain in terms of flexibility and being able to ramp up or down quickly in response to customer demand. The right sourcing strategy could position you to be the hero when a customer has a pressing need.
By their nature, reshoring and nearshoring both increase supply chain visibility simply by bringing the source closer to home. But companies may want to look for opportunities to take this even further through strategic vendor relationships and digital supply chain management. These approaches help you run your own operations more efficiently while becoming more responsive to customer needs, which can help offset some of the costs involved in relocating your supply base.
Consider every impact before you make your move.
Both reshoring and nearshoring have major implications for many areas of your business. The more aware you are of the pros and cons of either approach, the better your ultimate sourcing strategy will be. For additional insights from the TBM team, download the full webcast Part 2: Solutions and Challenges in Manufacturing Reshoring vs. Nearshoring. If you missed it, check out the first installment in the series, Making the Decisions to Reshore, Nearshore, or Do Nothing. And keep an eye out for Part 3 of our series, where we will unpack specific strategies for making your reshoring or nearshoring strategy as successful as possible.
