Evaluating Nearshoring? Here are Five Realities
By Richard Howells, Stephanie Overby | 13 min read
Few supply chains emerged unscathed after COVID-19 disruptions. The pandemic revealed that supply chains for manufacturers, retailers, and others shipping products had been stretched thin, their threads easily torn. Decades of focus on improving long, lean, low-cost (and largely offshore) supply chains had delivered many benefits – but it also left companies defenseless against the extreme supply and demand shocks that followed.
The limits of geography have become evident for companies’ distribution networks. Moving some supplier sources closer to home offers a way of reducing risk. As business leaders in North America and Europe anticipate the future impact of trade wars, geopolitical turmoil, factory shutdowns, logjammed ports, and demand volatility, the appeal of nearshoring (moving sources of supply closer to HQ or end customers) or onshoring (basing supply sources in a company’s home country) has crystalized.
In its 2021 survey, global management consultancy Kearney found that 92% of U.S. manufacturing executives had considered reshoring (returning some operations back to the country) or had already moved some manufacturing operations closer to home. Of these respondents, 47% already had done some reshoring over the previous three years, 29% had decided to do so within the next three years, and 16% were evaluating the prospect. Kearney’s research also found that around 70% of CEOs whose companies had manufacturing in Asia were evaluating reshoring, had already reshored, or planned to reshore to Mexico, Canada, or Central America.
In many ways, the case is clear. Nearshoring or onshoring can contribute to risk-resistant supply chains and lead to faster time-to-market, more effective planning cycles, and greater flexibility in response to disruption. Proximate sourcing can enable greater control and more frequent site visits, fewer cultural barriers, and better communication. Reductions in logistics costs and lead times can also bolster the balance sheet by freeing up working capital that is tied up in cash outlays to suppliers and inventory in transit.
“The globalization of production has also made supply chains more vulnerable to disruption,” warns a 2022 U.S. Council of Economic Advisers report. Decisions to cut extra inventory and reserves of skilled people weakens supply chains. “Thus, though modern supply chains have driven down consumer prices for many goods, they can also easily break,” the report adds.
That’s why nearshoring is worth evaluating. But it’s a more complex opportunity than initial knee-jerk reactions may have indicated. Companies that move more activity closer to home can benefit if they move thoughtfully, factoring in costs and availability of supply in conjunction with efforts to improve communication, visibility, and data-sharing across the supply chain.
It’s also important that decision-makers remain realistic. Nearshoring is not as simple as just yanking everything back to an adjacent location. In many sectors, there may be no widespread sources of supply. In other cases, deciding when, where, and how to take advantage of geographically closer sourcing options will take effort, significant time, and increased up-front costs.
Following are five realities that business leaders should understand about nearshoring and onshoring as they figure out their next steps.
1. Expanding options is the point.
No one is bringing everything home. Don’t expect to see, for example, a retailer or hardware manufacturer move all their sourcing from Asia to, say, Mexico.
Instead, companies are focused on diversifying their supply chains, says Michel Roger, managing director in Accenture’s supply chain and operations practice. The degree to which they are pursuing diversification depends on their circumstances. “Sectors with added need for resilience and national security interests, like semiconductors and pharma, are diversifying even more,” Roger says.
For many companies, the near-term focus has been on finding suppliers in new geographies that can step in when their primary partner is facing a challenge rather than a comprehensive reversal of sourcing strategy. They may start by onboarding secondary suppliers in the United States or using a contract manufacturer in a nearby country or region while maintaining established partners overseas. Honda, for example, is considering building a parallel supply chain outside of China, where some 40% of its production currently takes place, Reuters has reported.
U.S.-based manufacturers that for many years have capitalized on the lower costs and “knowledge prowess” of specific countries, particularly China, now are reevaluating their options, says Elysse Blank, a manager specializing in supply chain in the operations excellence practice at West Monroe.
A May 2022 executive poll by West Monroe found that close to one-third (32%) said their companies planned to do some nearshoring or reshoring of suppliers. These efforts will, however, have their limits. “There has been a limited uptick in nearshoring and reshoring in many industries,” Blank says.
But there have been notable moves. After millions of dollars’ worth of Inter Parfums’ designer fragrance was held in a Shanghai warehouse for months during COVID-19 lockdowns, Jean Mardar, its CEO, told The Wall Street Journal that his company will keep some China-based suppliers but that it will permanently shift much of its contract manufacturing from China and Europe to the United States for products sold stateside. By the end of 2022, the company will perform all filling and assembly in the United States (where previously less than a third of such work was done), and U.S. suppliers will provide nearly 70% of its glass, metal, and pumps.
A May 2022 executive poll by West Monroe found that close to one-third (32%) said their companies planned to do some nearshoring or reshoring of suppliers.
The CEO of MGA Entertainment, the maker of Little Tykes toys and Bratz dolls, told Marketplace that its usual three-week shipping times to get products from China to the west coast of the United States dragged out to more than five months – post-lockdown. The company plans to maintain its relationships with Chinese factories and its own Hudson, Ohio factory, but it recently opened two new factories in Juarez, Mexico with plans for a third.
2. Don’t forget switching costs, which can add up fast.
There is a complex calculus to evaluating the business case for nearshoring. Consider, for example, that ocean freight transit times and costs are beginning to come back down since the worst of the pandemic. Companies that once considered moving their supply bases to North America to deal with those issues may find that the costs outweigh the benefits. “Amid today’s logistical chaos, costs are also often miscalculated,” says Blank.
When considering switching suppliers or locations, calculating total landed costs – the sum of all expenses related to the manufacturing and delivery of a product to the customer – is often the first step. Companies must consider the costs of production, transportation, customs duties, crating, handling, currency conversion, and insurance, among others.
Landed costs, however, tell only part of the story; the calculation historically stops when a product hits the warehouse or distribution center. Some companies are adopting the cost-to-serve metric, which factors in the expense of sales, service, and last-mile logistics. And the decision to nearshore or reshore can bring that number down.
But that’s just the start. Business leaders must also factor in the expense of introducing a new supplier into the network. This includes building enough stock to maintain production during the transition, redesigning supply chains and associated capital expenditures, the ramp-up period required to bring new facilities or suppliers online, onboarding and offboarding suppliers, and the time and money required to validate that the new local product or supplier can provide what’s needed.
3. It can make sense to nearshore some things, not everything.
Nearshoring or onshoring may only make sense for a certain subset of products, a practice known as supply chain segmentation, in which a company pursues different strategies based on the needs of different customers, products, and distribution channels. Supply chain segmentation means evaluating the business value of various activities at a more granular level – whether defined by product volumes, revenue, profit margin, strategic importance, or some combination thereof.
“Segmentation is a key driver shaping nearshoring decision,” says Roger. “Leading companies use data-driven segmentation to identify products or customers where responsiveness is more critical.”
Nearshoring may make more sense for high-value, high-margin products or dynamic, innovation-driven segments. One of the biggest mistakes a company can make when considering nearshoring or reshoring, Roger says, is to make sweeping decisions without this kind of analysis and segmentation.
Supply chain segmentation may reveal the upside to moving some materials and components in locations closer to where finish manufacturing or sales happen. And such analysis and evaluation of nearshoring and reshoring options should be ongoing. Customer demand, for example, can change on a dime, recasting the role of certain products.
4. Nearshoring or reshoring at scale will take years.
Some companies and sectors may not have the infrastructure necessary to support immediate nearshoring or reshoring. Industry consolidation in some sectors, such as semiconductors, means that sourcing is limited to a handful of suppliers and even fewer geographies. An August 2020 report by Bank of America indicates that the total joint cost for U.S. and European companies to shift all export-related manufacturing not intended for Chinese consumption out of China would be $1 trillion over five years.
Trained labor is another concern. Companies have spent decades moving capabilities and knowledge offshore, and they can’t bring that back overnight. “The number one issue is availability of talent,” says Roger. “Operations are increasingly more automated and leverage new technologies, which requires less people but with higher specialization in areas like AI, Internet of Things (IoT), 5G, blockchain. And there’s a talent gap across the globe that can limit organizations on their ability to pivot at scale.”
Rethinking far-flung supply is top of mind for many business leaders. According to PwC’s 2022 Supply Chain Survey, nearly 20% of operations and IT leaders said that insufficient supply chain localization was a major risk, and 40% cited it as a moderate risk. However, just 3% of respondents said increasing diversity of suppliers or segmenting them was a top priority in the months ahead – perhaps because nearshoring or reshoring is more likely a long-term play than a short-term solution.
… there’s a talent gap across the globe that can limit organizations on their ability to pivot at scale.
- Michel Roger, Managing Director, Accenture
New government regulations, such as the 2022 U.S. CHIPS and Science Act for semiconductors, will require companies operating in certain sectors to reign in their dispersed supply chains. But that will take time to make a difference.
In January, Intel announced details of its $20 billion investment in the construction of two new chip factories in Ohio. The company has the benefit of being one of few in the world (and the only one in the United States) that can perform both design and manufacturing in-house. CEO Pat Gelsinger says it will help the company build a stronger supply chain and ensure reliable access to advanced semiconductors. Intel expects the factory to come online in three years.
Government policies will drive location decisions in industries such as semiconductors, healthcare, defense, and the producers involved in electric vehicles, says Jim Kilpatrick, global supply chain network operations leader for Deloitte Consulting. “However, this degree of structural change will take many years,” he says.
Roger says that industries such as consumer goods, where manufacturers are slowly increasing their output, are evaluating new local facilities. But it will take at least a couple of years before they move forward.
5. Digital integration that enables real-time tracking and communications is paramount.
In terms of the overall complexity (or simplicity) of managing a supply chain, the level of digital integration that companies have built across supply chain nodes matters more than how geographically dispersed they are.
The key is to allow collaborative inventory planning at the network level, real-time tracking of goods, predictable and accurate lead times, and visibility into their suppliers’ suppliers – the tier-two and tier-three companies that are part of a modern supply chain. “These capabilities are not constrained by borders but by operating model, process, people, and technology,” Roger says. “Trade restrictions may come and go, but a flexible supply chain should be able to react to those.”
Many supply chain challenges of the past two-plus years could have been mitigated with better communication, greater transparency, and the right tools. In response to a drop-off in demand for new vehicles, for example, many automakers scrapped their semiconductor orders. Semiconductor manufacturers naturally shifted their production to meet soaring demand for products such as laptops, TVs, and gaming consoles. When consumers started shopping for new cars again, the automakers were out of luck. Greater communication and collaboration among automakers, their network of suppliers, and those suppliers’ networks of suppliers would have been beneficial.
Companies need to help their suppliers help them – whether they’re located in the same time zone or halfway around the world. A crucial element of the solution is sharing data related to demand trends and supply constraints and building closer relationships within an entire business network – not just the big tier-one suppliers (partners that a company directly conducts business with, including contracted manufacturing facilities or production partner).
Companies that implement technologies and digital processes that can boost responsiveness and flexibility at even lower costs can increase visibility across their entire supplier network to sense, anticipate, and respond to real and potential risks, Kilpatrick says.
Organizations in which offshore supply chain planning decisions are made offshore with little visibility into them suffered more from lack of transparency, slower decision-making, and poor visibility into shipment in recent years, says Roger. “It is, to a large extent, a gap in the operating model and digital integration,” Roger explains. Using technology to ensure timely, transparent decision-making is important.
As COVID-19 began its march around the world, 94% of Fortune 1000 companies were seeing supply chain disruptions as early as March 2020, according to an Accenture study at the time. But the pandemic was only one factor.
Long before the COVID-19 virus, the 2018 import tariffs were causing companies to reconsider the geographic makeup of their suppliers. Port congestion caused delays in receiving available goods, suggesting the need to localize more warehouses or production. Political friction between Taiwan and China has caused automotive and consumer product companies to worry about their Taiwanese supplier base. More recently, oil shortages resulting from the Russia-Ukraine conflict have increased energy and logistics costs, and supplier shutdowns in China have stemmed from sporadic energy use regulations.
The pandemic was an eye-opener, but it soon became clear that, for many companies, an unexpected border closure or a sudden port strike would leave them at sea (sometimes literally). There were often no backup plans because backup plans erode margins.
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