Nearshoring and Reshoring: Getting Your Products Closer to Your Customers
by Megan Smith
It takes a village to raise a child. With the modern complexity of the global supply chain, even the most self-sufficient companies must surround themselves with a team of well-qualified industry partners in order to thrive given the current state of global logistics.
With supply chain interruptions coming from a virtual laundry list of sources, the traditionally effective model of trans-Pacific shipping has essentially run aground. The key to improving your own supply chain resiliency is enlisting the help of the right people, in the right place, at the right time via outsourcing.
The term “outsourcing” carries negative connotations, however. The phrase conjures up an image of valuable American jobs being sent overseas. But outsourcing is much more integral to the global supply chain than its detractors want you to believe. Talking authoritatively about the subject requires that you use a more nuanced set of terms in order to adequately situate offshoring in the proper, globally connected context.
Today, the team at Symbia Logistics will discuss two such sub-categories of outsourcing, nearshoring and reshoring, and a cost/ benefit analysis of each subtype. But first, some definitions.
What is Nearshoring?
Let’s start with the basics. Outsourcing is the practice of employing a third party to handle aspects of your company’s operations. Take call centers, for example. However, outsourcing has grown over the years to include a huge array of job duties. Outsourcing functions such as IT, accounting, or marketing are currently in vogue.
When you outsource a business function to another country, the term is called “offshoring”.” This is the paradigm most customers associate with outsourcing. Many people think of outsourcing as a way of getting cheap, unskilled labor. Still, in today’s globalized market, more companies are looking to outsource jobs that require specialized knowledge and expertise.
So how does nearshoring compare with offshoring? By definition, nearshoring is the practice of outsourcing labor to an adjacent country. The entire point of outsourcing/ offshoring/ nearshoring is reducing your labor costs, especially when it comes to large-scale work. But as the complexity of the outsourced job roles continues to increase, more and more employers are looking to harness talent, especially in STEM-based fields, from a regional job pool. Moreover, nearshoring allows those employers to maintain a tiger level of oversight on their respective projects than outright offshoring can provide.
What is Reshoring?
Outsourcing rose to prominence during the 1980s alongside the rapid deregulation of the American business sector. It was seen as a way to minimize expenditure while maximizing profits.
Now, more than 40 years later, the offshoring industry has evolved to such a degree that many companies are reversing their previous choices by repatriating jobs back to the US. This technique is known as “Reshoring.” You might also hear the term referred to as inshoring or backshoring.
Given that the point of outsourcing labor is to reduce your costs and improve your operational effectiveness, why would any company want to employ the reshoring method? That brings us to our cost/ benefit analysis. For every advantage that outsourcing, offshoring, and nearshoring provide, there’s a trade-off.
The Pros and Cons of Nearshoring
Let’s take a look at the pros and cons associated with nearshoring. To understand the primary benefit of nearshoring, it’s helpful to keep the point of this outsourcing method firmly in mind: lowering your labor costs while expanding the potential talent pool available to you. The primary advantages of nearshoring, however, come in the form of proximity and familiarity.
Businesses operating in the US, Mexico, and other Latin American countries have emerged as the top nearshoring destinations. With nearshoring, you keep essential elements of your operation relatively close to home rather than sending them overseas. Therefore, nearshoring makes mutual collaboration with 3rd party vendors easier to conduct. Not only do you stand a greater chance of sharing cultural similarities with your contractors, which in turn facilitates better communication, but you also have a better understanding of their overall market. Chances are, there will be significant overlap between important factors such as:
Average level of education
Cost of materials and services
General infrastructure costs
Each of these factors helps to establish a commonality that’s lacking in the world of offshoring, leading to leaner and more adaptable business practices.
Oversight is another important advantage of the nearshoring schema. Your relative proximity to your vendors gives you greater insight into the effectiveness of their workflows and any large-scale impediments to their efficiency. With nearshoring, chances are neighboring nations are in the same time zone as you, making coordination with your vendors easier.
The one disadvantage of nearshoring is the associated cost. The similarities between our culture and adjacent allies mean that labor prices will ultimately be similar. Nearshoring, unfortunately, doesn’t have the same cost-saving potential as offshoring does.
The Pros and Cons of Reshoring
The concept of reshoring brings up an important question. If a company initially transitioned some aspect of its operations overseas —or to an adjacent country— to save money, why would they now want to bring back that department? The answer is complicated and partly driven by our current supply chain upheaval.
In years past, before the effects of the COVID-19 pandemic, labor was cheaper overseas. Without a significant interruption to the supply chain, offshoring and nearshoring were seen as effective and cost-efficient alternatives to local labor. Under shaky and imploding supply chains, now they cost more than they are worth.
COVID-19 and supply chain disruption might seem like the sole driving factor on paper, but in reality, reshoring had been occurring long before the pandemic. It’s estimated that more than 1,300 companies have moved back to the US in recent years —or are at least planning to. The result? A potential windfall of more than 443 billion dollars injected back into the US economy.
That is the primary advantage of reshoring: promoting growth at home. The American labor force is highly skilled and exceptionally diverse in its skillset. Historically, the quality of American-made goods has been unmatched. The advantage is a reinvestment in our own country’s logistics and infrastructure, which in turn yields $2.00 in revenue for every dollar invested.
The downside of reshoring? The process itself can be costly, especially in terms of securing real estate that’s suitable for your business. Moreover, by reshoring, you are banking on an investment that might not mature. Instead, you’re giving up access to foreign supply chains, and you aren’t saving on labor costs.
Outsourcing has become a necessary component of global logistics. It takes a village, after all. Fortunately, there are many different ways to secure the expertise and human resources that you need. In the end, the choice is yours.
For more news and information on the state of the global supply chain or to bolster your own supply chain resiliency, please contact Symbia Logistics today.