Nearshoring

What Is Nearshoring?

Nearshoring is a business strategy where a company moves its operations, such as manufacturing or services, to a nearby country rather than a distant one. This approach is a component of broader Supply Chain Management and global business strategies, aiming to balance the cost advantages of Outsourcing with the benefits of geographical and cultural proximity. Companies choose nearshoring to optimize various aspects of their operations, including logistics, communication, and responsiveness to market demands⁶⁰, ⁶¹, ⁶², ⁶³.

History and Origin

For decades, many companies adopted offshoring strategies, relocating production to distant countries primarily to reduce Labor Costs and increase Operational Efficiency. However, global supply chains began facing increasing pressures from geopolitical tensions, shipping delays, and rising transportation costs⁵⁷, ⁵⁸, ⁵⁹.

The COVID-19 pandemic significantly exposed the vulnerabilities and fragilities of these extended global supply chains, highlighting issues such as factory shutdowns, port congestion, and container shortages⁵³, ⁵⁴, ⁵⁵, ⁵⁶. This period acted as a major catalyst, prompting businesses and governments to rethink their strategies and prioritize resilience over pure cost efficiency⁵¹, ⁵². Policymakers and companies alike realized that a new paradigm was necessary for designing supply chain networks to improve agility and robustness⁴⁹, ⁵⁰. This shift accelerated the adoption of nearshoring as a strategic imperative, allowing companies to gain greater control and reduce risk by bringing operations closer to their core markets⁴⁷, ⁴⁸. The Brookings Institution highlighted this need for a reset in supply chain design to improve resilience and agility following the pandemic's disruptions.⁴⁶

Key Takeaways

• Nearshoring involves relocating business operations to a geographically closer country.
• It aims to combine the cost benefits of outsourcing with improved proximity and control.
• Key drivers include supply chain resilience, reduced Logistics Costs, and faster response times.
• Mexico and Canada are prime nearshoring destinations for U.S. companies due to their proximity and established manufacturing capabilities.⁴⁵
• Challenges can include higher labor costs than distant offshore locations, infrastructure needs, and regulatory hurdles.

Formula and Calculation

Nearshoring itself does not involve a specific financial formula. Instead, the decision to nearshore is based on a comprehensive analysis of various financial and operational factors. Companies evaluate potential Cost Savings versus upfront Capital Investment and ongoing expenses. This assessment considers variables such as:

• Transportation Costs ((T)): Reduced due to shorter distances.
• Labor Costs ((L)): Potentially higher than distant offshore locations but lower than domestic.
• Inventory Carrying Costs ((I)): May decrease due to shorter lead times and improved Inventory Management.
• Communication & Coordination Costs ((C)): Expected to decrease due to similar time zones and cultural proximity.
• Risk Mitigation Benefits ((R)): Quantifying the value of reduced supply chain disruptions and enhanced resilience.

The overall financial benefit of nearshoring is a qualitative assessment rather than a precise calculation, weighing these factors against the current operational model.

Interpreting Nearshoring

Nearshoring is interpreted as a strategic move to build more resilient and responsive supply chains in an increasingly uncertain global environment. It signifies a pivot from a sole focus on cost reduction to a more balanced consideration of risk, speed, and agility. When a company opts for nearshoring, it often indicates a desire for tighter control over its processes, better quality assurance, and quicker adaptation to changes in consumer demand or market conditions⁴², ⁴³, ⁴⁴.

For instance, businesses that previously relied on distant suppliers might interpret nearshoring as a way to reduce the impact of Geopolitical Risk or unforeseen Economic Shocks on their operations. It suggests a proactive approach to managing the complexities of global trade, aiming for a competitive advantage by enhancing supply chain stability and responsiveness.⁴⁰, ⁴¹

Hypothetical Example

Consider a U.S.-based electronics company, "TechGadget Inc.," that manufactures smartphones. Historically, TechGadget has offshored its component manufacturing to a country in Asia to benefit from very low labor costs. However, recent global events have led to significant shipping delays, increased Logistics Costs, and occasional quality control issues due to the vast distance and time zone differences.

TechGadget decides to explore nearshoring. After a thorough analysis, they identify Mexico as a viable option due to its geographical proximity, existing trade agreements like the USMCA, and a growing skilled labor pool. They establish a new manufacturing facility just across the border.

By nearshoring, TechGadget now experiences:

1. Reduced Transit Times: Components arrive at their U.S. assembly plants in days, not weeks, allowing for quicker responses to market fluctuations and reducing the need for large safety stocks in Inventory Management.
2. Improved Communication: Similar time zones facilitate real-time collaboration between U.S. design teams and Mexican manufacturing teams, leading to faster problem resolution and better product development.
3. Enhanced Control: TechGadget can more easily oversee production quality and ethical labor practices.
4. Lower Shipping Costs: While labor costs might be slightly higher than in Asia, the substantial reduction in freight expenses and import duties offsets this, leading to overall Cost Savings.

This shift allows TechGadget to maintain its competitive edge by ensuring product availability and quality while mitigating the risks associated with distant supply chains.

Practical Applications

Nearshoring is increasingly applied across various sectors as companies prioritize supply chain resilience and responsiveness. In manufacturing, companies producing goods like electronics, automotive parts, and medical devices are moving production to nearby countries to shorten lead times and reduce transportation expenses³⁷, ³⁸, ³⁹. For example, a 2022 Reuters Events study indicated that 67% of global retailers and manufacturers adjusted their material sourcing due to supply chain disruptions, with nearshoring being a key strategy to build flexibility into the supply chain.³⁶ UPS has also been actively engaged in supply chain mapping assessments for customers, identifying opportunities for nearshoring and even acquiring a Mexican logistics company to support this trend.³⁵

In the services sector, particularly in IT and customer support, nearshoring allows companies to access skilled talent pools in countries with similar time zones and cultural affinities, facilitating smoother communication and collaboration³³, ³⁴. This is particularly relevant for businesses seeking to expand into new markets while maintaining high service standards. Nearshoring also has broader implications for Economic Growth in host countries through job creation and increased Foreign Direct Investment.³⁰, ³¹, ³²

Limitations and Criticisms

Despite its advantages, nearshoring presents several limitations and criticisms. One significant challenge is the potential for higher Labor Costs compared to more distant offshore locations, which can sometimes offset savings in logistics and transportation²⁸, ²⁹. Companies must carefully balance these increased labor expenses against the benefits of proximity.²⁷

Another drawback is the need for substantial initial Capital Investment to establish new facilities or reconfigure existing supply chains, a process that can take months or even years to fully implement²⁵, ²⁶. Nearshoring destinations may also face their own infrastructure limitations, such as adequate electricity supply or water resources, which can hinder the seamless relocation of operations²⁴. Moreover, a lack of skilled workforce in certain nearshore regions or difficulties in aligning development practices and tools can pose challenges to successful implementation²², ²³. The OECD highlights that while diversification of suppliers can offer substantial benefits for shielding domestic production from shocks, partial onshoring (or nearshoring) may offer only smaller additional benefits, and warns against excessive government intervention that could create costly distortions.²¹ The OECD has also explored the broader complexities and risks involved in reshaping global value chains, suggesting that no single strategy is a "silver bullet."²⁰

Nearshoring vs. Offshoring

The primary distinction between nearshoring and Offshoring lies in geographical distance and, consequently, the level of operational control and responsiveness.

• Nearshoring involves relocating business operations to a country that is geographically close to the company's primary market, often sharing borders or similar time zones¹⁸, ¹⁹. This proximity typically leads to reduced Logistics Costs, faster shipping times, improved communication, and easier coordination due to less significant cultural and linguistic differences¹⁵, ¹⁶, ¹⁷. Nearshoring is often chosen to enhance supply chain resilience and agility, providing a balance between cost efficiency and operational control.¹⁴
• Offshoring, in contrast, entails moving operations to distant countries, often in different continents, with the primary aim of capitalizing on significantly lower labor and production costs¹², ¹³. While offshoring can offer substantial Cost Savings, it often comes with challenges such as extended lead times, complex logistics, considerable time zone differences, and potential cultural or communication barriers¹⁰, ¹¹.

Companies that are re-evaluating their global production strategies, especially in the wake of recent supply chain disruptions, often compare the benefits and drawbacks of both approaches to determine the optimal location for their operations.

FAQs

Why do companies choose nearshoring?

Companies choose nearshoring to enhance their supply chain resilience, reduce transportation and Logistics Costs, improve communication and collaboration due to similar time zones, and gain greater control over production and quality. It helps them respond more quickly to market demands and mitigate risks associated with distant supply chains.⁷, ⁸, ⁹

How does nearshoring impact supply chain resilience?

Nearshoring significantly boosts Supply Chain Management resilience by shortening lead times and reducing dependency on highly extended global networks. This allows businesses to react more swiftly to disruptions like natural disasters, geopolitical events, or sudden shifts in Market Demand, ensuring more consistent product availability.⁴, ⁵, ⁶

Is nearshoring always more expensive than offshoring?

Not necessarily. While nearshoring locations might have higher Labor Costs compared to very distant offshore destinations, the overall cost can be lower when considering reduced transportation expenses, lower inventory carrying costs, improved communication efficiency, and the value of mitigated risks. The total cost of ownership often makes nearshoring a more economically attractive option in the long run.¹, ², ³