Supply chain strategies have undergone a significant transformation, with businesses increasingly adopting regionalization and nearshoring as alternatives to traditional globalization practices. The once-dominant approach of concentrating production in distant countries, primarily driven by cost considerations, is giving way to a more localized and resilient model. This shift has been catalyzed by factors such as geopolitical tensions, trade disputes, and the disruptive impact of the COVID-19 pandemic.
Nearshoring, the outsourcing of operations to nearby countries or regions, has emerged as a key strategy in this evolving landscape. In this article, we will explore the growing importance of nearshoring across various industries, examining the motivations behind this shift, the benefits it offers, and the potential implications for future supply chain strategies.
What is Nearshoring?
Nearshoring is a business strategy that involves outsourcing specific business processes or production to nearby countries or regions. Unlike offshoring, which involves outsourcing to distant foreign countries, nearshoring focuses on geographical proximity, aiming to establish production facilities or partnerships in neighboring locations.
Key characteristics of nearshoring include:
- Proximity: Nearshoring emphasizes selecting locations close to the company's home market, reducing transportation time and costs.
- Cultural and Time Zone Alignment: Nearshoring often involves choosing countries or regions with cultural similarities and overlapping time zones, facilitating effective communication and collaboration.
- Supply Chain Optimization: Nearshoring aims to enhance supply chain efficiency by shortening lead times, improving responsiveness to market demands, and reducing overall operational risks.
What is the Difference Between Nearshoring & Onshoring?
Onshoring refers to the practice of locating production facilities or operations within the same country as the company's headquarters. Unlike nearshoring, which emphasizes proximity to the home market, onshoring prioritizes the local economy and domestic workforce.
The key distinction between nearshoring and onshoring lies in the geographical scope. Nearshoring extends beyond national borders to take advantage of neighboring countries, while onshoring focuses exclusively on domestic production.
Other types of supply chain strategies include:
Offshoring
Offshoring involves outsourcing business processes or production to distant foreign countries, often driven by factors such as lower labor costs or specialized capabilities. In contrast to nearshoring, offshoring emphasizes cost savings rather than geographical proximity. Offshoring destinations are typically located in regions with significant cost advantages, such as Asia or Eastern Europe.
Reshoring
Reshoring refers to the process of bringing previously offshored production back to the company's home country. This strategy is driven by factors such as rising labor costs overseas, quality control concerns, or the desire to support domestic manufacturing. Reshoring aims to restore or enhance local production capabilities and supply chain resilience.
Common Misconceptions and Cost Comparisons
When considering the costs of local production versus overseas production, it's important to address the misconceptions that often arise. By debunking these misconceptions, we can gain a clearer understanding of the true cost dynamics.
Beyond Labor Costs
One common misconception is that labor costs are the sole determinant of production costs. While labor costs do play a significant role, it's crucial to consider the total cost of ownership (TCO). TCO encompasses a broader range of expenses, including logistics, transportation, inventory carrying costs, intellectual property protection, and the costs associated with quality control. By considering the TCO, businesses can make more accurate cost comparisons between local and overseas production.
Hidden Costs of Offshore Production
Offshore production may initially seem more cost-effective due to lower labor costs. However, it's essential to account for the hidden costs that can arise from offshore production. Logistics expenses, such as longer shipping times, increased transportation costs, and the complexities of managing a global supply chain, can impact overall profitability. Quality control challenges due to geographical distance, cultural differences, and language barriers may lead to additional expenses. Communication barriers and time zone differences can also hinder collaboration and increase operational costs. Considering these hidden costs is crucial for making an accurate assessment of the true cost implications of offshore production.
What Categories are Better Manufactured Regionally?
Nearshoring has proven to be particularly advantageous in industries that require agility, quick response times, and close collaboration between suppliers and manufacturers.
Since fashion trends change rapidly, the ability to respond quickly to market demands is critical. Nearshoring allows fashion brands to reduce lead times, enabling them to adapt their production and inventory levels more efficiently. With shorter supply chains and proximity to the target market, brands can closely monitor market trends and consumer preferences, facilitating faster decision-making and reducing the risk of overstocking or missed opportunities.
Furthermore, the textile and apparel industry often involves intricate manufacturing processes, involving the coordination of various suppliers and the need for frequent quality control checks. Nearshoring enables brands to have better oversight of production, ensuring consistent quality and timely deliveries.
Additionally, nearshoring in the textile, fashion, apparel, and accessories industry supports sustainability efforts. By manufacturing closer to home markets, brands can reduce their carbon footprint by minimizing long-distance transportation and lowering associated greenhouse gas emissions. This aligns with the growing consumer demand for sustainable and locally produced fashion.
The automotive industry is another industry that benefits from the nearshoring trend. It relies on just-in-time manufacturing and benefits from shorter lead times and improved collaboration between suppliers and manufacturers. The electronics industry, with its fast-paced product cycles and demand for technological innovation, can also benefit from the proximity and faster response times offered by nearshoring.
Advantages & Benefits of Nearshoring
Nearshoring offers several advantages compared to other outsourcing strategies:
Reduced Supply Chain Risk
Nearshoring offers a more resilient supply chain by reducing dependence on distant and potentially unstable regions. Proximity allows for faster response times to market changes, natural disasters, political disruptions, and other unforeseen events, minimizing supply chain disruptions.
Shorter Lead Times
Nearshoring provides significant advantages in terms of time-to-market and agility, allowing companies to respond quickly to market demands and changes in consumer preferences. This enables companies to quickly adjust production volumes, introduce new products, or modify existing ones based on evolving customer preferences and market trends.
Lower Inventory Holding Costs
Proximity to the market enables companies to adopt a "just-in-time" inventory management approach. Nearshoring reduces lead times, allowing for more accurate demand forecasting and inventory planning. Companies can maintain lower inventory levels, minimizing storage costs, and the risk of excess or obsolete inventory.
Improved Communication & Collaboration
Nearshoring to countries or regions with shared time zones improves coordination and communication between teams. Real-time collaboration becomes easier, reducing delays caused by time zone differences. This facilitates faster decision-making, problem-solving, and smoother workflow across the supply chain.
Enhanced Quality Control
Nearshoring often leads to improved quality control as companies have greater visibility and control over production processes. Being geographically closer to the manufacturing facilities allows for easier oversight, regular inspections, and quicker resolution of any quality issues that may arise.
Sustainability benefits
By locating production facilities closer to the home market, companies can minimize shipping distances and take advantage of more cost-effective transportation options. This can lead to substantial savings in terms of freight costs, customs duties, and import/export fees. By working with suppliers in regions that prioritize worker safety, fair wages, and adequate working conditions, companies can also demonstrate their commitment to social responsibility and ethical sourcing.
Current Nearshoring Trends
Latin America has become a region of focus for nearshoring initiatives, with Mexico, Brazil, and Costa Rica standing out as hotspots. However, it is Mexico that has gained significant traction in the nearshoring landscape, attracting attention from businesses worldwide. According to FourKites data, shipment volume from Mexico to the U.S. has experienced a remarkable 20 percent year-over-year increase.
Mexico vs China — a Shift with Favorable Trade Agreements
The nearshoring trend to Mexico is also influenced by a shift away from heavy reliance on manufacturing in China. According to OTEXA data, while imports of apparel and textiles from China decreased by 32.1 percent year-over-year, Mexico's imports declined only slightly at a rate of 1.6 percent. This shift signifies a strategic move by companies to diversify their sourcing options and reduce their dependence on a single manufacturing hub.
Mexico's geographical proximity to the United States and Canada, along with the preferential tariffs provided by the United States-Mexico-Canada Agreement (USMCA), make it an appealing choice for nearshoring projects. Moreover, Mexico boasts trade agreements with 48 other countries, further enhancing its attractiveness as a manufacturing and export hub.
Economic Impact and Benefits
Nearshoring to Mexico offers significant cost advantages and economic benefits for companies. As consulting firm PwC Mexico reports, implementing nearshoring strategies in Mexico can lead to a reduction of up to 23 percent in operating costs. This substantial cost savings, combined with the proximity to major markets, positions Mexico as an attractive destination for businesses looking to optimize their supply chains.
The Inter-American Development Bank (IDB) predicts that Latin America and the Caribbean could receive over US$78 billion per year from nearshoring, with Mexico expected to capture a significant portion, amounting to approximately US$33.5 billion annually. Mexico's six major markets have witnessed a doubling of net absorption from 2019 to 2022.
Brands Shifting Focus to the Americas
According to a survey conducted by McKinsey & Co., 71 percent of chief procurement officers at clothing companies plan to increase their nearshoring share, with 13 percent expecting to do so by more than 10 percentage points. Central America is particularly attractive to U.S. companies, with approximately eight out of ten North American apparel players planning to increase their sourcing value share in the region.
The rise in nearshoring activities is supported by data on denim imports. In the United States, blue denim apparel imports from Western Hemisphere countries increased by 40 percent year over year, with Mexico experiencing a 43 percent gain and countries in the Central American Free Trade Agreement (CAFTA) seeing a 29 percent increase.
One of the key drivers of nearshoring in Central America is the uncertainty surrounding forced labor in China's Xinjiang region. The U.S. government's actions on Xinjiang, including the signing of the Uyghur Forced Labor Prevention Act, have prompted brands and retailers to reassess their supply chains and seek closer proximity to their markets.
Central America, particularly Honduras, has attracted investments from companies like Parkdale Mills, a North Carolina-based manufacturer, which plans to invest $150 million in building a new yarn spinning facility in Honduras. This investment aims to support job creation and shift production away from supply chains in Asia.
Brazil is also experiencing an increase in demand for its products, particularly from the United States. Companies are seeking to diversify their sourcing locations to mitigate risks and reduce reliance on a single producer. Brazilian footwear manufacturers, such as Savelli and Pegada, have seen rising orders and are working toward sustainable production practices to differentiate themselves in the market.
In addition to economic factors, sustainability is a growing consideration for brands when choosing sourcing locations. Countries like Guatemala, with a significant renewable energy portfolio, are attracting companies that prioritize addressing carbon emissions.
Overall, the shift toward nearshoring in the Americas reflects a strategic move by brands and retailers to de-risk their supply chains, ensure transparency, and reduce dependence on China and Asia. With the right investments in local infrastructure and continued collaboration, doubling exports from Central America and Western Hemisphere trade partners within three to five years is considered achievable.
Nearshoring Success Story: Supply Chain Diversification to Meet Market Demand
A global sportswear brand faced significant challenges with delayed shipments and longer lead times resulting from their manufacturing operations in Asia. These difficulties not only hindered their ability to meet market demand but also caused a decline in sales and market share. Determined to find a solution that would enable them to capitalize on seasonal trends and improve their supply chain efficiency, the brand turned to nearshoring.
In collaboration with Melengo, a trusted partner specializing in nearshoring strategies, the sportswear brand embarked on a transformative journey to establish a local-for-local solution in the Americas. The first step was to conduct pilot programs as proof of concept, ensuring that the product quality and consistency from the Americas matched that of their Asian production. Melengo carefully developed identical textiles in the Americas, considering factors such as weight, quality, costing, and color. By partnering with a garment factory in Guatemala equipped with in-house screen printing and embroidery capabilities, they were able to achieve garment construction and decoration quality that mirrored their goods produced in Asia.
The results were remarkable. Through nearshoring, the sportswear brand successfully reduced their production turnaround time from nine months to just three months. This newfound agility in the supply chain empowered the brand to respond swiftly to market demands, test new ideas, and explore trending colors. With the expanded manufacturing infrastructure in the Americas, the brand enhanced their competitive edge in a fast-paced and dynamic industry driven by social media influence. The successful implementation of nearshoring not only improved their market share but also positioned them for sustained growth in the ever-evolving global apparel market.
Explore Nearshoring with Melengo
Brands face significant challenges when it comes to manufacturing their products. Lengthy lead times, high costs, and coordination issues with suppliers can hinder their progress. That's where Melengo comes in.
With our integrated network of manufacturers in the Americas, we offer a one-stop shop for product manufacturing. Leveraging the nearshoring trend and our industry expertise, we help brands launch new products faster, more sustainably, and affordably. Our streamlined platform ensures real-time communication and simplifies manufacturing workflows, from design and development to sourcing raw materials, components, and manufacturing.
Partner with Melengo and overcome manufacturing challenges with ease. Say goodbye to lengthy lead times, high costs, and coordination headaches. Experience a seamless manufacturing journey that empowers your brand to thrive. Reach out to us today.
