nearshoring

What is nearshoring?

Nearshoring is a business tactic where companies move their operations to the closest country with a qualified workforce, favorable labor costs, or comparable time zone. The scope of operations may encompass manufacturing, marketing, customer service, or software development, among other pursuits.

Understanding nearshoring

Nearshoring is an approach where one company moves some of its operations to a less expensive nearby country.

Nearshoring is similar to the process of offshoring where a company moves its operations to another country.

The only difference between the two may be the location of the company or contractors who perform the work.

Offshoring is concentrated in countries with access to cheap labor, while nearshoring prioritizes distance.

The preference for proximity has important implications for efficiency.

This is because teams who work in comparable time zones are better able to communicate and synchronize their tasks and activities. 

Countries such as Brazil and Mexico with similar time zones to the United States became ideal nearshoring options in the early 2010s.

Mexico was also producing a significant number of skilled graduates at the time which increased its suitability as a nearshoring location.

Where is nearshoring most prevalent?

Here are five industries where nearshoring is common:

IT

Some western companies outsource IT operations to countries we touched on earlier such as Brazil and Mexico.

For companies in Europe, Ukraine, Poland, and Romania are ideal locations.

Customer support

Companies such as Uber, Amazon, and 3M have moved customer support operations to San Jose, Costa Rica.

Colombia is also a popular option, with thousands of new call center jobs created there in 2020 alone.

Automotive

Mexico is also the base for many automotive manufacturing operations with 80% of all vehicle exports destined for the bordering United States.

Companies such as Ford, General Motors, Audi, BMW, Nissan, and Toyota all have a presence there.

Pharmaceuticals

Several American pharmaceutical companies nearshore their manufacturing in Mexico.

Medtronic – a renowned medical equipment manufacturer – nearshored in the country as early as the 1970s.

Apparel

Zara parent company Inditex nearshores around 53% of its total production output to Morocco, Turkey, Spain, and Portugal.

In late 2021, Italian fashion firm Benetton shifted more than 10% of its production from countries such as Vietnam and China to several closer European locations.

The company has plans to halve its Asian production by the end of 2022.

Key benefits of nearshoring

Some of the key benefits of nearshoring include:

Cost-efficient

Nearshoring allows companies to hire cheaper labor.

If the labor is also located in a time zone where teams across countries can collaborate easily, costs are further reduced.

Workforce Access

Assembling in-house teams can be expensive and time-consuming for any company.

This is particularly true when skilled workforces need to be recruited and trained.

Nearshoring enables the business to access a ready-made workforce in a location that is convenient operationally.

Cultural fit

Since nearshoring involves establishing a presence in a nearby country, there is more chance that each party will share the same cultural perspectives and traditions.

A software development company based in Chicago, for example, would work well with a nearshoring partner in Vancouver, Canada.

Both countries approach business relationships the same way with common work cultures and ways of life.

Nearshoring vs. Reshoring

reshoring
Reshoring involves a company moving its manufacturing operations from a foreign country to the country in which it is based. The process is the opposite of offshoring, where manufacturing operations are moved overseas to access cheaper labor markets.

For the last two decades, one of the major trends in business has been offshoring part of the business.

This has led to new lightweight business models, such as drop-shipping.

dropshipping-business-model
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

In short, the flow worked pretty well for those who, years back, started a dropshipping business, as they could set up a website, outsource manufacturing of cheap items to China through Alibaba, and sell it back to the US.

Yet, with the complete disruption of the supply chain, after the pandemic, and the complete block of China, due to the zero-COVID policy of the government, many former Chinese suppliers have not been able to fulfill their orders.

This has led to a complete change, where the real costs of outsourcing most of the manufacturing to China have shown its drawbacks.

That trend has become clear, as in 2022, Apple, which for over a decade made China its main outsourcing partner for producing the iPhone (with Chinese Foxconn making most of Apple’s iPhones), is now planning to move the production outside China.

Just like Apple had been among the ones who opened the way to offshoring, Apple is opening the way to a new trend, restoring.

Of course, in Apple’s case, the company will move manufacturing to India and other countries outside the US.

But for many other companies, where supply from China had been cheap, convenient, and efficient, it worked pretty well until this mechanism completely broke down in 2022.

Today the cost of doing business has increased, and companies realized that to build a viable business in the long term, they needed to bring manufacturing back home.

Thus, we might see more and more companies, especially in the US, bringing back the supply side at home to have more control over it, even if, in the short-term might be more expensive.

Key takeaways

  • Nearshoring is an approach where one company outsources work to a less expensive company that is located in close proximity.
  • Nearshoring is common in industries such as IT, customer support, vehicle manufacturing, pharmaceuticals, and apparel.
  • Nearshoring has numerous benefits. The practice increases efficiency since both companies in the arrangement tend to work in closely aligned time zones. Nearshoring is also cost-effective and in some cases, avoids potential issues arising from cultural differences.

Connected Business Concepts

Vertical Integration

vertical-integration
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Horizontal vs. Vertical Integration

horizontal-vs-vertical-integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Decoupling

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

Entry Strategies

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.

Disintermediation

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.

Reintermediation

reintermediation
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

Scientific Management

scientific-management
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.

Poka-Yoke

poka-yoke
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.

Gemba Walk

gemba-walk
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.

Dual Track Agile

dual-track-agile
Product discovery is a critical part of agile methodologies, as its aim is to ensure that products customers love are built. Product discovery involves learning through a raft of methods, including design thinking, lean start-up, and A/B testing to name a few. Dual Track Agile is an agile methodology containing two separate tracks: the “discovery” track and the “delivery” track.

Scaled Agile

scaled-agile-lean-development
Scaled Agile Lean Development (ScALeD) helps businesses discover a balanced approach to agile transition and scaling questions. The ScALed approach helps businesses successfully respond to change. Inspired by a combination of lean and agile values, ScALed is practitioner-based and can be completed through various agile frameworks and practices.

Kanban Framework

kanban
Kanban is a lean manufacturing framework first developed by Toyota in the late 1940s. The Kanban framework is a means of visualizing work as it moves through identifying potential bottlenecks. It does that through a process called just-in-time (JIT) manufacturing to optimize engineering processes, speed up manufacturing products, and improve the go-to-market strategy.

Toyota Production System

toyota-production-system
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.

Six Sigma

six-sigma
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.

Read Also: Vertical Integration, Horizontal Integration, Supply Chain, Backward Chaining, Horizontal Market.

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