Nearshoring

A primer on the nearshoring trend, the benefits of manufacturing closer to home, and Asia’s attempt to offset the nearshoring trend

In today's globalized economy, businesses are constantly exploring strategies to optimize their supply chains. One such approach gaining significant traction is nearshoring. Unlike offshoring, which involves moving operations to distant countries, nearshoring brings manufacturing closer to the end consumer. 

With Mexico emerging as a prime nearshoring destination, companies are reaping the benefits of reduced costs, faster shipping, and supply chain resilience.

Since nearshoring is becoming somewhat of a buzzword, I wanted to use this newsletter to explore the key components of the practice to help you determine if this is something worth keeping your eye on, especially if you work with manufacturers and suppliers in China.

Mexico: A favored nearshoring destination

According to the U.S. Census Bureau, Mexico recently surpassed China as the United States' primary trade partner, accounting for 16.1% of total trade. This shift reflects the growing preference for nearshoring operations in Mexico.

The country's proximity to the U.S. market provides several advantages. For instance, once a truck crosses the border, it can reach any point within the U.S. in just four to five days. For direct-to-consumer companies with manufacturing operations in Asia, this is a game-changer in terms of simplifying supply chains and lowering logistics costs. They could even ship products to consumers directly from manufacturing sites.

Less overstocking, faster shipping

By manufacturing products nearby, companies can eliminate the need for expensive warehouse chains and excess inventory. Nearshoring enables a more agile manufacturing process known as "manufacturing on demand." 

Instead of producing goods in anticipation of demand, companies can produce goods when an order is placed. This approach reduces inventory costs and eliminates the risk of overstocking, ultimately leading to improved profit margins.

While nearshoring does not eliminate the manufacturing time required to fulfill an order, it significantly reduces shipping time. Customers benefit from shorter wait times due to the proximity of manufacturing facilities. Compared to waiting weeks for products to arrive from overseas (those of us who have ordered furniture know this story), nearshoring ensures that the shipping process is faster and more reliable.

Easier returns, more resilience

If a product is damaged and needs repaired and restocked, nearshoring eliminates the need for a lengthy and costly voyage across the seas. Instead, returns can be processed and resolved locally, minimizing the time and expense associated with international shipping. This streamlined approach not only enhances customer satisfaction but also reduces costs for businesses.

It also creates more resilient and flexible supply chains. Nearshoring reduces reliance on distant suppliers and mitigates disruptions caused by global events. By moving production closer to the end market, companies can respond swiftly to changes in demand and reduce lead times.

Friendshoring vs nearshoring

A fun concept called “friendshoring” was presented in this article. 

While friendshoring and nearshoring both aim to optimize supply chains, friendshoring focuses on sourcing from trusted suppliers regardless of their location. For example, if you found a supplier in China that created similar quality products as a supplier in Mexico but the China supplier was referred to you, more reliable, and less expensive, the benefits of nearshoring in Mexico might not outweigh the benefits of having a trusted supplier in a distant land.

In contrast, nearshoring emphasizes the physical proximity of manufacturing facilities to the end market. According to a 2019 survey, 75% of companies expressed interest in nearshoring, recognizing the value of bringing production closer to their customers.

The nearshoring trend which originated in the 1990s continues to gain momentum. However, new US-Asia trade pacts being signed that exclude China could convince U.S. companies to give Asian countries a second chance. The question is: can the benefits of doing business in Asia outweigh the benefits of nearshoring?