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Nearshoring & The Supply Chain

Moving manufacturing closer to the final destination has distinct benefits

12Apr

Shipping is the most important part of the supply chain. It’s also the most unpredictable and therefore the most complex to manage. In the age of Amazon Prime, there’s an unprecedented level of expectation on all retailers to deliver goods to customers within days, which gets pushed onto shipping companies who are then expected to also deliver goods within this time frame. Customers are also increasingly demanding full transparency with their orders, meaning that shipping companies have to provide real time progress on transportation.

Meanwhile, shipping companies are facing a raft of fresh challenges in the actual transportation of goods. These include rising labor costs, new regulations, and volatile oil prices - all of which mean that overheads are far higher. Shipping companies are also contending with a turbulent geo-political climate and adverse environmental conditions, increasing risk, particularly with El Nino due this year, and on top of this online streaming has cut into the volume of goods moving through distribution channels, which has cut revenue. Global supply chains have also lost a total of $23bn cargo to theft in 2015.

During the 1990s and the early 21st century, transportation services were cheap relative to the cost of holding inventory, which meant that organizations were incentivized to offer frequent delivery to customers at a low cost. However, all the aforementioned issues have caused transportation costs to rise, which has had a knock on impact on supply chains, meaning they have had to be more resourceful in their strategies.

One of the most important of these is the shift from offshoring to nearshoring sourcing strategies. Nearshoring is the transfer of production facilities to a territory closer to the final market. This has the obvious advantage of reducing the number of miles that shipments have to travel. Obviously, this means reduced freight costs and increased revenue. Freight costs go down as nearshoring means fewer miles traveled, and therefore smaller distance-driven transportation costs and less fossil fuel burned. This also means retailers are closer to customers and more responsive to the market.

The practice of nearshoring is increasing rapidly. In the recent AlixPartners survey of manufacturing and distribution companies serving North America and Western Europe, 32% of companies surveyed reported that they have already near-shored or are in the process of doing so to meet end-market demand, while 48% said near-shoring activities are likely within the next one to three years. This has tremendous implications for manufacturing industries in countries like China, which are suffering heavily as a result of the move. It also means long distance haulage - ships and planes - suffer.

Before companies reshore, they have to consider that China is still an extremely fast-growing market, and it may be necessary to move back in the near future anyway so the whole thing might not be worthwhile. However, the need for fast delivery, something that nearshoring immediately enables, makes it extremely likely that companies will continue to incorporate the policy into their strategies.

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