Many businesses who rely upon manufacturing have considered offshoring as a way of reducing costs. But they might be simultaneously asking, just what is nearshoring, and is it right for my business? After all, offshoring has been the smart choice for growing companies since the previous century. So, why change now?
But on the other hand, if nearshoring can be shown to be an improvement on the concept of offshoring, then why not choose to nearshore? It all comes down to understanding just what nearshoring is, how it works, and what challenges to avoid to do it right. And that’s precisely what we’re about to dive into.
So, what exactly is nearshoring? Simply put, nearshoring is when a company relocates or outsources a business function – typically manufacturing – to a foreign location near their home country.
By performing this business function in another country, you take advantage of that country’s tax benefits, lower labor costs, etc. And because the country is relatively close to the country in which the company is based, communication between the two facilities is not as challenging it would be across the world.
By way of contrast, offshoring is relocating to a location offshore or across the ocean. In the 1990s, US manufacturers found they could counter rising wages at home by outsourcing their manufacturing operations to China and other Asian countries where labor was extremely inexpensive. Back then, the global economic situation was relatively predictable and fuel costs were low.
But the situation has changed over the years. So manufacturers have begun looking for ways to bring that outsourced manufacturing closer to home.
Resiliency: What Nearshoring Can Do
This brings up a considerable point that must be mentioned when answering the question of what nearshoring is. Because it’s not just a process to relocate closer to home. It’s also a strategy many companies use to build resiliency into their business model.
The fact is, bringing your supply chain closer creates resiliency. And these days, resiliency is quite valuable. A few years ago, when the world was swept up in a supply chain crisis that caused backorders, shipping delays, and rigidity in the face of rapidly changing market factors, companies began questioning their global business model.
Geopolitical tensions and the COVID crisis strained supply chains that stretched around the globe. When time to market mattered most, many companies found they just couldn’t keep up. Their offshore operations were too far away, and their supply chains were spread too thin. Decades of overemphasizing lean manufacturing only exacerbated the situation even further.
As a result, those companies that had nearshored operations to Mexico or Canada found they had a strategic advantage. They were still taking advantage of other benefits like lower labor costs and reduced materials costs, but their products were located just across the border and well within reach. And through shelter and contract manufacturing, they were also able to scale up and down as the market fluctuated.
Without a doubt, when asking what nearshoring is and if it’s right for your company, it helps to understand its unique challenges and potential benefits. Because this form of outsourcing has them both.
Some of its challenges include:
But nearshoring to a place like Mexico is also full of benefits, too:
So, once we answer the question, what is nearshoring (and is it right for my business), the next question that follows is how to do it right. So, here’s a quick idea how to get started with nearshoring.
The first step is to define your goals. Clarify what you want out of a nearshoring arrangement. This will help you as you analyze wages, talent pools, distance, infrastructure, etc. Then home in on a location. Find the country, state, and city that make the most sense for your goals.
This is where you get serious. If you’re all in with nearshoring, then now is the time to choose a mode of entry and compare nearshore providers. These are the people who help companies settle into a new country. You can work with them on contract manufacturing or setting up your own maquiladora through a shelter corporation. Be specific in your selection process and ask the right questions. Consider their track record, time in the country, and how well they understand the nearshoring process.
Hopefully, you now know how to answer the question, what is nearshoring, and you’re better prepared to make a decision for your operation. Some helpful homework and a few key questions are all that stand between you and outsourcing success!