Thinking about Nearshoring? Do Your Homework.

Satellite image of Aeolian Islands, Italy

Every year, I look forward to the Ariba LIVE  Conference – and not just because this spring’s show was in Las Vegas. When you get some of the smartest supply management professionals together under one roof, you’re guaranteed to have a few aha moments. And last week’s conference was no exception.

One of the topics on people’s minds was nearshoring, or outsourcing business functions like manufacturing, IT or customer support to companies that are closer to home and have a degree of cultural affinity.

There’s a hard numbers game propelling the nearshoring trend. The economic incentive to outsource is evaporating, with even China running short of workers to support low-cost manufacturing. Throughout Southeast Asia, growth in the service-sector is fueling a stronger middle class, wages are going up, and there’s a dramatic shift away from an industrial economy. All these factors make nearshoring a more attractive and economically viable option today.

We’ve been talking about nearshoring for years. But it’s hardly a flip-switch change, so it’s taken time to gather real-world learnings. How well does it actually work? What are the tradeoffs?

In a stark reversal of outsourcing to less expensive countries, companies like Apple and BMW are now manufacturing some products in the United States. These moves speak volumes.

Let me just say that I’m a fan of nearshoring. The upsides are a little hard to quantify, because keeping teams in the same time zone has a lot of implications. I’m going to boil it down to two main benefits: better communication and good PR.

  • Enhanced supplier innovation and collaboration, no 15-hour flight required. With outsourced services like manufacturing, IT and support closer to home, it’s easier for companies to work directly with production, R&D and IT to ensure quality, cost control and even find new ways to create better products and services. In my previous life, I worked in product development and saw how innovation can stall – sometimes dramatically — when development teams get outsourced. Sometimes, proximity really is everything.
  • Less risk and greater competitive advantage. Let’s be honest, there’s often a stigma associated with outsourced labor, especially after the series of headlines regarding worker safety and wages in Bangladesh and China. Consumers and businesses are more sensitive to this than ever before, calling for more ‘Made in America’ products and U.S.-based services.

All this isn’t to say that nearshoring is right for every business. Many companies, some successful, some not, move their operations – and spend a million dollars or more doing it – without any data to back up their decision. Here are a few questions you need answer, and data you need to gather, to determine the best place to relocate.

  • What’s the demographic makeup of the area? Will you have the staffing resources needed?
  • How many customers and prospects are in close proximity?
  • What’s the economic outlook?
  • What are the risk factors: weather, social, political?

Rash decisions won’t help your business. Even as a nearshoring proponent, I caution you to get the insights you need to get nearshoring right, the first time.

Posted in Credit & Risk, Supply Chain Management by Phil Fisher

Phil Fisher is Senior Director of Partner Solutions Strategy and D&B.

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