Nearshoring: The Opportunity to Reduce Risk, Cost in Your Global Supply Chain
Thomas A. Cook
Nearshoring can be defined as follows: the practice of transferring a business operation to a nearby country, especially in preference to a more-distant one.
Nearshoring is a process that’s been more seriously considered by procurement and supply chain managers in the past five years and it’s anticipated by most professional sourcing executives to become a major factor in future years, implemented by most companies as a critical risk management tool.
Throughout modern business history – dating from the 1980s - leveraging spend in procurement consisted of four primary practices:
1. Overseas sourcing, particularly in China
2. Focusing on a few key suppliers
3. Lowering acquisition costs
4. Rough negotiations with carriers and service providers in the quest to lower freight costs
The Covid-19 pandemic we faced in the last two and a half years, with residual impact heading into 2023, has upended these long-held strategies, teaching us profound lessons in understanding the challenges in foreign sourcing and less diversification in our supplier base.
In the period of unprecedented constraints brought about by the pandemic, the consequence of the prior strategies was a major uptick in supply chain risk and costs. Risks manifested themselves in delays, unavailability of certain materials, parts and finished products, increased costs and significant uncertainties in our demand planning models.
Procurement and supply chain managers over the last 2 ½ years have had many great challenges which have taught them valuable lessons, leading to new strategies for 2023 and beyond.
Leading the new strategies are:
1. Diversifying the vendor/supplier base both by company and country of origin
2. Increasing the number of supplier/vendor options
3. Viewing “nearshoring” options
4. Seeking cost reductions in overall “landed costs” - not just acquisition and freight costs
Global companies impacted negatively by the pandemic, across all verticals including food import businesses, have begun to seriously explore options in all four areas outlined above.
Managing “landed costs” is a much-needed component of the nearshoring decision. Outlined below are the key areas of landed cost assessment:
The dissection and assessment of “landed cost” is taking each of these areas and modeling how nearshoring can provide benefit.
Acquisition cost is defined as what we pay for goods acquired, usually expressed as the FOB Price (Freight on Board/INCO Term). This brings the goods in the origin country to the port of export. It’s the price we pay plus the cost of freight from origin to the outbound gateway.
As a general rule, the acquisition cost of nearshoring is likely to be higher. But the other four areas of consideration could be much lower, mitigating the impact of the higher acquisition cost.
Manufacturing brought back to the Canada and the United States is happening, but slowly. Labor shortages are a major factor here, along with environmental and HR concerns.
However, bringing manufacturing to a country such as Mexico and working in the local Maquiladora program, could potentially have a huge advantage in all five areas that make up landed costs.
In many instances, the acquisition cost is the same or a small amount higher. But the freight costs are much lower, customs clearance is easier and less costly, import duties and taxes are significantly reduced or eliminated and the cost of distribution, depending upon location may be the same or a little less.
A case study is outlined below:
The benefits outlined above demonstrate the ROI in a simple comparison in coordinating manufacturing in Mexico as compared to China.
To this simple overview, other challenges must of course be considered: the nature of the product, quality control, production capability, etc. But the case study clearly demonstrates that when “landed cost” modeling is used it affords nearshoring to be a viable option.
In a “best practice” scenario, we believe that overseas manufacturing has value in reducing cost but we must also consider the risk that’s compounded when all our manufacturing is dependent on one country, a few suppliers and thousands of miles away where economic, political, climate and environmental concerns abound.
A preferred practice would be to not be wholly dependent upon foreign suppliers, such as in China, and diversify our supplier management by bringing a certain percentage closer to home, mitigating both risk and cost.
Nearshoring should be a serious consideration for any supply chain or procurement manager for the following reasons:
Foreign Trade Zones
For companies in Canada and the United States that want to consider bringing manufacturing back to their country and obtain some leverage in doing so should explore specially designed programs: Foreign Trade Zones in the U.S. and in Duty-free Manufacturing Tariff Regime in Canada.
These programs basically allow imports of raw materials and components duty free into specially designated manufacturing sites.
Duty deferral is a big advantage, with duty coming due only once the finished product comes out (is sold). Furthermore, duty may be considerably less, depending upon if a favorable tariff shift has occurred.
The FTZ Program in the U.S. is determined by individual locations, authorized by “grantees” under the International Trade Administration’s regulations.
The Tariff Manufacturing Program in Canada has no geographic restrictions, opening the entire country to access the benefits of duty-free manufacturing.
Both programs, nearsourcing and FTZ, create a pathway for reducing both risk and cost to imported products. In turn, if some or all imported products are exported, additional financial benefits and incentives may also exist.
In our discussion of nearshoring we need to briefly discuss the notion of “friendshoring”, which has been described as a portmanteau buzzword for the business strategy of running supply chains only through countries that are close political partners.
Past and current trade disruptions caused by political events have caused this phenomenon to move forward, since allied countries are more aligned to keep supply chain open and working to the mutual best interests of the countries involved.
As examples, countries that might fit into this profile as countries to source from or trade with: Mexico, South Korea, Vietnam, Malaysia, Indonesia, Japan and Brazil.
The U.S. has various forms of trade agreements with all the countries named above and, in some cases, it affords more competitive trade, such as through duty mitigation, relaxation of barriers and trade facilitation mechanisms in place – thus significantly reducing the impact of any challenges.
Any company seeking to bring risk management into their global supply chain procurement strategies would be well served by considering these “friendly markets” as viable options.
The article ultimately points out the need for procurement and supply chain managers to deeply assess all the parts that make up their supply chain, with full anticipation of finding areas where risk and cost can be reduced.
Of the many ideas discussed in this article, at least one or two should provide benefit to your organization’s global supply chain business model. It’s certainly worth the time to take a good look.
About the Author
Thomas Cook is Managing Director of Blue Tiger International (bluetigerintl.com), a premier international business consulting company on supply chain management, trade compliance, purchasing, trade and disruption management, global business and logistics. Tom was former CEO of American River International in NY and Apex Global Logistics Supply Chain Operation in LA. Tom has over 35 years’ experience in assisting companies all over the world manage their import and export operations. He is a member of the NY District Export Council, sits on the board of numerous corporations and is considered a leader in the business verticals he supports. Tom is also the Director of the National Institute of World Trade (niwt.org) a 30-year-old educational and training organization, based in NY. Both Blue Tiger International and the National Institute of World Trade are strategic partners of the Department of Commerce.
Tom has authored over 20 books on global trade and is finalizing a nine-book series titled “The Global Warrior … Advancing on the Necessary Skill Sets to Compete Effectively in Global Trade.”
2023 U.S. Food Import Industry Annual Report
Chairman's Report - John Sessler
North American Olive Oil Association - Mouna Aissaoui
Processed Foods - Brent Danielson
Nut & Agricultural Products - Richard Rosenblatt
National Honey Packers & Dealers - Andy Sargeantson
Regulatory and Trade Issues