CSCMP's Supply Chain Quarterly
December 18, 2018
Forward Thinking

Interest in nearshoring remains strong, but trend may be slowing

Many executives are attracted to the potential cost savings of moving production closer to the end market. But concerns about safety, security, and the availability of skilled labor in these locations are giving some pause.

While there's a lot to like about the practice of "nearshoring," or moving production nearer to its ultimate end market, the business analysis firm AlixPartners LLC says that companies need to be cautious before they rush back "home" (or closer to home).

A new study by the firm, which was based on a survey of 248 senior-level executives, found that nearshoring strategies continue to find favor. Many manufacturers and distributors based in North America and Western Europe have already shifted production from low-cost countries half a world away to locations closer to end consumers. Additionally, nearly half of the executives surveyed reported that they are likely to engage in nearshoring activities within the next one to three years.

Respondents said they believe that the biggest advantages of nearshoring are lower freight costs, improved speed to market, and closer proximity to customers. Those that are already engaging in nearshoring or are planning to nearshore production expect to see savings of 8.5 percent on average.

Yet the survey also showed signs that the nearshoring trend may already be slowing, according to the AlixPartners article "Strategic Manufacturing Sourcing Outlook: Promise and Challenges in Global Nearshoring." Only 21 percent of respondents said that where to source manufacturing was a greater concern for their companies now than it was last year.

Part of the slowdown may be due to increasing concerns about safety and security in top nearshoring locations such as Mexico, Northern Africa, and the Middle East, AlixPartners says. Interest in Mexico as a manufacturing location, for example, has dropped from a high of 49 percent in 2012 to 31 percent this year, with only 42 percent of North American respondents expecting to see an improvement in safety and security in that country.

Likewise, half of Western European respondents said they believe conditions will deteriorate for nearshoring locations in North Africa. However, they do expect safety and security to improve in Eastern Europe, which is by far the preferred nearshoring location for Western Europe.

Other challenges cited include the availability and cost of skilled labor, quality and consistency, local government regulations, and tax rates.

Overall, the decision about whether or not to nearshore production remains a complicated one, says AlixPartners. The decision by the central bank in China to devalue the yuan is just one example of the many factors at play. "Recent moves by China to devalue the yuan make already complex manufacturing-sourcing decisions all the more complicated," said Foster Finley, managing director of AlixPartners and head of the firm's operations practice in the Americas. "These actions prove, as do what I'll call the nuanced results in our survey, that the world of manufacturing and supply chains is in constant flux, and that in such a world, there's no substitute for deep, strategic, case-by-case analysis and tight project management."

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