The goals on the floor of the plant remain unchanged. A successful manufacturer must deliver a quality product at a competitive price and still meet hard deadlines. The challenge for many small and medium-sized manufacturers is remaining a viable option against larger global companies. As companies seek to reduce supply chain risks to growth, they are asking whether nearshoring is an opportunity for growth. Outsourcing manufacturing is a common way to increase capacity while maintaining low capital expenditures (CAPEX). However, companies have to be cautious when selecting the right partner.
Nearshoring to a neighboring country can be an attractive option given the current supply chain disruptions companies have faced after the COVID 19 pandemic and the invasion of Ukraine. The Wall Street Journal reported: “Treasury Secretary Janet Yellen called for a reorientation of the world’s trading practices in the wake of Russia’s invasion of Ukraine, pushing again for countries to become less reliant on China for critical components like semiconductors.”
US companies must explore nearshoring alternatives to mitigate considerable supply chain and procurement risks.
1. Employee Shortages and Turnover
There is a shortage of talent in the marketplace, and many skilled workers are expensive and difficult to find. For many manufacturing companies hiring young talent out of school and training them is costly and time consuming. In addition, it’s expected that after a few years of training, some of the trained young professionals will be lured by larger companies offering higher salaries and more growth opportunities. Turnover is expensive because it’s time consuming and the knowledge drain for smaller companies costly.
By nearshoring, manufacturing companies can access skilled and trained workers through a partner. The costly process of seeking, hiring, training, and losing talent are minimized.
Unlike the US, many of the neighboring countries in the Americas have high unemployment rates and therefore have no labor shortages. For US manufacturing companies experiencing difficulties hiring talent, nearshoring can help increase profits.
2. Proximity to the US
One of the most significant issues with offshoring is the distance between the US and the country where the supplier is located. As fuel prices continue to increase and airlines struggle to scale back their operations, international travel has become more expensive. Costly travel to visit potential suppliers and to inspect production and safety processes can hit profits. For manufacturing companies, time is money, and crossing the pacific can be very expensive.
The invasion of Ukraine, recent port closures in China, and political tensions between China and Taiwan have made offshoring to distant countries risky. Many US manufacturers circumvented tariffs imposed on China by the Trump administration by offshoring to other Asian countries. However, many companies still feel the pain of supply chain disruptions on the pacific coast, despite moving away from China.
Nearshoring reduces travel time and costs significantly, increasing profits. Inspecting the product and the production process is less demanding and reduces risk. Products spend less time at sea, reducing lead times and minimizing uncertainty. Nearshoring reduces costs but, more importantly, minimizes risk and can help you increase profits.
3. Increased Flexibility
Finding local suppliers gives your company flexibility in its operations. You’ll have lower transportation costs and shorter shipping times, which means more reliable alternatives.
When nearshoring manufacturing, quality, and reliability become your biggest concerns. If you have any production issues and need to audit your nearshoring partner, you can easily take a car or plane and visit them in person. Quality problems in manufacturing can erase profits from your bottom line. Flexibility to inspect and address any potential quality problems when nearshoring can help you increase profits.
The negative impact some manufacturing companies experienced with supply chain disruptions was unprecedented. Many manufacturers are still recovering from the financial impact. As a result, many companies are making use of nearshoring as an alternative to offshoring. In fact, over 70% of US businesses are moving production closer to our shores.
Nearshoring Your Supply Needs
Nearshoring can result in substantial savings and more flexible manufacturing capabilities for certain companies. Small and midsize companies might benefit from nearshoring rather than increasing their manufacturing capacity during uncertain times. Managers should weigh the cost benefit of outsourcing or building in house but, more importantly, should assess the risk of offshoring to distant countries. After all, capital is always a constraint, and allocating it appropriately is critical for any manufacturing company.