Nearshoring: The What, How & Impacts for SME’s

Nearshoring is a strategy used by companies to bring production closer to their primary market while still outsourcing certain operations abroad. The goal of nearshoring is to reduce transportation costs associated with sourcing materials or manufacturing goods overseas. While at the same time not compromising quality, safety, speed, and flexibility of the product’s supply chain. Since the pandemic all but destroyed the global supply chain, nearshoring has become an increasingly attractive option for many companies.

• Benefits of Nearshoring
• Challenges of Nearshoring
• How to Implement Nearshoring
• Strategies for Successful Nearsourcing Implementation
• What are alternative options for nearshoring?
• FAQ

Definition of Nearshoring

Nearshoring is defined as the practice of moving production, operations, and services to a country geographically close to where they are needed. The term was first used in reference to the trend of multinational companies shifting parts of their operations from expensive countries to locations with lower wages, such as Central and Eastern Europe.

Benefits of Nearshoring

The benefits of nearshoring are similar to those found in reshoring operations. However, they are focused on the nearshore location and markets. The key benefits of nearshoring include:

• Reduced cost – Nearshoring can reduce the cost of production, as labor and materials are typically cheaper in nearshore locations than in other international markets.

• Reduced transportation costs – Nearshoring also cuts transportation costs, since goods can be shipped more quickly and easily to their destination.

• Improved quality control – By bringing production closer to target markets, companies can ensure higher quality control over their products.

• Improved customer service – As production is done closer to home, businesses are able to provide better customer service and respond quicker to demand changes.

Companies can also benefit from tax incentives that may be offered in the markets they are nearshoring production to. This may include increased labor mobility across multiple locations if applicable. But it may also lead to an increased cost of goods and services.

Challenges of Nearshoring

Although eliminating global transportation costs is one way for companies to increase profits, it does not always come without challenges. The cons of nearshoring include:

• Cultural differences – Even though nearshoring reduces transportation costs, it may be less efficient if there is a language barrier or cultural divide between the two countries.

• Limited access to the labor force – In some cases, the nearshore market might not have the same availability of skilled labor as in other international markets.

• High cost of living – Some nearshore locations might have higher costs of living, making it difficult for companies to attract and retain talent.

Depending on what parts of the supply chain are being nearshored there could be additional upfront costs such as machinery or space requirements that were not previously taken into account. Additionally, regulatory policies associated with certain industries may need to be taken into consideration. Determining what operations should remain local versus those that can be outsourced overseas will need to be weighed. Get the Checklist! ✅

How to Implement Nearshoring

When implementing a near sourcing strategy for your company there are several key factors you will want to consider:

• Conduct a comprehensive assessment of your current outsourced operations. This includes supplier evaluations, pricing models, and potential savings from returning production closer to home. It also includes any associated financial risks from changing suppliers
• Have a detailed understanding of what types of resources your new operation requires by assessing the size and location needs needed
• Research any local incentives available where your new operation will be located
• Develop relationships with domestic suppliers who can provide high-quality materials at competitive prices
• Establish clear operating procedures for running an efficient operation based on these new resources
• Create a plan for transitioning staff who may have been displaced through outsourcing abroad

Strategies for Successful Nearsourcing Implementation

Successful implementation and integration of nearshore operations requires developing strategies specifically catered to achieving maximum efficiency. This includes:

1. setting production goals based on what customers need
2. ensuring processes are standardized across multiple plants or locations if applicable
3. training personnel on their respective roles related to supply chain management
4. maximizing production output coefficients compared to those found overseas

Lastly, leveraging technology such as automation can help create competitive advantages that were not previously available when sourcing production overseas which should factor into decision-making when considering non-domestic outsourcing versus nearshore options.

What are alternative options for nearshoring?

Options for nearshoring include:

• Onshoring (reshoring): Bringing production back to home markets
• Offshoring: Outsourcing operations to foreign countries
• Vertical integration: Integrating businesses from different stages of production into one larger entity
• Horizontal Integration: Merging companies operating in the same industry
• Contract Manufacturing: Outsourcing manufacturing activities on a contractual basis
• Joint Ventures: Collaborating with other companies or organizations to create a new entity focused on creating a unique product or service.

ESG options for nearshoring

• Develop ethical sourcing guidelines
• Implement a robust environmental compliance program
• Commit to responsible and sustainable development practices
• Incorporate renewable energy sources into production processes
• Select local suppliers who meet sustainability standards and metrics
• Utilize emerging technologies, such as automation, to minimize waste and improve efficiency
• Participate in community engagement initiatives that address social challenges faced by the local population
• Consider labor regulations when designing supplier contracts
• Monitor the environmental performance of vendors

FAQ

What are the risks in a supply chain?

• Financial Risk: Uncertainty over the financial stability of suppliers, customers, and other parties in the chain
• Regulatory Risk: Increased compliance scrutiny from government regulators
• Political Risk: Unpredictability of political outcomes and laws that may affect operations in different countries
• Reputational Risk: Negative public sentiment towards a company or its product/service due to ethical issues such as labor practices or environmental pollution
• Shifting Demand Risk: Changes in customer preferences and industry trends could disrupt production schedules or create supply shortages
• Operational Risk: Manufacturing failures and supply chain breakdowns due to poor process design or management oversight

What is sustainability and why is it important?

Sustainability is an approach to managing resources responsibly and developing systems that consider both short-term and long-term effects. It is important because it ensures that resources are used in a way that does not compromise their availability for future generations. It leads to a more equitable distribution of benefits across society. Additionally, sustainability helps reduce waste, conserve energy and natural resources, promote responsible practices, and foster economic growth. It is the cornerstone of Stakeholder Capitalism.

What is stakeholder capitalism?

Stakeholder capitalism is an approach to corporate governance and management that gives equal weight to the interests of all stakeholders. This includes employees, customers, suppliers, and the community at large. It is based on the idea that a company’s success is dependent on consideration. It balances treating each stakeholder fairly and creating value for them. By investing in all of its stakeholders, companies can create long-term value and build trust with those impacted by their actions.

The 6 cons of not investing in ESG?

The cons of not investing in Environmental, Social and Governance (ESG) initiatives include:

1. lower financial performance due to a decrease in public trust
2. missed opportunities for growth through the development of sustainable products and services
3. lack of access to capital from impact investors
4. potential for increased regulation and scrutiny from authorities
5. difficulty attracting top talent due to poor reputation
6. increased risk from climate change and human rights violations

What are the benefits of investing in ESG?

• More resilient businesses that are better placed to manage current and future risks
• Access to capital from governments, impact, and private equity investors
• Gain in public trust, leading to improved brand reputation
• Increased attractiveness for top talent (think Gen Z and quiet quitters)
• Opportunities for growth through developing sustainable products and services
• Potential reduction in regulation and scrutiny from authorities

What is a business model for sustainability?

A business model for sustainability is one that makes it possible for organizations to create social, environmental, and economic value while generating profits. It involves leveraging the power of business to solve environmental and social challenges. Sustainable business models typically include:

• Long-term strategies to reduce costs
• increase efficiency and minimize risk
• innovative approaches that contribute to a better future such as shared value initiatives
• circular economy solutions
• renewable energy projects or carbon-offsetting activities

What is a sustainability scorecard for SMEs?

A sustainability scorecard is a tool used to evaluate the environmental, social, and economic performance of an organization. It’s important for SMEs because it provides an easy-to-understand measure of their sustainability efforts. It allows them to benchmark themselves against their competitors and helps them identify areas where they can improve their performance. This in turn can help them capitalize on new opportunities to drive cost savings, increase efficiency, and reduce risk. Additionally, a strong sustainability scorecard can be beneficial when trying to attract investors or customers who are looking for companies that prioritize sustainability.

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