Nearshoring Trends Slow Offshoring

09/11/2011

 

With the economy still treading to stay afloat, supply chain executives in a recent survey expect nearshoring to increase over the next two years.  WT100 and the University of Tennessee’s recent survey of global supply chain trends shows that 52 percent of industry leaders anticipate production of U.S. goods to relocate closer to the States.

Nearshoring, the act of maintaining production or IT in a country in close proximity to your own, minimizes some of the logistics and problems associated with offshoring.  While American offshoring to countries with inexpensive land and labor forces like China and Japan is enticing to many businesses, product quality may diminish because of the distance and the enhanced risk of miscommunication. Japan’s earthquake earlier this year disrupted much of the global supply chain, and jolted executives into considering offshoring and outsourcing not as lucrative as it has been in the last decade.

Turnaround time for new production implementation lengthens when a company isn’t based in the States and has production half-way around the world.  Communication isn’t as fluid, as noted by the survey’s 28 percent of executives citing poor product quality. A company overseas may subcontract out production of a product, thus when businesses in the states need immediate changes to a product, multiple lines of communication need to be gone through first. This relay can easily become delayed and misunderstood, resulting in a subpar outcome. This can be seen with the drastic drop in outsourcing and offshoring through U.S. technology companies with 35 percent outsourcing services or manufacturing – a drastic change from the 62 percent in 2009, according to a study by BDO USA, LLP, a leading accounting and consulting organization

Labor overseas is also not as cheap as it once was. According to the U.S Bureau of Labor, China’s hourly compensation in the manufacturing industry more than doubled between 2002 and 2008, rising from $0.57 to $1.37. While this is still far under the U.S. manufacturing wage rate, rising fuel and transportation costs have decreased much of the profit once gained through the global supply chain. Crude oil prices are a contributing factor towards a push for nearshoring, with crude oil prices reaching a 30-month high at $114 per barrel in May.  Of the executives surveyed, 61 percent cited the spike in shipping costs to be the key reason of the perceived future utilization of nearshoring. Likewise, increased shipping costs and late product deliveries are a source of ill sentiment toward global supply chains.

Surprisingly, of those surveyed, 48 percent said that they do not analyze risk while making their outsourcing decisions.  Those who do, safeguard themselves mostly by doing business with an established provider and implementing a second domestic source that can be quickly implemented if necessary. In a 2010 survey conducted by Grant Thorton, a consulting firm, of those surveyed, 44 percent felt that they had received no benefit going overseas.

The survey highlights supply chain executives seeing a continued growth in the U.S.’s outsourcing to China, India, and Latin America (excluding Mexico). However, American nearshoring in Mexico is logistically smart for some businesses, since it’s an easily accessible border country and its transportation infrastructure has improved. Additionally, the cost of Mexican labor is much cheaper than compared to that of the U.S. “[T]he country has a lot of appeal right now because of its proximity to North American demand and the continuing need of many companies to improve their working-capital positions,” Chas Spence, a director in the Latin American Manufacturing Practice at Alix Partners, explained. “That appeal could grow if fuel prices continue to rise globally.” For other Latin American companies, English proficiency still needs to be overcome.

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