Numerous companies are setting up production increasingly closer to their end customers

Nearshoring, or the benefits of producing close to home

January 5, 2024

Digitalization and globalization are making connectivity between countries simpler by the day. Markets have become interconnected thanks to advancements in transportation and the reduction of delivery times. As their products reach farther and farther, numerous companies are choosing to set up production increasingly close to their end customers.

What is the meaning of nearshoring?

Nearshoring is the outsourcing of part of a business’s services to other organizations in neighboring foreign countries or bringing production closer to the consumer territory. These locations comprise nearby destinations in a similar time zone, facilitating communication and expediting responsiveness and transfers of goods. This strategy is aimed at lowering costs while staying closely aligned with your original market. It shouldn’t be confused with offshoring, where manufacturing is moved to distant countries to economize on processes, often at the expense of proximity.

One of the main objectives of establishing services in neighboring countries is to maintain fluid communication with work teams. By being closer to your products’ final destination, you’ll have a shorter, more resilient supply chain.

Shifting from offshoring to nearshoring can be beneficial when you have trade agreements with nearby countries. In addition to bringing down transportation costs, customs procedures run more smoothly, and goods are moved efficiently. Adopting this strategy — i.e., bringing production centers closer to final consumers without sacrificing international trade — shortens delivery times and boosts competitiveness.

Nearshoring leads to lower transportation costs and efficient goods movements
Nearshoring leads to lower transportation costs and efficient goods movements

From industrial offshoring to deglobalization

For years, numerous companies relocated or outsourced their production centers thousands of miles away (particularly to countries such as China, Brazil, and India). But that trend has begun to reverse. Businesses that once left their regions of origin are now returning to their home continents. This could result in a market with less reliance on industrial hubs. So, the term nearshoring stems from the once more widespread concept of offshoring.

Example: the case of Mexico

One of the countries that has gained the most from nearshoring in recent times is Mexico. US and Canadian companies are moving part of their services to their southernmost neighbor, entailing benefits for both parties. Mexico, on the one hand, receives more industry and skilled jobs, which is a boon to its economy. Likewise, its neighbors to the north can access customer service in English and Spanish and are geographically close (generally less than 4 hours away by plane).

US and Canadian organizations that have set up shop in Mexico cite cost reduction, talent, and lack of necessary equipment as the main reasons for relocating some of their business activities. According to Mexico’s Ministry of Economy, in 2022, the country drew in more than $35 billion in foreign direct investment, up 12% from 2021. Simultaneously, Mexico is attracting investments from Chinese enterprises looking to trim costs by bringing their production closer to the American market.

Nearshoring and reshoring

Moving production closer to consumer destinations has become more noticeable in the wake of the Covid-19 pandemic and can take two forms. Nearshoring companies decide to manufacture near their original location from the beginning. However, if production starts in a distant location (offshoring) on another continent and is brought back to the area of the original market, it is referred to as reshoring or backshoring.

Outsourcing services to a neighboring country can help in finding qualified labor
Outsourcing services to a neighboring country can help in finding qualified labor

Organizations often find it more cost-effective to move manufacturing to distant, developing countries. Nevertheless, this can also lead to a loss of control due to the distance. Therefore, nearshoring is becoming an increasingly popular option.

What are the benefits of nearshoring?

Businesses bring services and processes closer to neighboring countries for several reasons. These are some of the advantages of agile nearshoring:

  • Supplier diversity. Branching out close to your borders allows for a broader range of suppliers and can prevent future issues in the supply chain. Additionally, it facilitates more frequent contact with suppliers.
  • Reduced transportation times and costs. When your central office and subcontracted companies are located in the same geographical area, deliveries are faster and more cost-effective. This also has environmental advantages, promoting the use of less polluting means of transportation.
  • Better market understanding. Closer proximity and fewer cultural differences make it easier to change strategies and tailor your offerings to demand.
  • Improved control over the legal environment. Labor and commercial regulations in neighboring countries are more similar, avoiding complications in international expansion.
  • Access to more talent. Countries facing labor shortages may find workers in nearby regions. Furthermore, the presence of multiple foreign companies in certain areas can give rise to the formation of sectoral clusters, helping to create skilled workforces.
  • Similar time zones. Organizing and managing business activities is much simpler, as the production center and local market share the same time zone. This allows for phone calls and meetings throughout the workday, streamlining communication between all parties involved.

Before making the move to outsource part of your manufacturing operations to a nearby foreign country, it’s advisable to have full control over the resources located in your country of origin. A warehouse management system combined with automated warehousing technology can optimize your company’s logistics operations, getting you ready to expand abroad.

At Interlake Mecalux, we specialize in implementing intralogistics solutions for regional warehouses, central facilities, and those combined with production centers. Be sure to get in touch. We’ll show you how you can enhance your logistics processes.

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