As repeated disruptions rock global supply chains, businesses strive to find stability. The offshoring activities that companies have relied on for decades are quickly becoming unfeasible – generating a need for new strategies.
One of the biggest hurdles that companies face is achieving cost savings without compromising on quality. Traditional methods like offshoring sure save on costs, but hidden communication and efficiency issues can easily offset those savings.
Add on top the breakdown of global trade connections, and the offshoring starts to look like a bad time.
This is where nearshoring is looking more and more like a viable alternative.
Nearshoring gets you the best of both worlds from in-house to outsourced operations. In effect, it strikes a perfect balance between cost savings and operational efficiency.
This ultimate guide will provide a comprehensive overview of nearshoring, exploring its benefits, considerations, and how many companies are using it to strengthen their supply chain operations.
If this sounds like your cup of tea, let’s dive in.
What is Nearshoring?
Nearshoring is a business strategy that has been gaining traction in the global market over the past few decades. At its core, nearshoring is the practice of outsourcing business processes, particularly those related to production and services, to companies in neighboring countries.
Historically, businesses have sought to reduce operational costs by offshoring – outsourcing work away from your home country to countries with lower labor costs. To find the best capital and labor prices, these arrangements typically meant doing business on the other side of the world.
The best example of this is U.S. companies outsourcing to China.
However, this approach comes with its own set of challenges, including communication barriers, time zone differences, and lack of control over the quality of output.
This is where nearshoring comes into play. Nearshoring allows businesses to reap the benefits of lower labor costs while also maintaining more control over their operations. Because the outsourced work is conducted in geographically closer countries, businesses can better manage the quality of work and overcome issues like time zone differences and language barriers.
The rise of nearshoring can be attributed to the increasingly interconnected global economy and advancements in technology that have made international collaboration easier than ever before. However, supply chain disruptions have led to adjusted priorities for many companies away from offshoring which has contributed further to the nearshoring trend.
As businesses continue to seek out strategies for optimizing their operations, the practice of nearshoring is likely to become even more prevalent.
Nearshoring vs. Offshoring
When it comes to outsourcing, businesses often find themselves deciding between offshoring and nearshoring. Both strategies aim to reduce costs and improve operational efficiency, but they are slightly different.
Offshoring refers to the practice of outsourcing tasks to countries far away, typically where labor costs are significantly lower. This approach can lead to substantial cost savings, but it also introduces challenges such as language barriers, cultural differences, and inconvenient time zones. These factors can complicate communication and coordination, potentially impacting the quality and timeliness of work.
On the other hand, nearshoring involves outsourcing tasks to neighboring countries. This strategy offers a balance between cost savings and operational control. While the cost savings may not be as high as with offshoring, nearshoring mitigates many of the challenges associated with offshoring. The closer proximity allows for easier communication and more aligned working hours.
Cultural and language differences are also less pronounced, further smoothing the path for effective cooperation.
In essence, the choice between offshoring and nearshoring depends on your priorities. If cost savings are the primary goal, offshoring may be the better option. However, if a company values control, communication, and quality assurance, nearshoring could be the more advantageous strategy.
The Benefits of Nearshoring
As offshoring has decreased over the past few years and companies are looking for the next best thing, nearshoring is looking like an attractive alternative. Nearshoring can offer several benefits that will transform your operations and drive business growth. Let’s take a closer look at some of these key advantages:
Cost-effectiveness of nearshoring
One of the primary advantages of nearshoring is cost-effectiveness. By outsourcing tasks to countries such as Mexico with lower labor costs, businesses can significantly reduce operational expenses. However, unlike offshoring, nearshoring also allows for savings on travel, coordination, and transportation costs due to closer proximity.
Improved communication due to similar time zones
With nearshoring, businesses operate in similar or overlapping time zones with their outsourcing partners. This allows for real-time communication and quick resolution of issues, improving efficiency and productivity. I can tell you from my experience with outsourcing to foreign countries, that this benefit alone is a game-changer.
Increased control over projects
When offshore companies have political and economic uncertainty such as tariffs, you don’t want to risk having your shipments delayed or exposed to risk.
Nearshoring mitigates this risk by giving you more control over your projects. The closer geographic location enables more frequent site visits and hands-on oversight, ensuring that projects progress as expected and you can get on top of issues before they spiral out of control.
Cultural similarities and shared languages
Cultural understanding plays a critical role in business relationships. Nearshoring implies shared languages and cultural similarities, leading to smoother communication, better collaboration, and stronger business relationships.
Access to skilled talent pools
Lastly, nearshoring provides businesses access to a broader talent pool. Different countries have different specialized skills and industries, and nearshoring allows you to tap into these resources – bringing fresh perspectives and skills to your operations.
In conclusion, nearshoring offers a lot of the same advantages as offshoring, but it also offers many more benefits. These benefits can provide you with significant competitive advantages in today’s global business environment.
Key Considerations When Nearshoring
While nearshoring offers numerous benefits, it’s important to approach it with a strategic mindset. The success of your nearshoring efforts depends on the careful evaluation of potential partners in nearby countries. Here are some key considerations to keep in mind to make sure your supply chain and logistics are smooth as butter:
Select the right nearshoring partner
Choosing the right nearshoring partner is everything. You don’t want to nearshore resources just for the sake of doing it. Bringing business close to home won’t help if you work with terrible companies.
Always look at these factors when sourcing your nearshoring partners:
- industry experience
- operational capacity
- technological capability
- cultural alignment
- turnaround time
- quality of work
When you do your due diligence on the front end, your nearshoring efforts will go much smoother on the back end.
Legal and financial considerations
Before entering into a nearshoring arrangement, always investigate the legal and financial implications. This includes understanding the tax laws, labor laws, and business regulations of the country you’re considering for nearshoring.
So depending on the math, you might be better off doing business in Canada given that labour cost savings in Mexico could be offset by taxes.
Also, keep an eye on global regulations. Tariffs, wage subsidies, and trade restrictions are in a constant state of flux. To get the best bang for your buck, you will have to keep an eye on the shifting environment.
Understanding cultural nuances
While nearshoring often implies cultural similarities, it’s still important to understand the specific cultural nuances of the country you’re partnering with. This includes:
- business etiquette
- work ethics
- societal norms
Never assume that your work style is the same as your country. These kinds of assumptions can lead to rocking relationships.
Instead, focus on understanding and bridging the gap between cultural differences. When you seek to understand your partners, you will inevitably foster better communication, mutual respect, and a successful partnership.
Nearshoring can be a game-changer for your business, but it doesn’t happen automatically. Researching and planning are musts if you want to leverage successful arrangements with your nearshoring partners.
Nearshoring Examples: Case Studies of Successful Nearshoring
Many big business names based in the United States use nearshoring to lower costs and meet supply chain needs.
Let’s take a look at a few.
Boeing is one of the most commonly touted examples of implementing successful nearshoring. They partnered with the third largest aerospace company in the world, SAFRAN (based out of France). Boeing’s headquarters are in Arlington Virginia.
The aerospace giants nearshore their aircraft wiring to a facility in Chihuahua Mexico. This facility was opened in 1996 and is now the largest aircraft wiring facility in the world.
Together, these partnerships allow Boeing to work with another Western company in SAFRAN and also access the cheaper manufacturing costs in Mexico. Nearshoring operations have allowed Boeing to integrate key operational efficiencies and maintain a stable supply chain for decades.
Ford is one of America’s crown jewel companies. The legend of Henry Ford’s assembly line revolution in 1913 helped position America as an economic powerhouse in the 20th century. Now, in the 21st century, Ford has maintained its position as a top automobile company by maximizing supply chain efficiencies.
Nearshoring has been an integral part of their strategy.
Ford uses manufacturing plants in Ontario, Canada, Cuatitlan, Mexico, Hermosillo, Mexico. Nearshoring production facilities have allowed Ford to build and sell vehicles in the North American markets without mucking about with intercontinental shipping – leading to massive cost savings, stability, and control over the entire supply chain.
Cardinal Health is a global healthcare logistics and supply company. The highly competitive healthcare field demands reliability and cost-effectiveness, especially since the pandemic in 2020.
Of all companies, Cardinal Health is highly invested in maximizing supply chain efficiency and minimizing disruption.
Nearshoring in combination with other supply chain planning solutions has contributed to the maintenance of Cardinal Health’s position as the 14th highest revenue-generating company in the US.
Future Trends in Nearshoring
Now that we know how nearshoring has affected global business thus far, let’s take a look at some of the factors affecting the future of nearshoring.
Shifting Global Trade
The world is changing. The past 20 – 30 years have been a story of globalization and interconnected trade. This has led to economic prosperity for many. The economies of scale possible from access to scarce resources and the right prices have contributed to immense wealth for many.
The world is changing now.
As geopolitical strategist Peter Zeihan puts it, “There’s no stopping it (deglobalization) now.”
Since WW2, the US has maintained a stable global trading environment by patrolling the oceans and warding off pirates. This allowed the US to write the security policy for many countries and maintain leverage over the trade relationships for favorable trade agreements.
The deal looked something like this – “If you don’t like our trade terms, we’ll stop providing security for your ships.”
This strategy worked, and it forged many economic alliances under the American system – creating cheap goods and stable trade routes for all.
The US is now changing its strategy and, along with it, the friendly global trading environment it created is shifting. Here are a few reasons why:
- The ending of the Cold War – less need for global security.
- Changing political strategy – less trade-friendly foreign policy.
- Demographic shifts – people having fewer kids.
Simply put, the US isn’t interested in policing the world’s oceans and trading as much with countries like China. This makes the global supply chains break down and everything becomes more expensive.
Nearshoring in Mexico
US companies nearshoring to Mexico isn’t new but it has taken off as of late. Mexico offers a close business alternative to China with an increasingly educated population and a strong manufacturing base.
Therefore, the cultural and logistical benefits are a no-brainer for US-based companies.
The effects of the nearshoring revolution have already been experienced in Mexico and are expected to continue. For example, in the first six months of 2023, Mexico collected over $29 billion in foreign direct investment – this is an increase of 5.6% from 2022.
More than half of foreign direct investment has been in the industrial sector as companies such as Tesla announced factory construction in Mexico.
Software Development Nearshoring
The obvious uses of nearshoring are in the industrial and manufacturing sectors. But there is also a great use case for nearshoring software development work. In fact, tons of renowned companies have used nearshore developers to great effect – Porsche, Google, Tesla, IBM, Johnson & Johnson, and EY, among others.
There is always a balancing act when sourcing software development work to find quality work while also at a good price point. Keep in mind that offshoring is a good option for finding cheap developers. For reference, a UX/UI Designer in the US will be charging anywhere between $85 – $130 USD/hour, whereas an offshore worker in India or China will be charging more like $29 – $71 USD/hour.
When it comes to software development, the main advantages of nearshoring are:
- Similar time zones
- Minimal language and communication barriers
These advantages allow the developer and the project manager to communicate more seamlessly than if the development work was done say on the other side of the world.
All in all, nearshoring strikes a great balance between onshore and offshore – you get the advantages of seamless communication while also finding workers at a great price point.
Nearshoring is a strategic approach that presents businesses with numerous benefits. It offers cost-effectiveness, improved communication due to similar time zones, increased control over projects, cultural similarities, and access to skilled talent pools.
However, like any business strategy, it’s not without its challenges. To effectively navigate the process, you need to carefully select the nearshoring partner, evaluate their technological capabilities, understand the legal and financial aspects, and respect cultural nuances.
Even in the face of these challenges, nearshoring can be a powerful leverage point in today’s globalized world. As global markets shift, many companies are moving away from pure offshoring strategies.
Don’t get left behind!
With careful planning, due diligence, and a focus on building strong, mutually beneficial relationships, nearshoring can be an incredibly valuable tool in your business growth strategy.