Last month we discussed “re-shoring” along with the associated risks and rewards. Now we will discuss the advantages and disadvantages of “nearshoring”. Let’s first take a quick look at some of the key terminology.
Key Terminology to Note
Re-shoring: the practice of transferring a business operation that was moved overseas back to the country from which it was originally relocated.
Nearshoring: the practice of transferring a business operation that was moved overseas to a country in the same region from which it was originally relocated.
Offshoring: the practice of transferring a business operation to another, typically lower-cost country.
Outsourcing: The business practice of transferring a business operation to an external organization.
This article will focus on nearshoring either through finding a new supplier in a nearby country or creating a new facility in the other country. As I mentioned in the previous blogs, there will be different costs and benefits, depending on the setup. However, for the purposes of this blog, we are treating them the same.
What Is Nearshoring?
Nearshoring mostly, though not exclusively, is used in the context of North America or Europe. In North America, nearshoring means sending production to Mexico or, to a lesser extent, Central America. In the European context, it means moving production from Western European countries to Central or Eastern European usually, though not exclusively, within the European Union.
Advantages Faced by Nearshoring Companies
Nearshoring is attractive for many reasons:
1. Labor rates are relatively low
2. The ability to establish concrete supply chains
3. Time zone & travel times
The drawbacks faced by near-shoring companies
However, as with any other change, there are bound to be drawbacks:
1. Higher transportation costs
2. Political risks and concerns
3. Strong dependence on currency fluctuations
The Bottom Line
Nearshoring has many advantages but before making that move, it is vital to compare your company’s specific needs and costs to each potential location.
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