Nearshoring: Resilient Supply Chains through regionalization
Regionalizing supply chains
The globalization of supply chains has helped European companies to become more efficient in recent years. But as current crises worsen, the risks are becoming clearer. For this reason, nearshoring is now on the agenda of management meetings at many companies. What are the advantages of nearshoring – and is regionalization worthwhile even with volatile logistics costs?
America’s former favorite has since shifted jobs en masse to low-wage countries like India, Brazil and China, stating that IBM was a global company and that labor costs were simply too high in the USA.
Offshoring, formerly the go-to strategy
At that time, IBM was an extremely controversial example of offshoring, but many other companies soon followed suit. Industry giants like Siemens also relocated jobs and production sites abroad, as did manufacturers in the clothing and toy manufacturing sectors. They all saw Asia or South and Central America as a great opportunity, because ultimately the labor costs were a price advantage, despite additional logistics costs. This led to many companies reducing the amount they produced in Europe or the USA – or relocating their business altogether.
In the years that followed, global supply chains were established in various industries in a number of different countries, and products were sent all around the world before reaching the end consumer. The system worked well and made good economic sense – for the time being, that is. Because the concept of free trade has been weakening for some years now – economic tensions between China and the USA, protectionism and new tariffs have created uncertainty on the markets. Since the coronavirus pandemic, the rules of the global game have changed.
The many benefits of nearshoring
A good three years after the pandemic, interest has subsided slightly. Logistics costs have temporarily fallen again and the risk of supply chain failures has decreased. Yet the number of early adopters is on the increase: Companies looking to the future, such as fashion giant C&A, have reverted to producing in Germany again after over 20 years; ski specialist Salomon is bringing production of its footwear back to its high-tech factory in France; and IT service providers are suddenly no longer moving to India but to the Algarve in Portugal. The country scores with high quality coupled with low labor costs compared to Northern Europe and has now received so many requests to establish company bases that sometimes they would get the response: “Sorry, we haven’t got any more capacity.”
This is hardly surprising, as there are many advantages of regional supply chains:
- Nearshoring reduces supply chain risks and increases transparency
- Short distances increase the control of own suppliers & upstream suppliers
- Nearshoring can play an important role in the green transformation thanks to highly automated, modern production and shorter supply chains
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Authors
Patrick Lepperhoff
is a Principal at KGM Strategy in Cologne. As head of the Supply Chain Management Competence Center, he mainly supports customers from industry and consumer goods production.
Jasmin Mikl
is a Project Manager at KGM Strategy in Cologne. She supports clients across a range of industries in analyzing and optimizing SCM and logistics processes, as well as in drawing up logistics and warehousing strategies.