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Nearshoring may overtake homeshoring in the manufacturing supply chain

Each of the last few decades have seen major upheavals in the manufacturing supply chain and this one promises to be no different. Wages in some parts of the world have lagged the dramatic improvements in communications and logistics since the final years of the last century, with the result that for several decades there has been a grand exodus of manufacturing from the traditional European and American bases to lower cost countries, especially China.

Rising costs

The last 7 or 8 years have seen this movement slow and even begin to reverse as the Chinese labor market has begun to mature. Workers are beginning to demand higher wages, and get them. While the Chinese supply chain has grown more efficient, costs have crept higher. Shipping times are inevitably measured in months. With this, a number of companies have undertaken “homeshoring” or “reshoring” of their manufacturing, bringing production back stateside, where unit costs are not that much higher any more. With efficiencies and automation total costs are sometimes calculated to be lower. Overall some firms, especially large ones, have been finding benefits in returning production to the home fold.

Honda's Anna, Ohio, Engine Plant

Honda employs 2400 workers at its Anna, Ohio, Engine Plant, producing over 1 million engines per year for the American market


But a new phenomenon is beginning to be felt – nearshoring, or moving final production closer to the end market. As lean manufacturing processes have taken root more extensively, new opportunities for cost reduction are being found. The mantra of lean manufacturing is eliminating waste, and one target of the waste eliminators is stockpiles of finished goods in specialized plants, awaiting shipment all over the world. This is in some ways a relic of pre-lean manufacturing, in which efficiencies were seen in having one specialty plant producing one product line, for distribution worldwide. But with new technologies that make short runs practical with little in the way of setup costs, some firms are asking why they should not postpone final assembly until the product is ordered and then complete final assembly at a location close to the customer in versatile, multifunctional, short-run assembly plants. This is becoming especially true as developing markets move closer to becoming consumer markets. For American markets, production shifts from China to Mexico are also being seen as advantageous, as are shifts from China to Eastern Europe and Russia for Western European markets – still relatively low cost production bases and not homeshoring, but shipping is by road not by sea.

Complex value streams

This is another radical shift in thinking and may result in even more complex supply chains. Nearshoring manufacturing strategies require considerable management of resources, something done most effectively in a computerized network in a global context. While the technology to do this has only recently become global, the ability is now there, with the ubiquitous presence of the internet, to have a total view of the status of a multinational’s value stream, even if the components of the stream may be scattered around the world. While some processes, such as plastic injection moulding for example, may still benefit from a single point concentration, other tasks such as final assembly and packaging may be best done in short runs at locations close to the final consumer.

Nearshoring advantages

There are many advantages of such a strategy. Currency volatility is less significant, since more of the value added is close to the end user. Quality may be less of an issue. Lead times are shorter, with regional production. With less transportation of finished products, fuel prices are less of an issue. While labor costs may be higher in locations close to consumer demand, they will be steadier. Political problems may be alleviated since more labour is being hired close to the consumer. Manufacturing in the same hemisphere as the market means fewer time zones between customer and producer, simplifying the customer relationship.

Some examples

Of course, nearshoring is not new to some firms. Honda began manufacturing vehicles in the United States in the 1980s, its main market in terms of vehicle sales. More recently, France-based Schneider Electric is moving a significant proportion of its production to Asia, where 27% of its sales are generated and growing, in contrast to its European sales, which fell 6% over the last year.

Supplying regional markets

While manufacturing costs in the traditionally low cost regions such as India and China have been increasing, the higher wages are translating into increased consumer demand for the products those same producers were previously producing for export. So it makes sense for production in those regions to shift from being export driven to meeting demand from within the region – a form of nearshoring in itself.

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