Nearshoring is a relatively newer term in logistics. It falls into the “-shoring” discussion, which includes offshoring, nearshoring and reshoring.
The true definition of nearshoring is simple: “nearshoring is the practice of transferring a business operation to a nearby country, especially in preference to a more distant one.” It’s the exact opposite of offshoring, and it’s immensely valuable to today’s shippers. With all the disruption in the market, getting your manufacturing nodes closer to the home base is going to mean shorter transit times, lower costs, and better service. But, it can carry greater risk for noncompliance with new regulations or factors you didn’t consider. After all, nearshoring means considering the laws of Canada or Mexico for a US shipper. Here are the factors to help you use nearshoring as a pathway to sustained success.
What exactly is nearshoring
The idea behind nearshoring is to tap the local resources of all of North America. It’s the use of a neighboring country’s resources that creates the most value and establishes long-term success.
Nearshoring also offers a strategic advantage in today's dynamic global market. Proximity to home markets ensures greater control over operations and responsiveness to market changes. According to Supply Chain Brain, the biggest area of interest in nearshoring is in Mexico, where foreign direct investment was up 30% in 2023. Further, “manufacturing production now constitutes nearly 17% of Mexico’s GDP.”
Such growth is astounding and a clear indicator that nearshoring is rapidly growing. Its transformative approach mitigates risks associated with long-distance offshoring. Moving production closer to home allows businesses to enhance efficiency while tapping into new markets.
But any move into a new center of manufacturing comes with risk, and understanding the nuances of nearshoring can help build the business case for such a change.
The nearshoring definition means you need to be hypervigilant with risk
Strong risk mitigation measures are essential for any change in the supply chain. The same applies to nearshoring; you need to be mindful of risks when moving your supply chain to another country. The nearshoring meaning inherently calls into question your ability to establish a presence in a new area, your relationships with carriers in another country, and how to optimize your process. There’s also the need to know what regulations may be in play.
For example, will you be responsible for paying the VAT tax in Canada, or what are you doing to maintain compliance in Mexico for freight subject to the “Transport document of hazardous cargo,” posits the Cacheaux, Cavazos, & Newton law firm. Will labor laws affect safety requirements?
Variances in regulations are true risks to your supply chain. The best way to maintain compliance as part of nearshoring is through robust carrier vetting. You could also track carrier compliance data and potential issues as part of a larger supply chain consulting partnership to ensure you’re working with reputable companies, too.
Benefits of nearshoring
Nearshoring offers numerous advantages for businesses that want to streamline their operations and enhance competitiveness. Depending on the exact source, estimates for the ROI of nearshoring is near 50% The exact ROI values depends on how cost-effective you are. In other words, how well a company executes its nearshoring strategy and what benefits are realized determine ROI. Here are the top benefits of nearshoring to help you think through the opportunity:
- Cost savings is perhaps the greatest benefit of nearshoring. Remember that transportation costs comprise the majority of company expenses after wages.
- Proximity allows for better communication and collaboration between teams. Improved communication can also foster stronger relationships with suppliers and partners, driving innovation and operational excellence.
- Faster turnaround times result in quicker delivery times and more responsive supply chains. A thorough supply chain analysis can help identify the best nearshoring locations to optimize turnaround times, improving warehouse and inventory planning processes along the way.
- Quality control is yet another great benefit of nearshoring. This proximity ensures that products meet quality standards consistently, reducing the risk of defects and the need for costly reworks, boosting throughput.
- Shorter transportation distances mean a reduced carbon footprint, aligning with corporate goals to minimize environmental impact. This also resonates with environmentally conscious consumers and stakeholders.
- Cultural and company alignment is often stronger when working with partners in nearby regions. Fewer language barriers and better cultural understanding foster stronger relationships and more efficient operations.
- Nearshoring enhances supply chain agility and resiliency. Companies can more easily adjust their operations in response to changes in demand, creating a stronger competitive advantage.
How to maximize your nearshoring results
Nearshoring can clearly provide significant advantages, but a solid plan is essential to truly benefit. Without careful planning, challenges like navigating regulations, managing cross-border logistics, and addressing cultural differences can outweigh the benefits. A strategic approach ensures that your business reaps real value without creating new potential disruptions. A typical strategic plan should include, at a minimum, the following:
- Understand local regulations and comply with labor laws, environmental rules, and trade tariffs in your chosen nearshoring locations.
- Optimize cross-border logistics from nearshoring facilities by working with a freight forwarder, i.e., IL2000.
- Leverage managed transportation services to enhance coordination and communication across your supply chain and especially with carriers.
- Invest in language and cultural training for your teams to reduce misunderstandings and improve collaboration.
- Utilize logistics data to drive route optimization and planning across borders via analytics and smart business intelligence tools.
- Address infrastructure and supply chain challenges early by identifying and solving potential bottlenecks.
- Enhance communication by using digital tools, such as a robust transportation management system (TMS), for real-time collaboration among dispersed teams.
Tap the true value of nearshoring in your supply chain with IL2000
Nearshoring can be a powerful strategy for businesses seeking to optimize their supply chain and reduce costs. However, failure to properly plan such a strategic move can lead to compounding problems and stagnation in your supply chain. Start by knowing the basics. Then, recognize that choosing IL2000 as your nearshoring partner and following a structured approach will help you achieve the best result.
Connect with an IL2000 team member to enhance your nearshoring strategy and achieve better business outcomes.