Nearshoring – back to the roots?

- Author: Konrad Potocki

For the last few decades, advancing globalisation has accustomed us to a proven business model that involved outsourcing manufacturing activities to Asian companies.

 

This practice known as offshoring delivered many benefits including :

– significant reduction in production costs
– access to a huge workforce
– simpler government and regulatory policy

Owing to this trend, cross-border trade became the norm for many companies in a very short time.

 

Change is the only constant

However, the last two years have been an “earthquake” for supply chains. Events such as COVID-19, the blockade of the Suez Canal and the war in Ukraine made this model of work very risky. During the March webinar, our expert Grzegorz Handzlik – board member of Phillips Poland – spoke about this:

 

“The crisis with semiconductors resulted in not only inflation and huge inflationary pressure, but also with devastated supply chains. If anyone relied heavily on supply chains stretching back to the Far East, they need to rebuild their supply chain very quickly to be able to offer their products to customers. The cost of shipping goods in a container from China to Europe has  increased 7 times. Two years ago it was 2,000 US dollars and at the moment one has to pay around 14,000 dollars for such a service”.

 

The research conducted by Alvarez & Marsal indicates that 70% of the top 30 European retailers have reviewed their supply chains because of COVID-19. 14% are already sourcing more from national economies and almost half (42%) plan to do so in the next 12 months. Many companies around the world, especially in the United States and Europe, have begun to search frantically for solutions to provide security against supply chain disruptions. One option increasingly being considered by analysts is the nearshoring model. It involves moving production closer to the target market. The main advantages of such a solution include:

  • shortening of supply chains (faster transport to the target customer)
  • reducing the risk of delays
  • lower customs duties
  • lower stock levels.

A good example of nearshoring and even onshoring (production within the manufacturer’s country) is the Inditex company (Zara, Massimo Dutti, Pull&Bear). The company has 10 logistics centres located in Spain. Most of the production takes place in close proximity.

In accordance with its business model, Inditex puts considerable emphasis on deliveries in the areas closest to the design centres. This allows them to adapt its commercial offer to emerging changes in trends and instantly adjust clothing production levels to meet current demand. This business model has proven crucial in 2020, during the pandemic. The possibility of minimising the surplus of goods contributes to the responsible management of inventories, in line with the company’s commercial objectives, including sustainable development.

 

Closer may be cheaper

Nearshoring also facilitates the process of supplier diversification and can become an effective weapon against the growing limitations in supply chains. The model also has strong economic justification, especially in the times of raging transport rates and rising prices for raw materials. Shortening distances resulting in reducing energy consumption and greenhouse gas emissions is a natural benefit not only for the wallet but also for the environment.

Predictions by experts clearly indicate the growth of nearshoring trends in various industries. However, this option is not universal and for everyone. Despite its attractiveness, large costs associated with re-modelling of business processes and the long time needed to relocate production from e.g. Asian countries can be a problem.

* https://static.inditex.com/annual_report_2020/assets/pdf/pdfseng/CAPITULOS_ING/IDTX_Business%20model.pdf
** https://www.inditex.com/how-we-do-business/our-model/logistics
*** https://www.alvarezandmarsal.com/insights/retailers-shore-ps42-billion1-products-uk-over-next-12-months-covid-19-resets-supply-chain