Nearshoring & Reshoring Will Continue to Increase Thanks to these Main Benefits
Take a moment to think about offshoring. Offshoring is basically when a company moves manufacturing to a foreign country in an attempt to save money. For a time, this model of manufacturing seemed to be the paragon of effective business. It was cheaper than producing products in the US, manufacturers could produce large inventories with little capital up front, and consumers did not really have a public voice. However, the American manufacturing mindset is changing, and more companies are focusing their efforts on nearshoring as well as reshoring in order to gain the benefits of better, faster order fulfillment and product quality. Yet, understanding these concepts requires a bit more than this simple definition.
Reshoring Vs. Nearshoring...What's the Difference?
- Reshoring is the opposite of offshoring. Reshoring occurs when a company opts to move operations from overseas locations to the US. This may include research and development, product manufacturing, product packaging, and shipping processes.
- Nearshoring refers to when a company brings products closer to the US, which may not necessarily mean the products are manufactured in the US.
As the global market expands, more manufacturers are looking to save money in other ways besides offshoring. For some manufacturers, having factories and operations in foreign countries is beneficial to foreign customers, but having factories in the US is also beneficial to US customers.
Can Everything Go Through Reshoring or Nearshoring?
The short answer is no. While it would be an amazing concept to think of every US-based manufacturer returning their operations to the US, it is both unrealistic and costly. Overseas markets are becoming volatile, and the cost of labor in foreign countries is rising steadily. However, many countries still continue to have lower labor costs than the US, and so we still see offshoring by companies who are in the proverbial pursuit to the lowest cost model. Since one of the key benefits of reshoring and nearshoring focuses on lower shipping costs and increased quality, those companies who keep chasing the lower labor cost will hurt. However, some global manufacturers have consumers abroad in other countries, so it is unlikely EVERY factory of a US based manufacturer will return them all to the United States or a nearby country. But many US companies are redoubling their efforts in this venture of nearshoring and reshoring so they can get the benefits of lower shipping costs and increased quality.
Why Are Manufacturers Focusing on Reshoring and Nearshoring?
The rise of the Internet has given the average consumer access to more information, more products, and more competitors, known as e-commerce. Therefore, some companies offer drastically low shipping rates, and products are competitively priced. However, the American attitude towards the value of a product is changing.
According to Consumer Reports, up to 80 percent of Americans are willing to pay extra for products that are manufactured in the United States. Additionally, most of these respondents claimed to be willing to pay up to 10-percent more for a US-made product.
Of course, there are other factors affecting the American push towards reshoring and nearshoring. The political climates of foreign countries are becoming unstable. Russia is continually testing the international waters of potential warfare, and terrorist activity has frightened the entire country lately. Even though these events do not necessarily represent a threat on US soil, consumers want products that are related to safe areas. Combining this information with increasing costs of doing business overseas, manufacturers must be willing to return their operations to the US if they hope to continue to have a profitable consumer base in America.
For businesses that plan to expand operations on a global scale, manufacturing is best achieved when it is closest to the end user. In this case, each manufacturer that can operate as close as possible to its target demographic, which may include domestic and foreign markets, will have a higher chance of success. This closeness leads to quality and according to the United States of Commerce's Access Costs of Everywhere, they show an interesting graph with the following points:
- Inputs from a foreign supply chain may lead to lower product quality, potentially costly product returns, and legal liability.
- Overseas supply chains reduce U.S. manufacturers' flexibility to quickly react to customers' changing demands and requirements.
In the most basic sense, product quality means getting customers the product they want. At minimum, a product of acceptable quality meets a set of previously agreed-upon specifications. However, quality can also be understood more broadly as the ability to quickly meet, if not anticipate, constantly changing market demand. In other words, it is no longer good enough for manufacturers to produce today a product that meets yesterday's specifications. Instead firms must produce to meet today's real-time specifications and be able to turn on a dime in order to meet tomorrow's as well.
It is not easy to quantify the extent or cost of poor product quality of manufactured goods, let alone with respect to specific countries or geographic areas. Data from the Consumer Product Safety Commission (CPSC), however, do allow us to take a partial look at recalls by country. The CPSC publishes online a listing of recalls by country or administrative area of manufacture and year. These recall counts point to sizeable growth over the past decade in the recall notices of Chinese-made consumer goods from 58 in 2002 to 153 in 2014. This is not surprising given the sharp rise in goods imported from China. In contrast, there were 47 recall notices of U.S.-made consumer goods, 4 of consumer goods manufactured in Canada, and 9 of goods from Mexico.
Meeting the Specs of Quality
There is anecdotal evidence of the role of product quality in U.S. manufacturers' decisions to reassess where they are producing or sourcing. The risk of product failure is real. Consider that 46 percent of respondents to a 2010 Accenture survey of North American manufacturing companies had "experienced product quality concerns as a result of offshored manufacturing and supply operations," and that 11 percent had product safety concerns. Increasingly, customers are asking for smaller, more frequent, more customized orders; transportation costs and commodity prices are rising, and exchange-rate pressures are increasing. In the same Accenture report, 61 percent of respondents indicated that they were considering shifting their manufacturing and supply bases closer to their customers to better meet demand.
Understanding Benefits of Reshoring and Nearshoring
There are two fundamental benefits of reshoring and nearshoring: public perception and cost reduction. However, additional benefits of reshoring and nearshoring extend beyond these fundamentals, and they may include local expertise on the product or a company's operations, better customer service, lower order fulfillment and shipping rates, and greater accountability. Additionally, reshoring will help to drive millennials to manufacturing as companies look to the next generation of Americans to bridge the skills gap, explains Manufacturing.net.
If you want to see an example of offshoring verses reshoring, look no further than the illicit trade markets for name-brand fashion items. Some of these items look legitimate, but Americans demand quality and proof of where a product comes from. Unfortunately, many companies have broadened their definitions of “Made in America” to include products that were made in a foreign country and assembled in the United States. Essentially, this is not a 100-percent American-made product. Now, think about what this means for the cost to the consumer.
In this example, the consumer is paying for a product that was originally manufactured bit by bit overseas. Each part that was manufactured overseas incurs shipping and manufacturing costs, increase costs of processing by Customs, and it must then be assembled by US workers. As a result, a large portion of the money in the product is still going overseas. To consumers, this would seem unethical, and the power of social media is making consumers more aware.
What Will Happen Next in Reshoring and Nearshoring?
The trend towards reshoring and nearshoring will continue in 2016. Although reshoring appeared to diminish slightly in 2015, according to the AT Kearney Reshoring Index , a quick glimpse of any mainstream media broadcast almost always includes a segment on the value of products that are manufactured and completely “Made in America”. Obviously, some companies are going to expand globally, but companies that follow this model are doing so not to make costs cheaper for Americans. These companies are aiming to make cost cheaper for consumers of foreign nationality, and companies that continue operations in the US are doing so to make products that meet American demands of expertise, local quality, and US shipping rates.
Ultimately, reshoring and nearshoring will be the most defining factors impacting the costs of products that are demanded both in the US and in foreign countries.
What do you think about reshoring or nearshoring in the future? Will it expand or wane? Let us know in the comments below!